Eicher Motors Q1FY18 Concall Summary

Financial Highlights

The topline for 2018 Q1 is 2001 crores making this the best ever quarterly performance
This is about 29% higher than the Q1 FY17 where the topline was about 1556 crores
EBITDA is at 621 crores and is also the highest ever at consolidated level
The growth rate is at 32% compared to the EBITDA of Q1FY17 at 470 crores
In percentage terms, EBITDA increased from 30.2% of topline in Q1FY17 to 31% in Q1FY18
The total comprehensive income is at 458 crores in Q1FY18 which grew at a rate of 22% compared to 378 crores in Q1FY17

Volvo Eicher Commercial Vehicles Limited (VECV):

VECV is the joint venture of Eicher with Volvo group
VECV’s income from operations dropped by 15.7% i.e.2139 crores in Q1FY17 to 1803 crores in Q1FY18
VECV’s EBITDA also reported a de-growth of 23% i.e.194 crores in Q1FY17 to 149 crores in Q1FY18
VECV’s PAT is at 65 crores in Q1FY18 as opposed to 106 crores Q1FY17
The transition from BS-III to BS-IV was smooth compared to its competitors with least amount of BS-III stocks
The CV industry is heavily impacted with series of events- Demonetization, Transition from BS-III to BS-IV and GST and recorded a 26.5% fall
VECV also recorded a 27% fall in line with the industry
The industry sales volume fell from 106,000 units in Q1FY17 to 80,000 units in Q1FY18
VECV sales volume fell from 16,071 units in Q1FY17 to 81,583 units in Q1FY18 with a decline in market share from 15.1% to 14.4%
The new management is keen on working close with Eicher to take advantage of low costs and currently Eicher supplies only Engine and other small parts to Volvo
There was a loss from subsidiaries and the composite is from the profit of VECV or the net sum is a decline of 7cr

Royal Enfield:

The sales volumenis at 183,731 motor cycles in Q1FY18 growing at 25% compared to sales in Q1FY17
As of June end, the retail footprint expanded to 700 locations
The industry was affected by a series of disruptive events of Demonetization, transition from BS-III to BS-IV at March end and GST at June end
Royal Enfield, however, has been largely unscarred by these events and moved from BS-III to BS-IV with zero stocks of BS-III in April
It continues to grow consistently, competitively, and profitability leading the midsized motorcycle globally

Royal Enfield Product mix:

The classic brand is now almost 70% of the mix and other brands are seeing a decline on Year on Year basis
The brand equity and visibility of classic is high and driving the sales
The residual value and the velocity of the residual market is extremely good in the case of classics
Though the price for classic is more than bullet, the value in residual market after 2-3 years gets back large part of initial investment
The classic is becoming more easily available as waiting periods are coming down
The bullet doesn’t sell much in cities anymore and has become a semi-urban and listed small town affair
The Thunderbird doesn’t sell much in smaller towns and is more of bigger city and southern city’s affair
The propensity to but Thunderbird is higher in Bangalore, Maharashtra or Uttar Pradesh
The classic is ubiquitous and caters to everyone making it a easier purchase
Every future model of Royal Enfield that is planned for next 5 years will have a relevance in India
The products made exclusively for markets outside India are difficult to scale and eventually doesn’t get cost and will become irrelevant
The 500 cc is not extremely differentiated from 350 cc in terms of looks. It is Rs 15,000 expensive than 350 and little bit upgrade in power
The idea is to create a ecosystem that makes the bikes accessible in all angles and riders are not intimidated by the power
In India, the market is bigger for Roadster or standard motorcycles as the main purpose of vehicles is commuting in India

Himalayan Odyssey:

The 14th edition was flagged off from India gate in Delhi on July 8th, with a participation of 61 riders including 6 women
The participants go to Delhi to all the way to Khardung-La pass which is the highest motorable road
The period of ride was about 18 days and covers about 2300 KMs

Employees:

Employees, the percentage of sales for Royal Enfield to the standalone piece is 5.5% and increasing with revenues
The scale increased from 8 regions to 12 regions and 400 points of sales to 700 resulting in an increase in frontline sales and sales support
There is also a backend cost because of construction of third plant

Operating leverage:

In domestic, Eicher is growing deeper and deeper and in International, the spending is more on people, little bit but on events, on advertising and marketing and research
This is as an investment and the growing phase results in more operating leverage
The revenue growth is not as high as 50% like 2-3 years ago, but the cost growth at current is matched with the revenue growth
Royal Enfield is in no need of partnership in 3 major aspects of the business – distribution system, manufacturing and technology

Technical Centre in UK:

The new technical centre is located near Leicester in Bruntingthrope airfield with an own proving ground
Taking the motorcycle route through the week to the proving ground and testing them helps in development
The area of office and testing is spread over 36,000 square feet and over 100 employees with a lot of productivity
The second phase of Technical centre which includes the testing validation equipment, the dynamometers, will be operation by December of 2018

International Markets:

The store count is increased to 26 exclusive stores and 600 multibrand stores
The focus is more on Brazil, Columbia, Indonesia, Thailand, North America and Europe

Segment wise performance:

In 3.5-5 tonnes the industry grew at 16% to 2400 units and Eicher grew at rate of 24% to 578 units
Eicher is in growth in this segment and had a product in very recently
In the 5 to 15 tonne segment, industry showed a drop of 21% and sales volume was 13,500 units
Eicher’s sales volumes were 4490 units with a drop of 23.5% and the market share was down from 6% to 3.9%
In Bus segment, the industry sales were at 16,400 units which is 22% lower and Eicher was at 3400 units with 18% growth to the last quarter
The market share has increased from 20% to 21% in the bus segment
Volvo trucks sold 82 units which is approximately half of that in Q1FY17
Eicher’s medium duty engines was the only area of growth in the last quarter of 7264 units with a growth of 57% over the same quarter last year

EPPL:

Eicher Polaris Private limited is a joint venture of Eicher with Polaris
EPPL is continuing to expand distribution footprint and trying to replicate the success in Kerala market across the country

BS-III to BS-IV Transition:

There has been a general decrease across all the segments because of BS-IV supply issues and overbilling in the previous quarter
The industry was down by 8% at 12,000 units and Eicher was down by 30% just under 1600 units

Impact of GST:

There was no compensation to dealers for any inventory loss this quarter because of GST
No financial impact of GST in numbers
There won’t be any drastic effect on ICV because of lot of distribution happening in regional as opposed to national
300-400 KMs in B roads is perfectly suited for ICV as it will get from one medium town to another medium town in a day
ICVs are more used than heavy duty trucks for perishables and quicker turnarounds
The discounting is still on and had not abated in any meaningful manner in the last few months
The post GST rates are implemented on 19th June about 10 days ahead of time to reduce dealers and customers anxiety
The difference in price after conversation is only 1.2% of classic 350, Chennai on-road price

Capacity:

The capacity is being ramped up from 60,000 a month to 80,000 units a month in a matter of 6-9 months
After assuming price adjustments the capacity from delivery standpoint will be at 900,000 units a year in FY19
There has been a dip in order book and hence there has been no dramatic impact on waiting time even in case of stagnant capacity for a long time
The classic 350 has a waiting time of 2 months and less for some models and 1 month for some models

Distribution System:

Currently Eicher has 600 touch points globally and mostly are multi-brand
In multi-brand stores it is 2-3 motorcycles in a store with 30-40 motorcycles
Eicher is trying to get better space and bigger corner for the brand
There is a Royal Enfield present multi-brand outlet in each of the top 50 cities of USA
In both western and emerging markets Eicher is trying to make products available closer with more reliable traders and partners

Vendor sourcing:

All the 3 plants of Eicher are in close vicinity within 30-40kms of each other and will take time to benefit from vendor consolidation
The vendors of the bigger fabricated parts where the freight costs tend to be little higher are in the vicinity of 5-10 KMs

Pricing Strategy

The products are fairly priced in line with market price increases and the high margins are a result of low cost base
The small price increases are preferred to one time huge price increase in India. People expect that prices increase twice by 1-2% rather than one time increase of 4-5%

Gross Margin:

Though the price increased, the costs also have increased due to the transition from BS-III to BS-IV
This regulatory one-off event coupled with inflationary pressures resulted in less improvement in gross margin