Royal Enfield’s (RE) volumes have contracted for the past six quarters in a row. The total volume for FY20 fell by 15.6% to nearly seven lakh units. It further skidded by 85% to 19,204 units in the first two months of the current fiscal. Analysts expect a drop of 15-20% for the full year, which will result in a five-year low annual volume.
To counter the low demand, the company will continue with the strategy to launch a new product every quarter. The success of these new models will be crucial in reducing the dependence on the Classic-350 model, which forms nearly 70% of the company’s total RE volume. RE’s market share in more than 125 cc bike segment has been in the range of 24-27% since FY17.
Lower utilisation of plants and inability to fully pass on the higher costs due to regulatory compliance have affected the company’s operating profitability. The operating margin fell by 700 basis points to 20.8% in the March 2020 quarter. Though the gross profit per unit of RE expanded by 2% following lower raw material costs, the operating profit before depreciation and amortisation (EBITDA) per vehicle dropped by 11%. This was because the average price increase of 10% per unit was not sufficient to cover the entire spike in costs due to regulatory changes such as inclusion of anti-lock braking system, disc brakes and the compliance cost regarding new emission norms.
Although the company has hiked prices by Rs 3,000 per unit in April 2020, margin pressure may persist. Given the challenges on the demand and margin fronts, the stock’s premium valuation over mass market peers such as Hero MotoCorp has been gradually narrowing. Eicher Motors’ current stock premium is 60% compared with the long term average of 79%. The trend is expected to continue in the near term.
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