The One Thing That’s Going In Favour Of Royal Enfield
Robotic arms spray lacquer onto gas tanks for Royal Enfield Classic 350 motorcycle as they move on a conveyor on the production line at the company’s manufacturing facility in Chennai, India. (Photographer: Dhiraj Singh/Bloomberg)

The One Thing That’s Going In Favour Of Royal Enfield

While Eicher Motors Ltd.’s two-wheeler sales contracted in all but two of the last 16 months, analysts have found a reason to be optimistic. They see the maker of Royal Enfield motorcycles better prepared to deal with the disruption that has prolonged India’s auto slowdown: transition to stricter emission standards.

The company’s dealer inventory is among the lowest, at about 10 days, and they would benefit from customer response to the switch to Bharat Stage-VI emission norms and favourable base, Goldman Sachs said in a report authorised by analyst Pramod Kumar. It estimated that as much as 70 percent of the Royal Enfield motorcycles sold in February complied with newer norms.

Royal Enfield was the only two-wheeler maker to register a growth in sales in February amid a slowdown, a higher base and intense competition. But this was only the second time in the past 16 months that sales rose—the last time being in October 2019—a period when India’s auto sector saw its worst slowdown in more than two decades.

The maker of Classic 350 and Himalayan has been the third-worst performer on the Nifty Auto index so far this year—after Tata Motors Ltd. and Motherson Sumi Systems Ltd. The stock has tumbled nearly 23 percent compared with the index’s 1 percent decline.

Eicher Motors also trades at a valuation higher than its peers like Hero MotoCorp Ltd. and Bajaj Auto Ltd., according to Bloomberg data. Nearly 16 analysts tracking the stock recommend ‘Buy’, while 17 recommend ‘Hold’ and 11 ‘Sell’.

Yet, the consensus of analysts’ estimates tracked by Bloomberg expects a 21 percent upside to the stock from its current market price.

Morgan Stanley said in its report that given Royal Enfield’s low inventory of BS-IV vehicles, year-end discounts across segments should remain contained. Binay Singh, equity analyst for the automobile sector at the brokerage, wrote that the company is better placed as nearly two-thirds of its sales are already come from BS-VI bikes.

Royal Enfield sold more than 63,000 units in each of the first two months of the year. That compares with average monthly dispatches of 60,760, 71,415 and 64,306 units in the previous three years, respectively.

Royal Enfield, in an emailed response to BloombergQuint, called the ongoing auto slowdown cyclical, saying it will be difficult to predict future volumes. But the company is looking at it as an opportunity, it said, adding Royal Enfield has already announced the launch of new Bharat Stage VI-compliant Classic 350 in January and all other motorcycles in its portfolio will meet the stricter standards by the end of this month—the deadline. “We are well on track to migrate the rest of our portfolio within the time frame to meet the BS VI norms as has been mandated by the government.”

What Other Brokerages Are Saying

JPMorgan

  • Royal Enfield was a standout among two-wheeler manufacturers, Gunjan Prithyani analyst at the brokerage, said in her latest report.
  • Concerns around elevated channel inventory and competitive disruption have eased in the two-wheeler segment, she said.

IIFL

  • Royal Enfield, which transitioned to BS-VI ahead of peers is now sitting on low dealer inventory and seeing relatively better end-demand, according to Joseph George, analyst at IIFL.

BofA Securities

  • Volumes can pick up in second half of FY21, led by multiple new launches of BS-VI products, according to Sahil Kedia, analyst at the brokerage.

Edelweiss Securities

  • Increased exports (Interceptor 650, Continental GT 650 and Himalayan Sleet models) and sustenance of demand for the 650cc twins in the domestic market are crucial for volume growth.

Nirmal Bang Equities

  • Volumes are bottoming out, Aditya Rankawat, research analyst at the brokerage, told BloombergQuint.
  • New approach of coming up with small format stores, launch of entry level variants for various products is driving higher footfalls in showrooms.
  • Royal Enfield should be able to sustain these levels, and mandatory BS-VI will contribute to the sales.

Also Read: Royal Enfield’s Problem Is Bigger Than The Auto Slowdown

Outlook

Eicher Motors is betting on setting up more studio, or smaller, stores to aid growth.

It plans to open 800 such stores across India by the year-end from 500 currently, it said at a post-earnings call for the quarter ended December. The company is also focusing on the international markets, where it has 675 stores at present.

The company said that its market share in the 150 cc+ segment has risen from 26 percent to 32 percent in the quarter ended December and that its 650cc twin bikes have been well received. Exports, it said, may pick up by February-March.

(Updates an earlier version with Royal Enfield’s emailed response)

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