Eicher Motors reverses loss, jumps over Rs 1800 in one day! Is it worth buying this Royal Enfield maker?
In February 2019 month, a total 62,630 Royal Enfields were sold, which was a drop of 14% compared to 73,077 units in the same month of previous year.
Seems like mountain bike Royal Enfield maker is resistant to negative views, as it has just reversed its losses into massive gains. In early opening hours of Tuesday’s trading session, investors had not so great views on Eicher, which is why they took the stock down by nearly 3% with an intraday low of Rs 19,550. Reason behind selling sentiments were due to decline in Royal Enfield’s sales for February 2019 month. Even majority of analysts have started to give sell call on the company. Interestingly, such scenario was short lived, as within few hours, Eicher is now trading over Rs 1,191.75 or 5.69% at Rs 21,073 per piece on BSE. Overall gains in Eicher in second half of the session are over Rs 1,848 or 9.27%, as it has touched an intraday high of Rs 21,178.95 per piece.
In February 2019 month, a total 62,630 Royal Enfields were sold, which was a drop of 14% compared to 73,077 units in the same month of previous year. Models with engine capacity upto 350cc, saw negative demand with sales of just 57,029 units, down by 15% as against 67,081 units in February 2018. Meantime, Models with engine capacity exceeding 350cc also saw decrease of 7% in sales with 5,601 units in the latest month, versus sales of 5,996 units in February 2018.
Such would be the largest decline in Royal Enfield sales in over 60 months, as per Elara Capital.
Jay Kale and Vijay Gyanchandani analysts at Elara Capital said, “Given increased cost of purchase for RE vehicles, owing to insurance and ABS dual channel, RE volume growth has underperformed the MC industry for the past eight months. Other firms would largely transition to ABS from April 2019 when regulations take effect. While there could be some relief in market share loss once competition transitions to ABS, competition is likely to adopt single channel ABS in most of their models, thereby restricting price increase vs RE.”
Following which, the duo added, “With the kind of pressure seen on volume post cost increase of ABS along with a corresponding profit on this cost rise, we believe at the time of transition to BS6 RE will be unable to earn a proportionate profit, thereby putting pressure on margin. The entire channel’s ability to sell the product would be tested with most models now available off the shelf. The CV business (VECV) EPS growth also would remain muted, with the upcoming transition to BS6.”
Thereby, analysts at Elara reteriated saying, “ We reduce EPS by 1-3% as we expect a weak 6% EPS CAGR over FY19-21E. We reiterate Sell with a revised SOTP based TP of Rs 17,197 from Rs 17,773 valuing RE at 18x PE and VECV at 10x EV/EBITDA.”
On the other hand, Nomura has given a neutral call on Eicher with a price target of Rs 19,949 per piece ahead.
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Interestingly, analysts at Nalanda Securities Private Limited say, “We believe, Royal Enfield has multiple products in its kitty, aftermarket, distribution reach, service parts availability, etc. All these things going strong for RE and there are many more exciting products in the pipeline to deal with the competition. New 650cc has received strong response from India as well as Overseas and we think it’s still a vacant space as there is no competition in this zone.”
Hence, in Nalanda Securities’ view, RE is a market creator and the competition always follows it. The company has the largest dealer network for any premium motorcycle manufacturer and has kept Maruti as a benchmark for further addition in small towns.
Therefore, they said, “We remain optimistic about the long term prospects of the company as it creates a market and peers follows, the new exciting product launches and eventual candidate to break the duopoly of Tata Motors and Ashok Leyland in the MHCV space.”
Hence, for short-term surely one can expect not a great news from Eicher Motors and its stock price. But Royal Enfield can be a game changer for the company in long term.