The stock of Eicher Motors Ltd has been on an unending upswing for about 6 years now. From levels of about Rs.200-odd in March'2009, the stock rallied to Rs.2500+ levels in March'2013 and further to Rs.15000+ levels in March'2015, i.e. now. The Eicher Motors stock has multiplied over 75 times in the last 6 years and about 5-6 times in just the last 2 years, despite having multiplied over 12 times in the previous 4 years!!!
If we look at Eicher's progress on the business front, the company's Total Income has gone up from Rs.3044 crores in FY'2009 to Rs.8846 crores in FY'2014, i.e. tripling in 5 years time. During the same period Eicher's Net Profit has multiplied seven & half times from Rs.83 crores to Rs.615 crores. This healthy growth in Eicher's business performance & the humongous rise in the company's Market Cap can be attributed to Two major developments in the company's business profile. Sometime during the year 2008, Eicher Motors entered a JV agreement with the Swedish Bus & Truck maker Volvo to jointly manufacture & market Commercial Vehicles. This was the single biggest reason for the start of the rally in Eicher's stock price from Rs.200+ levels in early 2009. This JV with Volvo propelled Eicher's Consolidated Total Income to more than double between FY'2009 to FY'2012, while Net Profit Quadrupled during the same period.
While this JV was powering Eicher's business growth, the company's MD, Siddhartha Lal was working on modernising Eicher's cult bike brand Royal Enfield. During these years the MD invested in R&D for Royal Enfield to make the bikes more reliable, modern, slightly more efficient, all this without compromising on the THUMPing factor behind sales of Bullet range of bikes. All these investments started paying off with increased demand for Royal Enfield bikes, which led to Eicher investing substantial capital to triple the subsidiary's bike manufacturing capacity during FY'2012 & FY'2013. From an annual capacity of about 1.5 lakh bikes, the company expanded it's capacity to nearly 5 lakh bikes. As the expanded capacity started coming on stream, the company started increasing the reach of it's Sales & Service outlets across the country. At the same time the company was reaching out to Foreign markets to ensure that there is healthy demand for it's bikes in the Export markets.
All these efforts are showing terrific results with Royal Enfield's sales growing from monthly numbers of about 10-12,000 units in FY'2012 to about 25,000 units by the end of year 2014. The company sold close to 27,000 bikes in February'2015, again reporting close to 50% Y-o-Y growth, as the company continues to ramp up production at it's plants in a measured fashion. In short, Royal Enfield has been the primary reason of growth for Eicher Motors since FY'2013. The above charts are ample evidence of the same. As can be seen, Eicher's T-T-M Total Income growth, as well as the company's profitability, has picked up pace over the recent 4-6 quarters. For FY'2014, which ended recently, Eicher reported a growth of 28% in Total Income & a growth of 56% in Net Profit, with a very healthy expansion in Net Profit margin in the last year or so. Eicher's EPS for the year ended December'2014 stood at Rs.227/-, while the Cash-EPS stood at Rs.308/-.
Coming to the Valuations part, the Eicher stock trades at very very very Rich valuations. At the current share price of close to Rs.16,000/-, the stock trades at 70 times it's current EPS and 52 times it's current Cash-EPS, which is very expensive according to me. Remember that Eicher Motors Ltd is after all an Automobile manufacturer. These kind of valuations are generally attributed to companies in something like e-commerce space or other service industries where the companies can be expected to easily sustain high growth rates for the next 3-5 years. But an Automobile manufacturer cannot be expected to continue posting 50+% growth rates in Net Profit for many years at a stretch. Royal Enfield is currently growing at a strong pace of about 50%, but the base was small until a year ago. As the base grows larger, the incremental growth rates will taper down to more moderate levels of about 30% over the next 2 years and could go lower after that. One other factor is that cult bikes do sell because of Novelty factor as well as uniqueness factor. With more & more showrooms opening in several cities & towns, the company is selling more & more bikes. The Uniqueness factor will eventually wean away. Royal Enfield can continue to grow for many more years for sure, but I am not expecting the high growth rates to last for anything more than 2-4 years.
Another factor is yesterday's news of Volvo booking profit by selling over 4.50% stake in Eicher Motors Ltd in the open market. Volvo had acquired about 8.40% stake in the company during the JV agreement signing in the year 2008-09. Volvo had paid something like Rs.691 per share that time. That means Volvo made a cool profit of about Rs.14,500 to 15,000 per share on the stake sold, over 20 times it's acquisition price. I think retail investors too should think of selling atleast half of their stake or 3/4th of their holding at current levels. These crazy valuations might not last very long. I could be proven wrong, but I would still be a seller in Eicher Motors Ltd., if I had any shares.
If we look at Eicher's progress on the business front, the company's Total Income has gone up from Rs.3044 crores in FY'2009 to Rs.8846 crores in FY'2014, i.e. tripling in 5 years time. During the same period Eicher's Net Profit has multiplied seven & half times from Rs.83 crores to Rs.615 crores. This healthy growth in Eicher's business performance & the humongous rise in the company's Market Cap can be attributed to Two major developments in the company's business profile. Sometime during the year 2008, Eicher Motors entered a JV agreement with the Swedish Bus & Truck maker Volvo to jointly manufacture & market Commercial Vehicles. This was the single biggest reason for the start of the rally in Eicher's stock price from Rs.200+ levels in early 2009. This JV with Volvo propelled Eicher's Consolidated Total Income to more than double between FY'2009 to FY'2012, while Net Profit Quadrupled during the same period.
While this JV was powering Eicher's business growth, the company's MD, Siddhartha Lal was working on modernising Eicher's cult bike brand Royal Enfield. During these years the MD invested in R&D for Royal Enfield to make the bikes more reliable, modern, slightly more efficient, all this without compromising on the THUMPing factor behind sales of Bullet range of bikes. All these investments started paying off with increased demand for Royal Enfield bikes, which led to Eicher investing substantial capital to triple the subsidiary's bike manufacturing capacity during FY'2012 & FY'2013. From an annual capacity of about 1.5 lakh bikes, the company expanded it's capacity to nearly 5 lakh bikes. As the expanded capacity started coming on stream, the company started increasing the reach of it's Sales & Service outlets across the country. At the same time the company was reaching out to Foreign markets to ensure that there is healthy demand for it's bikes in the Export markets.
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| Trailing-Twelve-Months figures |
All these efforts are showing terrific results with Royal Enfield's sales growing from monthly numbers of about 10-12,000 units in FY'2012 to about 25,000 units by the end of year 2014. The company sold close to 27,000 bikes in February'2015, again reporting close to 50% Y-o-Y growth, as the company continues to ramp up production at it's plants in a measured fashion. In short, Royal Enfield has been the primary reason of growth for Eicher Motors since FY'2013. The above charts are ample evidence of the same. As can be seen, Eicher's T-T-M Total Income growth, as well as the company's profitability, has picked up pace over the recent 4-6 quarters. For FY'2014, which ended recently, Eicher reported a growth of 28% in Total Income & a growth of 56% in Net Profit, with a very healthy expansion in Net Profit margin in the last year or so. Eicher's EPS for the year ended December'2014 stood at Rs.227/-, while the Cash-EPS stood at Rs.308/-.
Coming to the Valuations part, the Eicher stock trades at very very very Rich valuations. At the current share price of close to Rs.16,000/-, the stock trades at 70 times it's current EPS and 52 times it's current Cash-EPS, which is very expensive according to me. Remember that Eicher Motors Ltd is after all an Automobile manufacturer. These kind of valuations are generally attributed to companies in something like e-commerce space or other service industries where the companies can be expected to easily sustain high growth rates for the next 3-5 years. But an Automobile manufacturer cannot be expected to continue posting 50+% growth rates in Net Profit for many years at a stretch. Royal Enfield is currently growing at a strong pace of about 50%, but the base was small until a year ago. As the base grows larger, the incremental growth rates will taper down to more moderate levels of about 30% over the next 2 years and could go lower after that. One other factor is that cult bikes do sell because of Novelty factor as well as uniqueness factor. With more & more showrooms opening in several cities & towns, the company is selling more & more bikes. The Uniqueness factor will eventually wean away. Royal Enfield can continue to grow for many more years for sure, but I am not expecting the high growth rates to last for anything more than 2-4 years.
Another factor is yesterday's news of Volvo booking profit by selling over 4.50% stake in Eicher Motors Ltd in the open market. Volvo had acquired about 8.40% stake in the company during the JV agreement signing in the year 2008-09. Volvo had paid something like Rs.691 per share that time. That means Volvo made a cool profit of about Rs.14,500 to 15,000 per share on the stake sold, over 20 times it's acquisition price. I think retail investors too should think of selling atleast half of their stake or 3/4th of their holding at current levels. These crazy valuations might not last very long. I could be proven wrong, but I would still be a seller in Eicher Motors Ltd., if I had any shares.
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