Royal Enfield maker's stock slips Rs 574; Jawa bikes give sleepless nights, should you buy Eicher Motors?

The company that is known more for its iconic Royal Enfield motorcycles than anything else, is definitely about much more than just bikes. The company is Eicher Motors and it also manufactures trucks. The Notably, Eicher Motors shares are expensive, very expensive! Today, investors kick-started the trading session on a cautious note. However, within a few minutes of opening session, Eicher Motors gave away about Rs 574 of its market price, by crashing to its intraday low of Rs 20100 per piece on BSE. Such panic mode in Royal Enfield maker was due to its December 2018 (Q3FY19) result. Eicher Motors posted a net profit of Rs 533 crore in Q3FY19, up by a mere 2.4% versus Rs 530.9 crore in Q3FY18. Even revenue from operations recorded single-digit growth of 3.2% year-on-year (yoy) to Rs 2,341 crore.

On the other hand, Eicher Motors EBITDA was Rs. 680 crore, down by 4% compared to Rs 707 crore in the same period last year. What is of big concern, is that this quarter, Royal Enfield sold 193,871 motorcycles in the quarter, registering a decline of 6% from 202,736 motorcycles sold in the same period last year. On Royal Enfield’s performance, Siddhartha Lal, Managing Director and CEO Eicher Motors Ltd, said, “The latter half of 2018 was a challenging period for the two-wheeler industry in India. Factors like increased insurance requirements, rising raw material costs and the subsequent price increase due to regulatory safety requirements impacted the momentum of the industry."

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Hence, should you buy Eicher Motors shares? 

Raghunandhan N L and Mumuksh Mandlesha analysts at Emkay said, "Vehicle prices have increased substantially (more than 15%) in the 350cc category motorcycles due to an increase in insurance premiums (~3%), adoption of new safety norms (~10%), and pass-through of commodity inflation (~2%). Prices are expected to increase further in Apr'20 due to the transition to BS6 emission norms (3-6%)."

The duo explained, competitive intensity has increased in the cruiser motorcycles segment after the entry of Jawa Motorcycles, which has provided an alternative to RE's unique brand positioning and offerings. Jawa has witnessed strong order bookings, and its existing production capacity is fully booked until Sep'19.

Following which, Emkay says, " We expect margins to contract from 30.2% in FY19E to 28.3% in FY21E, driven by a partial pass-through of cost inflation, lower utilization, and higher marketing spends."

Hence, analysts at Emkay said, "We maintain Sell, with a target price of Rs18,000 (unchanged), valuing the RE business at a PE of 17x and the VECV business at a PE of 15x."

If Eicher is set to touch this new sell target, it will be new all-time low for investors, as the company current 52-week low stands at Rs 18780.

At around 0941 hours, Eicher has managed to restore some positive sentiment in investors. However, a cautious note is called for. Eicher Motors shares were trading at Rs 20731.05 up by Rs 56.35 or 0.27%.