In its Friday trade, Eicher Motors’ shares lost 4% leading the losses in the Nifty 50 index. The stock dropped following the company reporting weak financial performance for the June quarter. With bookings nearly returning to pre COVID-19 levels, Royal Enfield motorcycles is seeing demand recovery.
The company has an order backlog of around 40,000 units. An inventory of less than one week of sales against the desired level of about three weeks provides decent volume visibility.
Emkay Global Financial Services Ltd analysts stated, “New products remain a focus area, with the expectation of one new model or major refresh every quarter for the next three years to support the widening of the addressable customer base in domestic and overseas markets.”
Investors are nonetheless unenthused with the drop in the share price. Weighing on the sentiments are continuing restrictions in urban areas, a large addressable market for Royal Enfield, and local lockdowns which are hampering sales, production ramp-up.
Kotak Institutional Equities analysts alert that if COVID-19 infections continue to spread and restrictions are extended in urban centres, new model launches can see limited traction in the near term.
The other bottleneck is supply-chain. Around 90% of the dealers reopened post the easing of the initial lockdown restrictions. But this has come down to 75-80% after re-imposition of local lockdowns. Similarly, due to raw material constraints, the company could not readily meet the sales demand.
Motilal Oswal Financial Services Ltd said in a note, “The supply chain has been the biggest bottleneck due to lockdown seen in its key supplier cities. Operations could have been at 20–25% higher levels in July 2020, but for supply-side issues.”
Performance in the June quarter proved weaker than expected. With revenue slumping 66% and the company offering incentives to retailers, operating profit dropped to a trickle (Rs 4 crore). Gross and operating profit margins dropped sharply. Commercial vehicles business also fared poorly.
“Ebitda margin fell to near zero (0.5%), pulled down by adverse operating leverage impact of lower volumes. The commercial vehicle business also had a tough 1Q, with volumes down 84% YoY,” analysts at Jefferies India Pvt. Ltd said in a note.
To conclude, while the management is optimistic about demand, concern about demand fulfilment and the pace of recovery are making investors wary.