Eicher Motors Ltd’s approach of achieving volumes by sacrificing margin has rattled investors, pulling the stock 6% lower on Tuesday. The management talked about adopting this strategy in late 2024, but the margin hit is higher than anticipated.
Consolidated Ebitda margin at 24.2% contracted by over 100 basis points (bps) year-on-year and sequentially in the December quarter (Q3FY25). Ebitda is short for earnings before interest, depreciation, and amortization.
Launching new models with additional features but without commensurate price hikes, coupled with higher marketing expenses, played spoilsport. “Ebitda per unit has come off 14% from Q1FY25 to Q3FY25. Even if we adjust for the lumpy launch spend, Ebitda/unit has shrunk 10%,” said IIFL Securities.
Eicher launched five new models in the third quarter, including the Goan Classic 350, Scram 440, and electric vehicle Flying Flea. New product launches and enhanced on-ground activation activities led to a 90bps increase in marketing expenses in Q3. As per management, some of these expenses are one-offs, but its focus on volume and absolute Ebitda growth over margin would keep marketing and brand-building expenses elevated. One basis point is one-hundredth of a percentage point.
Better sales
The domestic sales of Royal Enfield (RE) rose 13% on-year in Q3FY25 versus a 2% drop for the industry. Including exports, RE volumes rose 19% on-year to 272,297.
Improved reception of new launches, the upcoming launch of a revamped Hunter and the marketing push would buoy sales momentum as Eicher Motors remains a key beneficiary of the premiumization trend. Both the Classic and Bullet models performed well during the festival, and growth remains strong post-festive season, supported by sustained customer inquiries, management said.
Plus, international retail demand is picking up. Although macro headwinds persist, it is cautiously optimistic. RE plans to expand retail reach in Brazil and is seeing strong traction in Mexico. For FY25, capital expenditure guidance is at ₹1,000 crore.
RE would keep outpacing the growth of the two-wheeler industry, but its outperformance would be lower versus the last decade, at 100-200bps per annum, said UBS Securities India. “We forecast its Ebitda margin settling around 25- 26% versus a peak of 30-31% during FY17-19, on: 1) management prioritizing growth over margins; 2) moderation of exports mix, as LatAm/ASEAN rise versus developed markets; and 3) new product development investment, including EVs,” added the UBS report dated 11 February.
Meanwhile, over the last one year, the Eicher Motors stock is up 31%, beating the Nifty Auto index. But worries of slower earnings growth linger. “After a 10% compromise on profitability (Ebitda/unit), if domestic volume growth tapers to sub-10%, the stock may de-rate sharply from current levels,” said the IIFL report.
