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Buy Eicher Motors for handsome gains: Nirmal Bang

Published on Sat, Dec 24, 2011 at 14:58 | Source : Moneycontrol.com

Updated at Mon, Dec 26, 2011 at 12:32

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Buy Eicher Motors for handsome gains: Nirmal Bang

Incorporated in the year 1982, Eicher Motors Ltd (EML) is the flagship company of the Eicher Group and a leading player in the Indian automobile industry. It is present in various businesses like commercial vehicles (CVs), two-wheelers and related component and design services, with CVs being the key revenue driver.

Its 50-50 joint venture with the Volvo Group, VE Commercial Vehicles Ltd (VECV) designs, manufactures and markets reliable, fuel-efficient commercial vehicles of high quality and modern technology, engineering components and provides engineering design solutions. Eicher Motors manufactures and markets the iconic Royal Enfield motorcycles.

Going by the robust earnings growth and strong balance sheet, Eicher Motors Ltd is likely to continue its growth story in the coming years.

Investment Rationale

Eicher Motors Ltd has identified the following as its main growth drivers: two-wheelers - Royal Enfield (standalone), CVs and outsourcing opportunity for Volvo (through VECV).

Strong Network

Eicher Motors' after sales network has been further strengthened with the addition of new dealerships and also upgradation of existing dealerships.

Eicher Group's products are brought to its customers through its strong network of around 213 dealers that are spread across the country. The company plans to further enhance it to 225 in CY11.

Royal Enfield added 24 new outlets in 2010, with full-fledged sales, service and spare facilities confirming to Royal Enfield showroom and service standards. Eicher has around 2,500 employees located at four manufacturing facilities all over India. Eicher is present in over 40 countries across the world.

Risks and Concerns

A significant rise in the cost of input materials like steel and aluminium will certainly put the margins under pressure.

The retail finance norms for the two-wheeler industry continue to be tough and limited numbers of financing options are available for customers, coupled with hardening of interest rates over the past few months.

Inability of suppliers and plant production capacity to meet demand

Vendor capacity constraints may limit supply.

Further slowdown in the economy.

Future Outlook and Valuations

Although, the final results of the initiatives taken by the company will be clearly visible only from Q1CY13 onwards, we believe that the company has taken the right step in the right direction and the initial signs of success are already visible.

Considering the robust earnings growth and strong balance sheet, we believe that EML will continue its growth story in the coming years. We see a significant potential upside in the stock for a long-term horizon and believe that the stock can be purchased on declines.

Source: Nirmal Bang's Beyond Market

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