Book Excerpt: How Eicher’s Siddhartha turned around Royal Enfield

Sometime in the middle of 2007, well before Siddhartha (Lal) launched the Classic range of motorcycles, he stunned his peers with an announcement of a joint venture—his company was going to make commercial vehicles with Sweden’s Volvo Group…

This was Siddhartha’s first big move after his return to Delhi from Chennai to take charge of the Eicher Group.

Secondly and more importantly, the Eicher stock price had started to factor in the changes that Siddhartha was bringing into the organisation. The stock that was trading at around Rs 20 apiece in 2000–01, around the time when Siddhartha came on board, gained twelve times the value in the seven years between 2000 and 2006. The Volvo announcement sparked a new growth. The stock more than doubled on 10 December 2007 to Rs 540 apiece.

This was happening when the capital markets had started to crash all around the world in the wake of the Lehman crisis that led to the global recession. Investors had started to pull out their money from stock markets, and yet, there was a positive momentum when it came to the Eicher share.

This sent the stockbrokers into a tizzy—not only in India but all around the world.

Mahantesh Sabarad, then a research analyst with Centrum Broking, got a post-market call from Singapore-based Arisaig Partners, a small, boutique fund with big investments in Eicher. Back then, Arisaig was one of the largest institutional shareholders in Eicher, and had first bought 5.53 per cent shares in Eicher in 2004, later increasing it to 8.46 per cent. They had seen its investments more than double in less than three years; they were curious to know if they needed to hold on to the investments in the company and place a bet on the new commercial vehicle venture.

Arisaig’s brokers started to call their counterparts in Indian broking firms. One such call came to Sabarad.

‘Do you think their commercial vehicles story will work out?’ the broker from Arisaig asked Sabarad, somewhat hesitantly. The Singaporean group was not entirely convinced by Eicher’s latest strategy. They had cause for concern: Volvo was already struggling in the market and then it had tied up with Eicher, which did not have a significant presence in the segment.

In their conversations, Sabarad told the Arisaig partners that the marriage between Eicher and Volvo wouldn’t really work in an environment dominated by Tata Motors and Ashok Leyland. Arisaig reached out to a few other brokerage firms too who saw little value in Eicher-Volvo partnership.

The value of Royal Enfield was anyway discounted in the stock. As a result of the homework that they did, Arisaig over a period of time sold their stock.

Around the same time that Arisaig had started to enquire about the company, the Eicher stock caught the attention of a small brokerage firm that was led by its co-founder: Raamdeo Agarwal…

When everybody discounted Royal Enfield’s value in Eicher stock, Agarwal wanted to place a bet on it. He realized that Royal Enfield did not have a competitor as such, and he looked at it as the creation of a niche or the beneficiary of a new fad. But he was more bullish on the trucks business and Siddhartha…

So he asked his trusted lieutenant Manish Sonthalia, then head of strategy and research at Motilal Oswal, to run a background check on the company…

After completing his research, Sonthalia reached out to the company to get a better understanding of the business. However, all his efforts were in vain. The Eicher management declined every request for a meeting. Sonthalia was not ready to return empty-handed. He argued with Vinod Aggarwal, the then CFO of Eicher, telling him that since Motilal Oswal was the first brokerage to have reached out to the company, it was only fair that the brokerage firm were afforded an opportunity to speak to Eicher management.

Sonthalia’s persistence paid off and a meeting was fixed between the top managements from both sides at Eicher Motor’s GK-II office in Delhi…

In the meeting, Siddhartha pulled out a sheet of paper with data on the demand for premium bikes in the country. He had divided the number of people looking for a motorcycle on the internet into two categories: those who sought information about normal motorcycles and the ones who looked up motorcycles with 350cc engine displacement.

For 350cc and above segment, approximately two million people had gone online. Now, not many companies had products in that segment; imported bikes such as Harley and Ducati were in the higher segment but were very expensive. Sonthalia noticed a big gap between demand and supply and understood Royal Enfield’s play. But he also took cognisance of the fact that Royal Enfield was short on capacity at its Tiruvottiyur plant, and that Siddhartha was busy trying to revamp the stores and add more stores by adding new dealers. With only about a hundred dealers at that point, there was a big demand-supply mismatch, and that made it clear to Sonthalia about how long the growth streak would run.

‘You can say that when we entered the business, it was more on account of the group rather than a conscious attempt to buy the Royal Enfield story. But, as time progressed, this whole Royal Enfield story started to build up and that’s how we built on the investment that we made,’ said Sonthalia in an interview for this book. ‘We extrapolated that growth much ahead in the stock price and that is actually how the stock went through the linear curve on the higher side,’ he said.

Motilal Oswal had invested 5 per cent of its Rs 300 crore portfolio in Eicher in 2009 at Rs 900 apiece. ‘The purpose, at that point, was to invest in the next billion-dollar stock,’ said Sonthalia.

The stock corrected itself significantly as soon as Motilal Oswal invested in it, only to pick up again with the launch of Classic motorcycles in 2009. Since then Motilal Oswal’s investments in Eicher Motors have grown sixty times.

Today, their overall portfolio is more than Rs 10,000 crore and Eicher accounts for nearly 5 per cent of that. Arisaig Capital, which did its due diligence around the same time that Sonthalia was meeting the Eicher management, exited Eicher and eventually shut down its business in India in 2011. Arisaig and Mahantesh missed the bus. Even when the two-wheeler growth story started, there was a sense of disbelief as they thought the Classic motorcycles were just a one-time wonder and not a sustainable model for mass use. ‘But we were proven wrong. Eicher sales continued to grow at a CAGR (Compounded Annual Growth Rate) pace of 30 per cent consistently for close to four–five years,’ recalled Mahantesh over the phone from Mumbai.

Excerpted with permission from ‘Indian Icon: A Cult Called Royal Enfield’ by Amrit Raj; published by Westland Business.