Eicher Motors’ shares have increased by more than 7 percent since the company announced its September quarter results (Q2FY22) on November 3 after market hours. The company’s results have beaten some analysts’ expectations. Strong realisations stood out, compensating for the lower volumes, thus supporting Eicher’s overall earnings.
Standalone operating revenues have increased by 2.8 percent year-on-year to Rs 2,182 crore. While Eicher’s volumes fell 18 percent, net realisations grew by 25 percent. Price hikes undertaken during the year to cope with rising input costs helped the improvement in realisations. Further, the product mix was favourable with higher sales of spares and accessories along with a better product mix.
Overall, reported EBITDA for the quarter stood at Rs 442 crore, representing an 8.5 percent decline compared to the September quarter last year. EBITDA is earnings before interest, tax, depreciation and amortisation, a key measure of profitability for companies. Even so, Eicher’s EBITDA was 17 percent above Kotak Institutional Equities’ estimates due to 10 percent higher ASPs (average selling prices) and Rs 40 crore benefit pertaining to unvested ESOPs or employee stock ownership plan in staff expenses.
In its conference call, the company told analysts that demand is robust currently. Eicher has said enquiries remain strong. Further, response for the new-generation Classic 350 model from its motorcycle division Royal Enfield has been encouraging. While these factors augur well, one would have to track if the price hikes will adversely impact demand in future.
Going ahead, there are supply chain challenges. Eicher maintains that the situation of the ongoing global shortage of semiconductor chips has started to improve from September-end/ beginning of October. True, this is a positive sign incrementally. Even so, investors will keep a close watch on the pace of normalisation on this front. “With chip shortages continuing to affect production for RE (Royal Enfield) and visibility for improvement only being gradual, we cut our FY23E volume by about 7 percent,” said analysts from Ambit Capital in a report on November 4.
Investors would also closely follow new launches. Separately, competition remains a worry. As analysts from Kotak point out in a report, “We expect strong volume growth for the RE business over FY2023-24E due to strong order backlog and new launches; however, with entry of new players, competitive intensity is set to increase over the medium term, which may put pressure on pricing, market share and profitability for the RE business.”
To be sure, the Eicher stock has appreciated around 24 percent over the past one year, indicating investors are capturing a good share of the optimism into the price. Accordingly, expensive valuations are likely to cap significant near-term appreciation in the stock price.
On November 9, Eicher Motors' stock closed 0.58 percent higher at 2,727 on the National Stock Exchange.
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