Eicher Motors Ltd - Analysis of Royal Enfield sales growth.

Eicher Motors Ltd. stock has been one of the most Glamorous stock of this decade. The share price of Eicher Motors hit the 4-digit mark for the first time sometime in the middle of the year 2010. From there it took just about 4 years for the stock to hit 5-digit mark!! That means a 10x multiple in just 4 years!! Did it stop there?? NO, Not at all. Eicher Motors stock hit the Rs.20,000 mark in less than 1 year after crossing the Rs.10,000 mark. I have seen many small retail investors/traders discuss this dream run on Eicher Motors stock and buy into it during the last 1 year. But Eicher Motors stock has not continued with it's dream run during the last 1 year. It's been about 9-10 months since it hit the Rs.20,000 mark for the first time and it still trades around the same level. It has spent most of the last 1 year moving in the range of Rs.16,000 to Rs.21,000.

The start of this huge multi-multibagger rally in Eicher Motors' stock price was mainly due to it's JV with Volvo for Commercial Vehicles manufacturing & sales in India. But most of the run, over the last 3-4 years has been due to stupendous success of Eicher Motors' golden baby, Royal Enfield, which is famous for making bikes with that 'Thumping' sound. I have discussed the journey of progress of Eicher Motors in my report about a year ago. Following is the link to that report:

http://stockslogic.blogspot.in/2015/03/eicher-motors-ltd-royal-ride-to-super.html

During the time of writing that report, Eicher Motors' 12-months EPS stood at Rs.227 and the share price was close to Rs.16,000.

Over the last 5 quarters since then, the company's EPS has shot up to Rs.399 (75% increase) and the share price now trades around the Rs.20,000 mark (25% increase). This clearly suggests that the share price had run way ahead of the company's fundamentals and is now consolidating to let the fundamentals catch up with it. The P/E ratio was around 70 that time and it is now down to about 50 levels. Even at this level of a P/E ratio of 50, it would have been fine if the company can continue to grow it's profits at the rate of around 50% easily for the next 2-3 years. To analyse this we should analyse the performance of the business which is the main driving force behind the company's profits.

At the time of writing the report last year, Royal Enfield had touched a monthly sales figure of just under 30,000 bikes. As of now the same has reached a figure of just under 50,000 bikes. With a monthly volume of almost 50,000 bikes, Royal Enfield is now making all the mass-volume bike makers in India hugely jealous!! The cheapest Royal Enfield bike costs nearly 3 times the average per unit realisation of most other mass-volume bike makers in India. And while most of them are struggling to maintain even a single-digit growth rate, Royal Enfield continues to grow at a very strong double-digit rate.

Have a look at the chart alongside. I have used 3-months moving average of monthly sales numbers to slightly even out odd spikes. From monthly sales of just over 30,000 units in March'15, Royal Enfield is now doing sales of very close to 50,000 units in the last couple of months. In order to achieve this terrific growth, Royal Enfield has expanded it's presence well beyond the major cities, to most of the major towns across the country over the last 2 years. I am a resident of a small coastal town & we got a Royal Enfield showroom over a year ago. And now we can see hundreds of blokes riding their Bullets with great pride. In fact the sight of a Bullet is getting just too common now a days. My personal opinion is that the 'Uniqueness' factor of owning a Bullet bike is very close to wearing away. The domestic sales of these bikes may not continue to grow at such scorching pace and we will see a substantial slowdown in growth over the next 12 months. But the company could push more units into the Export market in the coming months. As of now only about 2-3% of Royal Enfield's monthly production is exported. Going forward I am expecting Export sales to grow at substantially faster pace than domestic sales, thus increasing the proportion of Exports in monthly numbers.

Have a look at the chart alongside which shows the Y-o-Y monthly Growth rates posted by Royal Enfield's sales. Despite increasing comparison base, the company has managed to grow it's sales at a rate over 50% during the last 8-9 months. But I am expecting this growth rate to sharply come down to levels of under 40% over the next 3-4 months and then to levels of under 30% by the end of this year. Mind you that even at levels of around 25 to 30%, the growth will still be considered very healthy as the base is getting larger & larger. 

Coming back to Eicher Motors' valuation, I am expecting the company's EPS to grow from Rs.399 posted for FY'16 to somewhere around Rs.525 to 550 for FY'17. Even then the current share price of the company trades in the P/E range of 35 to 40 considering 1 year forward EPS. I still think it is a bit on the expensive side and hence don't expect big returns from this stock over the next 1 year, unless the company continues to positively surprise me on the sales growth front. I would reiterate my opinion, which I had shared during my last year's report. I will prefer to Not be invested in Eicher Motors, purely because of it's current expensive valuations. I have no doubts on the company's growth prospects. But I still feel that the fundamentals of the company are yet to catch-up with it's Market Cap.

Idea Cellular Ltd. - Q4-FY'16: Worse than Airtel's performance.

While writing about Bharti Airtel's Q4 performance, I was highly critical about the way the growth in Data Volumes & Revenues has dropped sharply for the company. But after going through the Idea Cellular Q4 result, I think Bharti Airtel did a much much better job. Both these companies are part of the incumbent group and hence are being hit by smaller competition in several circles. All these incumbents charge premium rates for their services, which is certainly driving away a small portion of their high-usage customers to networks of regional 3G operators, who offer rates which are easily 30 to 40% lower.

If you look purely at the P&L numbers, Idea Cellular has done well with over 5% Q-o-Q increase in Revenues. Couple this with excellent control on Operating Costs and the company managed to grow it's EBITDA by over 15% Q-o-Q!! The company probably posted it's best EBITDA margins in several past quarters at over 38%. But a sharp jump in Interest Cost and Depreciation provisioning lead to a near 25% Q-o-Q fall in it's Net Profit. With Idea Cellular needing to do substantial CAPEX as well as prepare for July Spectrum Auctions, I think the pressure via Interest Cost & Depreciation is not going to ease away anytime soon. Idea Cellular does not have 4G compatible spectrum in more than half the circles & hence will have to bid aggressively during the auctions, atleast to win spectrum in a few crucial circles which contribute substantially to it's revenues.

Have a look at the charts alongside. Idea Cellular has done well in terms of adding/upgrading 2.4 million users to it's 3G/4G customer base during the quarter, which is an increase of almost 12% Q-o-Q. But then look at the Q-o-Q growth in Total Data consumption, which is PATHETICALLY Low at just about 1.5%!! This clearly means that many of it's Data consumers are using less Data on it's network and have started shifting their usage to other networks. I think there has been an increase in a proportion of first-time Data users on Idea's network, people who generally consume less than 500 MB in a month. These people opt for smaller Data packs, which I think has lead to the slight increase in Idea's Average Rate per MB. This is certainly not good news for Idea Cellular. I seriously think that as people start using more & more data, they start thinking of moving to another operator like BSNL or Tata DoCoMo or Aircel, who offer cheaper Data packs for large users.

Now look at the chart showing Q-o-Q % growth in Data Revenues. The Growth rate has been sliding rather sharply for Idea Cellular. With an increasing Base for comparison, the growth rates are normally expected to reduce with every passing quarter, but in case of Idea Cellular, the slide can be called a Collapse. All this even before the true impact of RelJio yet to be seen!! With RelJio now introducing an invite-system, where employees can invite upto 10 people onto Jio's network, I think the operator is moving couple of steps closer to full commercial launch in the next 3 to 4 months or so. Idea Cellular will have to act fast to keep the Volume growth momentum going. The high-usage customers also offer much better ARPU. Nobody can ignore them, just because someone is able to attract attention of first-time users. Data usage is addictive and almost every user starts consuming increased amount of Data with every passing month. Most of these first-time users will be consuming several times more Data in another 12-months time & if an operator does not have appropriate Data packs to entice these customers enough, then there will always be a competitor ready to welcome such consumers.

Coming to Valuations: At the current share price of around Rs.115/-, Idea Cellular's Market Cap stands at about Rs.41,400 crores. At this Market Cap, it trades at little over 3 times it's T-T-M EBITDA and little over 4 times it's T-T-M Cash Profit. These valuations are not expensive even if the company is able to hold on to this EBITDA and Cash Profit level. But that is not going to be the case. I am expecting substantial pressure on Idea Cellular's Revenues, EBITDA and Cash Profit in the coming quarters, especially in the second half of this fiscal. On a conservative basis, I am expecting atleast 5-10% downside to Idea's Revenues, while the downside on it's EBITDA & Cash Profit will be larger at about 20% or so. The true impact will depend on When RelJio opens it's gates for general public. Even apart from RelJio, we are already seeing BSNL getting aggressive in the market & is already posting decent growth rates. The other smaller operators like Tata DoCoMo & Aircel & Telenor are getting aggressive in an attempt to survive. They will have to look at consolidation sooner or later. One possibility for them is to focus their resources on few strong circles, where they can offer good 3G or 4G service. Competing with larger players across the country is certainly draining their resources very badly. Let's see how things pan out, but we will certainly get to see lots of action on M&A front in the coming few quarters. We have already seen Videocon Telecom winding up it's operations by selling it's 4G compatible spectrum to Bharti Airtel. 

Reliance Industries Ltd - Q4 FY'16 update : Surprise after surprise.

Throughout Q4 FY'16, it was widely expected that Reliance will launch it's long awaited & much delayed Jio 4G services on a commercial basis by the start of April'2016. But the company did not fail to Surprise (read as Disappoint) AGAIN as there is absolutely no confirmed announcement about Jio's launch even by the first week of May'2016. More on this later....

The bigger Surprise from Reliance Industries came in terms of continued strong profitability in it's primary business units of Refining & Petrochemicals. The average price of crude hit the lowest levels during Q4-FY'16. Hence it was no surprise that the Revenues from Refining business took a proportionate hit. But the Refining EBIT number did better than expected with only a 1.5% Q-o-Q drop, but was still 30% higher Y-o-Y. The chart alongside shows the T-T-M EBIT progress of RIL's Refining business. The surge seen over the last 3-4 quarters will now lead to stability or only a gradual improvement going forward, unless the company has more surprises in store for us. I am expecting to see the T-T-M EBIT number for Refining to stabilise around the Rs.24,000 to 25,000 crores mark in the coming few quarters. The huge improvement in EBIT numbers from Refining unit of Reliance Industries did not come on the back of big expansion in capacity, but mainly because of improvement in efficiency of the existing capacities. I am not expecting further huge improvement in efficiencies, but there could be minor improvements.

On one hand I am expecting RIL's Refining business to stabilise in terms of EBIT numbers, but on the other hand I am expecting the PetroChemicals to continue deliver further improvement in EBIT numbers. In fact the EBIT improvement journey has just started for RIL's PetChem business. After posting a 27% Y-o-Y jump in EBIT in Q3-FY'16, RIL's PetChem division posted a stronger 35% Y-o-Y jump in Q4-FY'16. With more CAPEX projects coming on stream during the current fiscal, we can expect this division to continue posting strong Y-o-Y growth in EBIT number for few more quarters for sure. The CAPEX at the PetChem unit is leading to increased capacity of certain products as well as improvement in efficiency at certain other products. The full effect of all this CAPEX is expected to be seen in FY'18. That means we still have atleast another 4-6 quarters of continued improvement in EBIT numbers. The growth rates may vary, but they will still be good enough. As of Mar'16, the T-T-M EBIT from Petrochemicals unit has crossed the Rs.10,000 crores mark and could very well progress towards Rs.12,000 to 13,000 crores mark over the next 3-4 quarters.

As of March'2016, the two business segments of Refining & Petrochemicals of Reliance Industries Ltd. together contributed a total EBIT of around Rs.34,000 crores on a T-T-M basis. Over the next one year, I am expecting this figure to increase by atleast another 10% or so to levels of over Rs.37,000 crores.

The remaining three business units of the company together contributed just about 5-6% of the company's Total T-T-M EBIT as of March'2016, down from a contribution of over 15% at the end of March'2015. The primary reason for this is a near 90% fall in EBIT from Oil & Gas production business, which was on expected lines as the International prices of Crude Oil & Natural Gas had seen a collapse during the year 2015. The prices of these commodities seem to have bottomed around Jan-Feb'2016 and have seen a smart bounce back over the last 2 months. The Crude Oil price for example is now trading around $45 per barrel compared to lows of under $30 registered over 2 months ago. Even if the prices continue to trade within a 10% range of current levels, I think RIL's Oil & Gas business too will start posting improved EBIT numbers, mainly because of it's US Shale assets, where the company has managed to bring down operating costs considerably. Hence the recent recovery in prices will help boost profitability from near-zero levels in the most recent quarter. The T-T-M EBIT from the Oil&Gas business has dropped from levels of around Rs.3200 crores to under Rs.400 crores over the last 1 year. Even if Crude Oil stays within the $40 to 50 per barrel range for the rest of the year, I think RIL's EBIT from this business could partly recover to levels of around Rs.1200 crores or so quite easily.

Coming to RIL's most important consumer-facing business (until Jio's launch happens), which is the Retail unit. This business has progressed on expected lines with just over 20% growth in Revenues as well as EBIT. The current year & the next could prove to be the most important years for Reliance's Retail unit. We will see launch of e-commerce verticals of several of Reliance Retail's divisions. This Online expansion will benefit from Jio's infrastructure. In return, Jio will also immensely benefit from the Retail unit's wide network of stores as well as consumer connect. I think we can expect the Retail division to continue posting handsome growth of around 20% Y-o-Y, while the EBIT could post a little higher growth rates.

Coming to the All-Important question of RelJio's launch, I think Reliance will finally start charging for it's services & open it to general public anytime in the next 3 months. Currently the service is being offered completely Free-of-Cost to over 5 lakh users, most of whom are part of the company's employee base or their relatives. As a next step, Reliance has started an invite system where each employee can invite upto 10 people onto the RelJio's network. But there is one condition attached to this invite: the Invitee needs to purchase a LYF handset, which will entitle him to enjoy all of Jio's services without any further costs for a period of 90 days. This invite system could alone add another million users to RelJio's network in the coming few weeks. Apart from this, RelJio's network will see addition of another couple of million users in the form of RCom's CDMA subscribers, who are being migrated to 4G to free up the 850 MHz CDMA spectrum. That spectrum in about 17 circles is either being sold to or shared with RelJio to introduce a third 4G band on the network. This 850 MHz band will enhance the reach & indoor penetration of RelJio's 4G network. The process of integrating this band is what is said to have further delayed RelJio's commercial launch by an additional few months, than the April launch which was earlier expected. So even if RelJio plans for a August or September launch of commercial 4G services (atleast in some crucial circles), it could be having about 3 to 4 million active users on it's network. And once doors are opened for general public, RelJio could easily add another 15 to 20 million subscribers during the 2nd half of the fiscal. By then the company could be easily having a monthly revenue in excess of Rs.1000 crores, which should be good enough to cover about 75% of it's operating costs. I am expecting RelJio to be EBITDA positive during the next fiscal.

Coming to the Valuation part, RIL's share price has come down by about 10% post the announcement of the company's Q4 result. the primary reason being the continued uncertainty on RelJio's commercial launch. I think this is an excellent opportunity for those who still haven't invested enough in Reliance Industries. At the current price of about Rs.975 per share, the company's Market Cap is around Rs.3.15 lakh crores, which is just about 6 times it's current T-T-M EBITDA and less than 8 times the Cash Profit figure. Excluding RelJio, RIL is expected to post further double-digit growth in EBITDA & Cash Profit during the current fiscal & the next. This makes the current valuation of Reliance Industries look very very attractive. RelJio is expected to post substantial EBITDA & Cash Losses during this fiscal, but the numbers will dramatically improve in the next fiscal. Hence on a Consolidated basis, I am expecting RIL's numbers to look bad at the end of this fiscal, but will be substantially better from the next fiscal onwards. With most of the large CAPEX for RIL to end by the end of this fiscal, the company could start reducing it's large consolidated Debt from the next fiscal using the huge Cash Profits from the primary business units. I will further reiterate that FY'18 could be a dream year for Reliance Industries Ltd and nobody should miss the chance of being a part of it, especially when the stock is available at reasonably attractive valuations currently.