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:
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.
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