Royal Enfield Jan'17 Sales - Slowest Growth in many years.

Exactly a month ago I had written a report on Royal Enfield's Recent Sales Performance. In that I had specifically mentioned about my expectations for coming months. I am happy to say that Royal Enfield has not managed to perform beyond my expectations, atleast in

January'17. The Total Sales number for Royal Enfield motorcycles during January'17 was 59,676 units, which is 25.1% higher than the 47,710 units number reported for January'16. This is the slowest Y-o-Y growth reported by Royal Enfield in the last many years and are clear signs of the fact that the High-Base effect is finally catching up with this manufacturer of the famous 'Bullet' motorcycles.

Eicher Motors had reported a strong surge in sales of Royal Enfield motorcycles during the 3 months of January to March'16, compared to previous few months, which is now creating a High-Comparison-Base for the company during the corresponding period this year. Hence, despite selling the highest number of motorcycles in a single month in the company's history during January'17, it's Y-o-Y Growth has dropped sharply to 25% from the 42% growth reported in the previous month of December'16. For the next 2 months, I am expecting Royal Enfield to continue despatching increased number of motorcycles, most probably in the range of 60,000 to 62,000 units each month. But the Y-o-Y Growth number will continue to dip further lower to something around 22%. Another interesting factor is that the Low-Base effect for Export Growth comparison ended in January'17 as Royal Enfield had reported sharp increase in Export despatches from February'16 onwards. Hence it will be interesting to see the kind of growth numbers Royal Enfield is able to report for Export sales too going forward.

With monthly sales number of around 60,000 units, Royal Enfield is now competing with the likes of Yamaha India and Suzuki India's 2-wheeler unit in Volume stakes, but it's turnover is way ahead as the Average Selling Price of each unit of Royal Enfield motorcycles is nearly 2 times that of the two Japanese manufacturers. Thanks to the cult-bike image that it's products carry, Royal Enfield is able to price them at a premium and hence the company is able to enjoy way superior EBITDA and Net Profit margins compared to any other 2-wheeler manufacturer in India. It will be interesting to see if this situation remains unchanged even a couple of years down the line or not.

Eicher Motors Ltd. - Royal Enfield's recent Sales Performance & Expectations

In my previous Sales Performance update of Royal Enfield motorcycles, written about 6 months ago, we had seen the monthly sales number to be steady around the 50,000 units mark. With the company commissioning expanded production capacity from the month of July'16, Royal Enfield's monthly sales were expected to go well beyond the 50,000 units mark. Let's check out how the monthly numbers have progressed from the following chart:

We can clearly see from the chart alongside that Royal Enfield's motorcycle sales consistently improved M-o-M from June'16 till the festival season in October'16, when the monthly number peaked at little over 59,000 units. The figures for November & December'16 have been slightly lower than the peak number, but not as sharply lower as the drop experienced during the last 2 months of Calendar year 2015, when the sales were lower by about 9% compared to the October'15 number. In comparison the monthly sales number for November'16 & December'16 were lower by just about 3% when compared to October'16 number. This is despite the Demonetisation effect that India experienced during the last 2 months. This certainly talks volumes about the demand for Royal Enfield motorcycles. The strong sales performance of Royal Enfield during last 2 months of 2016 compared to last 2 months of 2015 has helped push up the Y-o-Y Growth Rates for the company during the last 2 months, which is seen in the chart below.

Royal Enfield had seen it's Y-o-Y Sales Growth taper off sharply from about 65% level in January'16 to about 30% level for the months of July to September'16. The Y-o-Y Growth Percentage has jumped sharply to over 40% level for the last 2 months, purely because of Low-base effect. Now here comes the challenging part for Eicher Motors & Royal Enfield. Look at the Sales Chart above once again. After low sales numbers for months of November & December'15, the company had seen a sharp jump in sales for the next three months. To be able to report a 40% Y-o-Y growth, Royal Enfield will have to sell in excess of 67,000 units during January'17, which looks quite impossible given the Capacity constraints as well as increased competition, especially from Bajaj's Dominar as well as Yamaha's expected new launch in the higher capacity segment. Even for a 30% Y-o-Y growth, Royal Enfield will have to sell in excess of 62,000 units, which is achievable but won't be easy. My estimate is that Royal Enfield will report sharp drop in Y-o-Y Growth rate for the months of January to March'17, something in the range of 22 to 25%, with monthly sales of around 60,000 to 62,000 units at best. This could be the slowest growth rate posted by Royal Enfield in quite some time. But remember that with increasing comparison base, even growth rate of over 20% is very respectable.

We should also be prepared to see the Y-o-Y Growth rate (possibly) dipping to under 20% during the second half of 2017. In comparison to most other volume bike makers, this growth being experienced by Royal Enfield is still very very respectable. What concerns me is the high expectations that many retail shareholders have from the Eicher Motors' stock. At the current share price of about Rs.22,700/-, Eicher Motors' stock is already trading at over 40 times it's EPS for the Trailing Twelve Months. The company's T-T-M Net Profit has grown at over 60% by September'16. The number for December'16 quarter is also expected to be strong. But I am expecting a deceleration in Net Profit growth for Eicher Motors Ltd from the March'17 quarter to something like 30%, as most of the Profit growth is riding on the back of strong growth in sales of Royal Enfield motorcycles. Hence we should not expect any run-away rally in Eicher Motors' stock going forward. I am expecting the P/E Ratio enjoyed by this stock to gradually come down to 30 to 35 levels over the next 12 months or so. Hence the shareholders of this company should have only moderate returns expectations over the coming months & years. As per my estimate, Eicher Motors will trade in the range of Rs.21,000 to Rs.26,000 over the next 12-15 months.