Royal Enfield maker Eicher Motors Ltd reported weak performance for the March quarter but the management said that the business is seeing a good recovery.

Eicher's current quarter’s consolidated EBITDA and net profit fell 37 and 44% since last year led by a lower margin and higher taxes. Demand commentary was strong though and management said its bookings have recovered to almost pre-COVID levels.

Its sales fell by a fifth over the year-ago period during the current quarter. In March alone, sales volumes fell 41%, in line with its peers. That also hurt the company’s revenue, which dropped 11% to Rs 2,208 crore.

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The company is witnessing a sharp rebound in retail demand and Royal Enfield’s new bookings have reached close to pre-COVID levels. About 90% of its dealer network has also opened up. There would be an element of pent-up demand and Eicher acknowledged that sustainability needs to be seen.

Royal Enfield has also taken about a 1-2% price hike in April to pass on the balance BS6 cost increase, which should aid margins. Royal Enfield also demonstrated a smooth BS6 transition and cleared up channel inventories despite the lockdown and without any extensive discounting.

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Royal Enfield is turning more aggressive on product launches and plans to introduce 2-3 new products in the coming years. The first launch is scheduled in the September Quarter and Royal Enfield is planning to hold a product introduction almost every quarter subsequently.

A big dealer network expansion is also underway, mainly targeting semi-urban and rural markets, which should fuel the next leg of growth. Royal Enfield added around 600 studio stores in the Fiscal Year 2020 and plans to add a similar number in the ongoing Fiscal Year 2021.

In the near term, discretionary demand i.e. non-essential demand is expected to remain weak as customers could tighten their purse strings. However, Royal Enfield's strong brand equity and new product launches could help it limit the impact of this headwind. Over the medium to long term, the premiumization theme is expected to play out in the 2 wheeler segment.

A significant and sustained decline in volumes due to increasing competition, inability to consistently introduce new models, or refresh its product portfolio and/or shrinkage in the premium motorcycle segment are some of the key risks. Furthermore, any sizeable debt-funded inorganic or organic growth plan can also lead to deterioration.

Final Thoughts:

Though the first quarter of the current Fiscal Year 2021 is expected to be muted because of COVID-19 impact on the economy as consumers are likely to spend less on non-essential products, Eicher Motor is well-placed to benefit from the potential demand recovery with its strong franchise, aggressive product pipeline, and big network expansion.

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