Eicher Motors (NSE:EICHERMOT)

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Joy Tuscano

Geoffrey Jordan

Eicher Motors (NSE:EICHERMOT) is the third largest player by volume in the medium and heavy commercial vehicle market (M&HCV) and light commercial vehicle market (LCV) in India. In the LCV and M&HCV categories of goods carrier subsegment, it has a market share of 1.75% and 8.89%.^[1] In the light commercial vehicle market, Eicher Motors has a market share of 6.69%, and in the medium and heavy commercial vehicle market it has a market share of 4.67%.^[1]

Over the past five years the revenues and net profit have grown at average annual growth rate of 15.26% and 21.88% respectively.^[2][3] In FY2008, due to general economic slowdown, the sales of Eicher Motors in the quarter ending December fell by 87.37% as compared to the same quarter in FY2007.^[4] The Indian economic condition coupled with the raw material cost has a direct effect on the sales and the operating profit of the company.

Company Overview

Eicher Motors Limited is an India-based company engaged in the business of automobile products and related components. The Company’s product range includes commercial vehicles (Eicher and Volvo trucks), motorcycles, and components, including gears and engineering solutions. The Company operates in the leisure cruiser segment with engine capacity of 350 circuit current and above.^[5] During the year ended December 31, 2009, the Company sold 51,955 motorcycles.^[5] In 2009, the Company introduced Classic bike in the two categories of 350cc and 500cc. The Classic bikes are powered by a single cylinder 500 cc unit construction engine (UCE) supported by electronic fuel injection (EFI).^[5] The UCE has an integrated assembly for the engine, gear box and clutch to reduce friction.

Eicher Motors' subsidiaries include VE Commercial Vehicles Limited, Eicher Engineering Solutions, Inc., Hoff Automotive Design Company and Hoff Technology Service Company.^[5]

Eicher Motors operates in three segments: Commercial Vehicles, Two Wheelers, and Components.^[6]

The company is also involved in management consultancy services and customized engineering products, as well as in the publication of city map and travel guides.^[6] Its commercial vehicle plant is located at Dhar, MP.^[7] The company manufactures motorcycles at a plant at Thiruvottiyur, TN, promoted under the brand Royal Enfield.^[7] The company’s engineering component plants - located at Gurgaon, Haryana and Dewas, MP - manufacture gears, gear boxes, and other components.^[7] It has a joint venture agreement with Volvo AB.^[7] The company has a strong network of 142 dealers distributed across India.^[8] Eicher Motors is present in over 40 countries across the world.^[8] Most of the exports are to South Asia, West Asia, and African countries.^[8]

Business segments

Commercial Vehicles (84.52% of the revenues)

This segment contributes around 84.52% of the total revenues.^[9] In the light commercial vehicle (LCV) and medium and heavy commercial vehicles(MHCV) categories of goods carrier subsegment, it has a market share of 1.75% and 8.89%.^[10] In the LCV market Eicher Motors has a market share of 6.69% and 4.67% in the MHCV market. In Aug 2008, Eicher Motors finalized a joint venture with Volvo to form a subsidiary for the commercial vehicle division of the company.^[11]

Two wheelers (10.89% of the revenues)

The company operates in the two wheeler market through the subsidiary Royal Enfield motors.^[12] It contributes 10.89% of the company revenues.^[12] It is the only player in the Indian market in the 350cc and more segment.^[12] The company faced capacity constraints in 2008 and has taken steps to maximize the capacity at existing plant by making productivity improvements, modernizing the equipment and adding balancing equipment.^[12] To cater to increase in demand, the company has planned to increase the capacity from the level of 3500 bikes per month to 4000 bikes per month.^[12]

Components Manufacturing (4.59% of the revenues)

This segment contributes to 4.59% of the total revenues.^[13] Exports account for 31% of the sales of this segment.^[13]

Trends and Forces

Economic slowdown resulting in adverse impact on the sales

The automobile industry is a cyclical industry. It is substantially affected by general economic conditions. The demand is influenced by factors including the growth rate of the economy, easy availability of credit, increase in disposable income, interest rates, freight rates and oil prices.^[14] Lack of vehicle finance availability, lower growth on GDP and/or increases in fuel prices lead to a decline in the demand for automobiles. The Indian economy has shown a sharp decline in GDP from 7.1% in the 2nd quarter of FY2008-09 to 5.3% in 3rd quarter of FY2008-09.^[15] The decrease in freight rates due to slowdown of economy also leads to decrease in demand for commercial vehicles as expansion of fleet size is stopped. The freight rates dropped by 9.4% in 2008.^[16] Despite the 62% decline in the international gasoline prices, the gasoline prices have dropped by only 10% in India.^[17] All this factors have affected the sales of Eicher Motors. In Dec 2008, the sales dropped 87.37% as compared to that of Dec 2007.^[18]

Raw material price fluctuations directly affect the operating margin and net profit margin

Raw material costs comprises of about 75.35% of the price of the finished products.^[19] Any price increase of the raw materials have a direct bearing on the overall operating margin. As can be seen from the Amex steel index and the world steel price index, there is high degree of volatility in the steel prices. This volatility not only affects the operating margin but also the inventory management of the steel required for production.^[20] Tires are also an important part of the raw material required for manufacturing. Tire prices are correlated to rubber prices.

Development of the rail network resulting in adverse impact on the sales

Development of Indian rail network and the freight rates has a direct impact on the sales of Medium and heavy commercial vehicles used for long haul. On October 5, 2006 Indian railways began the work of the Railway Freight Corridor.^[21] The project plan is to connect all the major cities in India with special track capable of carrying double decker wagon freight trains with greater axle load of 30 tonnes per wagon, each train having around 200 wagons and a speed of 150 km/hr.^[22] Successful completion of the project would increase the freight carrying capacity of Indian railways by 78%^[23] This would adversely affect the sales of medium and heavy commercial vehicles. In 2009 the work on the first phase of eastern freight corridor commenced. The entire project is planned to be completed by Dec 2014.^[24]

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References

1. ↑ ^{1.0 1.1} Indian Auto sector, DSB cholomandalam,M&HCV – Goods Carrier
2. ↑ moneycontrol,Eicher Motors, annual result, P&L
3. ↑ [Average Annual Growth is calculated by dividing the past four years revenue increase by the number of years]
4. ↑ rediff money,Eicher Motors, quaterly result, P&L
5. ↑ ^{5.0 5.1 5.2 5.3} Reuters: Eicher Motors Company Profile
6. ↑ ^{6.0 6.1} Investing,business week,
7. ↑ ^{7.0 7.1 7.2 7.3} info shine, Company Overview: Eicher Motors Limited
8. ↑ ^{8.0 8.1 8.2} eicher world, about us, official eicher motors website
9. ↑ Eicher Motors, Annual report 2007-08,OUR BUSINESSES,Commercial Vehicles, page 10
10. ↑ Indian Auto sector, DSB cholomandalam,M&HCV – Goods Carrier
11. ↑ financial express, Eicher, Volvo finalise JV deal
12. ↑ ^{12.0 12.1 12.2 12.3 12.4} Eicher Motors, Annual report 2007-08,OUR BUSINESSES,Two Wheelers, page 11
13. ↑ ^{13.0 13.1} Eicher Motors, Annual report 2007-08,OUR BUSINESSES,Components, page 12
14. ↑ Tata Motors, SEC filing, Risk associated with Our Business and the Automotive Industry, Page 10
15. ↑ Times of India, GDP growth at 6-year low
16. ↑ Freight rates begin to fall for World Merchant fleet
17. ↑ Indian express, Petrol to go cheaper by Rs 5 from Wednesday
18. ↑ rediff money, Eicher Motors Ltd, Quaterly result
19. ↑ rediff money, ratios,Component ratios, Material cost component (% earnings)
20. ↑ One steel, steel and tube holdings limited,chairman's address
21. ↑ PM lays the foundation stone for the Western Rail Freight Corridor
22. ↑ Vedic Instincts, Aspirations : The Indian Railway Freight Corridor
23. ↑ Business line, Low-profile Lalu, Speech on Railway Budget
24. ↑ Freight corridor, choice of traction, Motive Power Directorate

http://www.reuters.com/finance/stocks/companyProfile?symbol=EICH.BO