Eicher Motors: Effects of a Richer India

Playing the consumption theme via Autos

Hi all, after our previous edition on Titan (blog link here: Titan: India's LVMH), we are back with another consumption play which we believe is the biggest beneficiary of rising young India’s aspirations and income level in coming years. This blog is about Eicher Motors, the manufacturers of ‘Royal Enfield’ motorcycles and commercial vehicles (CVs including trucks) via their joint venture with Volvo. Talking about the scale, ~ 8.35 lac motorcycles were sold, and about ~ 77K commercial vehicles/trucks were sold by Eicher in the recently concluded FY23. Just to quantify the proportion of value Eicher derives from motorcycles and CVs/trucks, analysts like JP Morgan estimate about 85-90% of the business value coming from the motorcycles and around 10-15% of the value is derived from the CVs/trucks segment. This breakup gives us a sense that the majority of value continues to be derived from the brand ‘Royal Enfield’ which makes bikes in 250CC+ categories.

In this previous blog on Titan, we did mention how India’s Macros are shaping in recent months, with private capex on the anvil to takeoff, pushing for a vicious cycle of economic consumption growth. This blog discusses which factors made us invest in Eicher Motors shares recently.

Some History

Brand ‘Royal Enfield’ was started in 1901 but it was acquired by Eicher Motors only in 1994 before which Eicher primarily focused on making tractors. In 2008, Eicher also started to focus on manufacturing commercial vehicles by establishing a joint venture with Volvo. The current CEO and MD Siddhartha Lal has been the face of the company since Jan 2004 when he then became the COO of the company and took over the CEO post from his father in 2006. As recent as 2011, Eicher used to sell just ~ 75K bikes in a year which today has increased to ~835K per year, which is an ~11 times jump in the last 11 years.

India’s Strengthing National Highway Network

Indian highways are now better than ever before. The pace at which the roads have been built is crazy. India’s National highways increase by ~50% in just the last 9 years. Due to the government’s continuous focus on the infrastructure, the pace at which roads were built increased from 12.1 Km/day to 36.5 Km/day in FY2021. Even in FY2022, the pace even though decreased to 28.5 Km/day, it’s 2.5X than what it was 8 to 9 years ago.

Good connectivity between cities and states is crucial for both the segments in which Eicher Motors operates. Whether it’s the faster transportation of goods from one state to another via a truck, or overall biking experience on long tours on your bike, good roads add to consumer satisfaction and hence can boost the sales of vehicles done by Eicher Motors.

India’s Rich Demographics

Who buys a Royal Enfield?

Over 72% of buyers of Royal Enfield come from the age group of 18 to 35 years as shown in this chart from their investor presentation:

This age group of 20 to 59 years old is the one which is expected to increase from 56% today to 59% of the total population of India in 2031. That implies a larger market to take care of. And this market is not only growing just because of its potential customers growing but is also poised to grow as India gets richer. India’s per capita income is expected to triple in the 11-year period from 2019 to 2030. And as JP Morgan recently stated in one of its India-specific research reports by Ridham Desai (interview link with CNBC’s Anuj Singhal) about that same, the discretionary spending in India is just at its nascent level and can go up 10 to 20 times easily in just next few years. A strong positive tailwind for someone like Eicher Motors that caters to the premium segment of the 2-wheeler market.

Apart from the above-mentioned 2 key positives, other key positive includes metal prices cooling off due to global slowdown which can positively affect the margins and the rising tendency of Indian youth to ride a bike along the ability of Royal Enfield to identify and cater to a new developing segment of the market. For example, they identified the growing demand for bikes suitable for congested cities like Banglore and launched a lighter and modern-looking bike called Hunter 350 which has been a big hit recently. These abilities are the reason why Royal Enfield is a market leader and has retained its leadership by a huge margin.

Key Risks

1. Competition Risks: A growing market attracts competition. As the transition from ‘low cc’ bikes to ‘high cc’ bikes continues in India (as shown in the graph, the rising % share of >250 cc motorcycles)….

   

   …more players are trying to gain a share of the market. For example, Hero-Harley plans to launch the ‘HD X350’ model targeting the same set of customers. Similarly, the Triumph-Bajaj partnership too poses a threat to the monopoly Eicher has in this segment. Though I personally believe it’s hard to break the monopolistic brand and network Royal Enfield has built in India, and probably that’s why players like Harley Davidson who could sell only a few thousand bikes in 2019, and hence made a partial exit later, are re-entering the markets via the partnership route (with Hero).

2. EV risk: Eicher is yet to make significant advancements in electric vehicle space for their bike segment. Even though the characteristics of a 350cc or a 650cc bike and the sound it produces when driven by petrol/diesel might significantly change which affects the consumer purchase decision, the quantum of effect on consumer tastes is yet to be seen once Royal Enfield and competition bring new EV models in the market

   There do exist more risks like a possible rise in commodity prices as the global economy recovers from recession in 2nd half of this year, changes on government rules/regulations/taxes front, etc.

Shall end this blog with a mention of another substack content creator ‘Malliketh Nagda’ who recently started his blog page to write about his motorcycling experience. Do check it out!

That’s all for this blog, thank you for reading!

Note- Sources used in this blog come from investors’ presentations of Eicher Motors and this is not investment advice.

Disclaimers- 

Personal & client investment/interest in the shares exist; this isn’t investment advice; DYOR (do your own research) is recommended; Investing & trading are subject to market risk; the Decision maker is responsible for any outcome that this Indian market