Eicher Motors Limited (505200) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Q3 FY '20 Earnings Conference Call of Eicher Motors Limited hosted by UBS Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sonal Gupta from UBS Securities. Thank you, and over to you, Mr. Gupta.

Thanks, Margaret. Good afternoon, everyone. I welcome you all to the Q3 FY '20 Results Conference Call for Eicher Motors Limited. We are very happy and delighted to have with us the senior management team from Eicher Motors, led by Mr. Siddhartha Lal, CEO and Managing Director; and Mr. Vinod Dasari, CEO, Royal Enfield; and Mr. Lalit Malik, CFO and Chief Commercial Officer. I'll now like to pass the floor to Siddhartha for his opening comments. Over to you, Siddhartha.

Yes. Good afternoon, and thank you very much, Sonal, for hosting this. Good afternoon, everyone, and welcome to Eicher Motors Limited's quarter 3 results. I'm going to update you on the financials first. So at a consolidated level for Eicher Motors Limited for the quarter ended -- the third quarter ended December 31, 2019, we had a revenue of INR 2,371 crores, which is up 1% from last year; and EBITDA of INR 592 crores, which is up -- down 13% from last year; and an EBITDA margin at 25% against 29% from last year, resulting in a profit after tax of INR 499 crores, which is down 6% from last year. So that's on the overall financials. I'll hand it over to Vinod Dasari to tell us about the updates on Royal Enfield business now.

Thank you, Siddhartha. Good afternoon. The total sales for Royal Enfield for Q3 in terms of motorcycles was 189,000, down about 2% compared to last year. But our exports were up significantly to 8,400, which was triple of last year as both our 650cc Himalayans -- Twins and the Himalayan are doing very well. If you look at the motorcycle segment higher than 125 engine size, the entire motorcycle segment was down 23%, but Royal Enfield actually was down only 5%, and hence, our market share improved from 26% to 32%. Actually, if you look at sequentially, I significantly outperformed the industry. We are up 20%, while both the industry and the PST segment, the highest SI segment, is down 7% to 8%. So that's on the overall sales picture. And I think this was led largely by 2 things: One was the network expansion that we had done. We continue to add large format stores. We now have about 940, roughly, and we opened a whole bunch of Studio Stores. By December, I think we would have crossed well over 500. We'll add probably 750 by the end of the year. Very good initial response and almost all the stores have achieved breakeven point. Equally, we continue to grow internationally. We've added 10 more exclusive stores in markets like Brazil, where last year, we just had 1 store, now we will have -- by the end of this year, we'll have 10 stores. Overall, I think we have nearly 675 touchpoints outside of India. So we are just as many touchpoints -- growing touchpoints as fast as we are growing in India. Equally, just like we did the network expansion for accessibility, we also launched bikes like the Bullet X and the Classic S, which makes bikes more accessible. And we allowed the customers to have more personalized and customized things rather than just stock bikes. And building on the success of Bullet X and Classic S, we also launched what is called is Make Your Own, which was a first-of-its-kind initiative, allowing the customer to build their own bike using whatever array of paint colors that we have to, accessories and so on, so that they don't have to waste time or money doing it in the aftermarket. So this is what helped us. Equally contributed was the continued success of the 650, which seems to have won every possible award in the World -- Bike of the Year by Motorcycle Cruiser, Naked Standard Motorcycle of the year by Motorcyclist Magazine and so on. We were very successful with our Rider Mania. This time, a record turnout of 8,000 people who were paid participants, and we used the opportunity to announce the launch of a Slide School, which we'll be launching in Bangalore, hopefully sometime in a month or 2. Lastly, we're completely ready with BS-VI. We have launched all the models in BS-VI, except Bullet, which we will probably be launching in the next couple of weeks. We did launch the Tribute Black, the last of the 500, as a special series, which will -- the sales will go on Monday, I think, here. So initial response is quite overwhelming. We are very excited by just a special edition that we are doing, and we hope to turn this around overall market sometime soon. So compared to last year, I mean, yes, the volumes are down by 2%, but sequentially, there has been a little bit of growth, and I hope that this trend will continue. I'll hand it back to Siddhartha for comments on VECV.

Thank you, Vinod. As you know, the commercial vehicle industry has been extremely weak for some time now. So I'm going to give an -- run an update on VECV, our commercial vehicle joint venture with Volvo. So for the quarter, the revenues were down 23% to INR 2,164 crores. The EBITDA was at INR 133 crores, which is down 28%, and the EBITDA margin was at 6.2% versus 6.6% last year. That's despite a 27% drop in the volume. So overall PAT is at INR 30 crores, which is down 60%, and total sales were at 12,400 units of trucks and buses, which is down 27% from last year's approximate 17,000 units that we did. But the 27% drop is against an industry drop of 37%, so we've actually dropped less than the industry and therefore, of course, marginally increased our market share also as a result. So yes, overall, VECV industry has been extremely poor, medium and heavy duty, in particular. And -- but some segments are starting to show a little bit of sign of a pickup on account of pre-buying due to BS-VI transition. Having said that, there's also a lot of turmoil in the industry in order to get rid of BS-IV vehicles and to ramp up for BS-VI. So there's a lot of work being done by all the teams, and we're absolutely ready and -- for that. But it takes a lot of effort and energy in the company to get that going and to make sure that the 0 stock of BS-IV after -- from 1st of April onwards. We have had -- we've had an amazing launch of our new Eicher Pro 2000 series, which is our new light-duty platform with 1.8 and 2-meter wide cabins with -- and while it's doing its duty as a -- the first concept is from light duty, which also goes up to now medium duty, all the way up to beyond 12, maybe even to 14 tonnes segment. So this is a really new competitive and state of the art platform and cabin and chassis and engines which are -- which have come in and will be available. So they've been in the market now for a few months and been doing extremely well. And of course, it will be ubiquitous from BS-VI onwards, covering the entire range of light and medium duty for us. So we're delighted about the new platform of trucks that we've got. In addition to that, on the bus side, and traditionally, Eicher has been very strong in the light and medium duty segment, which is now the bigger part of the bus market compared to even heavy duty, so we've been extremely successful in school buses and have a very high market share there. In the last decade, we've also become very successful in the staff segment. And we've now just launched a new bus for the Route Permit segment, which is the more rigorous of all of these applications. The mileage is much higher and the weight is much more. And there we have a -- we've built a much stronger and high-durability bus, which we believe will give us another huge leg up on the Route Permit segment in the coming years, next year and subsequent years. So we're excited about that. And overall, we are ready with an extremely robust lineup of BS-VI engines and vehicles across all categories and segments of BS-VI products. We are in the process of rolling them out this quarter. We'll have an extremely wide range of BS-VI engines in India with 2-liter, 3-liter, nearly 4-liter, 5-liter, and 8-liter diesel-powered engines as well as 2 CNG-powered engines, and we believe that this is going to be a shifting point for both the commercial vehicle industry and for the Eicher brand of trucks and buses, in particular, where the opportunity is there to leapfrog in the industry, whereas we've been making Euro 6 engines for Volvo for many years now, and we've made hundreds of thousands of these Euro 6 engines. We have an understanding and knowledge of the manufacturing, and also from our partners, we have a knowledge of the field-related areas that we need to look out for. So as a result, we're extremely well prepared, and I believe much better prepared than our competition for introducing this extremely complex new technology of Bharat Stage VI, both from the industrial side and from the field side, and we believe that will give us a great competitive advantage in the coming year and in the years to come. So that's all about B series and commercial vehicles. And so yes, overall, just to repeat the financials, we've had a -- our revenue has been INR 2,371 crores and a PAT of INR 499 crores in the last quarter. So back to you, and over to you for some questions now.

[Operator Instructions] The first question is from the line of Kumar Rakesh from BNP Paribas.

My first question is around the export market. We have seen some volatility in the volume, which you have been discussing. Although you had highlighted in the last earnings call that sequentially it will come down. But can you tell us what would be a more sustainable number? Is that, September quarter number were reflecting off some of the new store ramp up and hence dealer inventory build-up in that? Or is there some seasonality which we are looking at in the export market of Royal Enfield?

Mostly. That has been there forever. Because what happens is that our big markets right now we're in clearly the -- some of the largest volume markets, which is Europe and America, USA, those slow down tremendously at this point in time, from October to December. Because the season just shuts up. You can't ride in the very cold weather at this point in time. It will begin to pick up sometime in Feb and March again when the -- buying by the dealers, not so into the customer at that point in time, but by the dealers, definitely tend to happen at that point in time because they want to be ready for the season to start. So that's a pattern we have been seeing for years and years. So there's no volatility at all, there is seasonality.

Got it. My next question is around the BS-VI transition for the Royal Enfield part. So can you help us understand how do you plan to plan your production? Have you completely shut down your BS-IV production and completely moved to BS-VI? And how do you plan to prepare yourself for any pre-buying demand which comes in? So how are you going to manage your retail, wholesale and production that -- these 3 bits in the coming 2 months?

Kumar, this question is slightly late in the day. So all the planning and all has been done. We have moved 100% of our Himalayan Classic to BS-VI, so large -- and the Twins, so a large part of the portfolio has already moved. The rest will move by the end of the month. This is a new supply chain in terms of some of the BS-VI parts, so that will take a little bit of time to stabilize. Not necessarily at our end, but at the vendor end. But generally -- so it's all in there now.

Equally, our inventory level was brought down substantially back in October itself. So it wasn't like we had to do a huge cleanup or anything like that. We had steadily brought down inventories from April to October. We had less than 3 weeks of inventory now -- or 2 weeks inventory, so -- and that's including the entire pipeline. So we can react or respond to it, whichever way it comes.

Yes. So exactly on that. Essentially, so what I was trying to understand was that, given that your inventory was very low, unlike for other OEMs where the retail and wholesale could be disconnected, at least in the instruments, should we expect that your retail and wholesale would largely be reflecting of -- be very connected and not reflecting of any disconnect? Given that the BS-IV inventory is largely clear, and...

Frankly, in January, we were a little stock out at quite a few places around the country. Because like I said, the BS-IV stock we had just whittled down over the last many months. And the BS-VI is yet to kind of fully take steam. And that will happen, right? I mean, so the [mission] of this enormity -- the change of such enormity will lead to that problems. But as far as in the next couple of months, they'll all get ironed out, unless there is a major China disruption. There's that and the others. So there is -- it's all in the works.

Okay. And finally, my question is on the margin front. You had talked about 25% to 30% margin guidance, that holds for the BS-VI transition items. Is it right?

Yes. The guidance -- it is not a guidance. We don't give any. But in the past, when somebody asked me that, at the peak and not so peak, where does the margin lies, my general sense and this is about a year back, so good that you just remember these numbers, was in that range. Well, the BS-VI, as you know, some of the precious metals have just quite skyrocketed, and not for us only, for everybody. So some of that cost management, ways to tackle that cost, what to do internally and all the stuff will happen in time. So will we protect our margins in percentage terms? The answer in a very short term-while is no. And that's a job to be done, right? And the last major regulation changes happened, as far as we know. So now is the time to, over time, claw back to some of the other margin ranges.

The next question is from the line of Pramod Kumar from Goldman Sachs.

My first question pertains to the demand situation, just extending on the point you made that you had stock-out situation. So if you can just help us understand what was the kind of order intake, what you had in the month of January? Because we did hear from dealers that there has been a short supply from the company side. And also related to that, how has been the acceptance of the higher-priced BS-VI variants across different models? And also provide some color as to how strong the demand pipeline is in terms of whether do we have more orders than what we can produce for the next month or so? If you can just provide some color on that.

Well, we're definitely not carrying a 30-day order book at this point in time. So -- but has the pricing action that we have taken because of the BS-VI change necessitated by BS-VI? Answer is 100%. Have people accepted that pricing? Yes, I have not heard of a single comment over there that it was too high or whatever, any reaction to that. So in that way, we are very pleased about. Otherwise, it's on a roll. I mean, there's not -- like the normal month of January, which -- a big spike used to happen, if you look at the past trends, I mean, that has not happened. We are still in a subdued environment, in that sense. But January has been promising. I mean it could have been far worse.

Okay. So well the -- was the total order intake or the customer bookings in the month in January at the dealer end higher than your dispatches nationally?

Yes, yes. Like I said, we were in a stock out position also. So definitely, they were carrying more orders than we could service.

Sounds good. And second question relates to the 650 performance. I think we had a spectacular start. We ramped up to almost 4,800 domestic plus export. And thereafter, the volumes have kind of eased a bit. And last month, of course -- a couple of months, it's been because of the exports, the seasonality, but even domestic numbers have been pulling off. So if you can just throw some color there as to where do you think the sustainable run rate for the 650 Twins is? Because if I recollect, at some point, we were looking at capacity constraints and you are planning to increase capacity for the 650?

So look, last few months have definitely because -- because of this whole BS-VI transition. And also, we definitely -- I mean, we don't want any dealer to have any BS-IV bike at the end of the quarter. But if we had a bike, then the last thing you want to is to him to have a Twin bike, because it's so expensive. And you know, the newer approval is something which we don't wanted to do to sell off that bike, higher discount on that or any other. So the sharp fall in the production, if you look at the numbers, for Twins and Himalayan, that happened from the month of say, mid-November or so. So we did choke down Twins and Himalayan quite a bit. But I have to say, the Twins have just launched like a few weeks back, but Himalayan was launched, BS-VI, it was the middle of last month. They have shown extremely good traction.

So where do you think, Lalit, the sustainable run rate could be for the 650, all-inclusive? And what capacities are we sitting on in terms of monthly run rate?

Just go quarter-by-quarter. This quarter only the 2 bikes been kind of relaunched in terms in that BS-VI avatar. Let's discuss in next May, how they have done in Q1 -- Q4.

The next question is from the line of Gunjan Prithyani from JPMorgan.

I just needed that clarification that you said that inventory levels are 3 weeks or 2 weeks. I'm not sure if you can clarify that, where we are on the inventory level? And assuming -- since you mentioned that we had these BS-VI launches early in Jan. So is it fair to say that the -- a large part of this inventory also was BS-VI in the market now?

No, no. Not a large part, because the BS-IV inventory is quite low. It's actually less than 10 days in the entire pipeline from...

From factory to dealer.

From the factory to the dealership. So it's that low. But because that is low and the BS-VI has not happened like commensurately in that -- in that pace, because of like of -- few issues I spoke about. So therefore there is a -- there are a few entry signs we have around the country.

Okay. And the total number you mentioned is 2 weeks at the dealerships, right?

Oh, no, no. Not even that.

Okay. It's less than 2 weeks at the dealership?

Yes.

Okay. And the second question is on the studio expansion. You mentioned that we've reached 500 by end of December, and we'll accelerate this further. And putting this together with the breakeven thing, I'm assuming that most of these stores are selling near about 10 or higher than that. Are you seeing that there has been a fair bit of cannibalization at the main stores because we are seeing acceleration on the Studio Stores, it should also -- you know, the growth should have been even higher? And secondly, what has been the response that you're getting? Because it's been now a couple of months that we've had these formats, like from the -- from your channel. How are they -- I mean, what are the advantages of this? What kind of models are doing well at these stores? If you can share some insights into it?

For the Studio Store -- let me give Lalit a break for a second. The Studio Store, the breakeven point is roughly only about 7 or 8, depending on the location. So even if we take all 500 of them, that's 3,500 a month extra. So it's not huge amount yet, but what it does is -- I remember visiting one Studio Store of a rural part of UP. And I saw one old guy brought his bike. He was literally dragging that bike in. So I sort of felt bad and I apologized as to what happened and he said, "Look, nothing wrong. I wasn't riding my bike because there wasn't a Royal Enfield nearby. I didn't want to go to the main city to get it serviced. Now that there is a Royal Enfield nearby, I'll get to ride it. All I need is my battery charged up." So that's the flip side benefit. Now if you're spread out more often in more places, then people get to ride, and the more they ride, the more they enjoy Royal Enfield, and that helps our sales. So it's direct a result of this is there, as I told you, in the numbers. But there's also that indirect benefit is the vast effect of this as you penetrate deeper into the country.

Okay. Service is something you can -- you really see that that's been a -- the proximity to people has been a big help for this format?

Yes.

Okay, okay. And just last question, if I can squeeze in. There was -- of course, I know you guys haven't commented on it, but there was this expectation that there will be a new platform rollover or a new product portfolio rollout along with BS-VI. Any comments on the -- is there a platform rollover that you can comment on when it happens? Or anything on the new launch pipeline from you guys?

We don't want to comment on our future product pipeline. As of now, we are focused on transitioning everything to BS-VI, and we'll let you know as soon as possible.

The next question is from the line of Joseph George from IIFL.

So my first question was on how you look at volumes next year. And -- so under normal circumstances, if there was a big price tag related to BS-VI, it would have been normal to assume that volumes would take a beating. But given that we have taken a hit in terms of volumes, not only for you, for the industry, in FY '20 itself on that lower base of -- for instance, your average is about 60,000 when I look at FY '20. Do you think it'll be a struggle to grow next year? Or do you feel relatively confident?

It's very difficult to predict what will happen next year. I think the first half will slightly be a little bit tight because of the changeover to BS-VI. But I think the market -- the sentiment should come back in the second half, and I expect the market to actually grow by roughly about 5% overall. That's my guess. 1 year ago, somebody had guessed for this year, nobody would've predicted a 15% downturn, but that's what happened. So we are in a volatile market. We have to continue to do what is the right thing for our customer and for our channel. We have to continue to bring in new products and expand our new solutions offering as well as grow into new markets outside India. And that's what we're focused on. We're not looking for very short term, what'll happen next month kind of figure.

Sir, the second question that I had was on how you look at passthrough of BS-VI cost. A couple of OEM indicated that given the environment, it'll be very difficult to charge a profit margin on the BS-VI costs, and hence, the percentage margin may come off purely because of that denominator effect. Do you see a same -- I mean, is that how you're also thinking about it? You know, easy to pass the cost, but difficult to pass a profit margin on the additional costs?

In some cases, we can pass it on where possible. And in some cases, we can't. But, yes.

So obviously, it's going to happen. I mean, we're going to be a little selective or choosy about the kind of platform and SKU and all that stuff. So it's not going to be very easy to pass on cost plus margin. That's for sure. I mean how much can you pass on, you have to kind of test the market and find out.

Okay. And the last question that I had was the relatively lower-priced variants that you launched, for the Bullet 350 and the Classic 350. How has been the customer adoption there? Have you seen your normal Bullet 350, Classic 350 customers shift in mass to the low-priced variants? Or is the mix still in favor of the older ones?

I mean, this was to make the bikes more accessible. They come to the store, and you obviously have to upsell it. In the end, I would say the Bullet X model that we launched was maybe less than 10% of our sales, right? So -- and Classic X was actually not margin dilutive at all, because it was directly a result of cost reduction. So what it does is offers a lower-priced entry for the customer who walks into the store. It doesn't necessarily mean that he buys just that bike. So we did not see -- in fact, the entire Bullet franchise actually went up in overall, and the Classic remained where it was. So that's why, probably, our market share went up.

The next question from the line of Chirag Shah of Edelweiss.

Sir, just a -- first a basic question on gross margins. Did we see raw material benefit in the quarter? Or it's likely to come in the ensuing quarter? Because our gross margin versus the -- your peers, be it in 4-wheelers or 2-wheelers, we are in a different trend where everybody is seeing some benefits that we have not seen in the reported numbers.

So there was -- it was a mix of both. In case of some commodities, there was a bit of a benefit. But generally, I would say, now and for the next few months, it's going to be adverse only there, with the precious metals going the way they are going.

Exactly.

There's the China issue. China has shut down most of its manufacturing for the next few days, and let's see, when they open up also. I don't see any relief over there. So what others are upholding, I don't really understand. But like I said, to each his own. The way they source and the way they book orders, so it could be a function of that. But we are not seeing any tremendous benefits there, to be honest with you.

Yes. And the second question was on 650cc Twins. Is it possible to indicate what is the current production that you are doing? Any other capacity that you have? Because we are looking to scale it up to upward of 5,000 units at some point of time. So are we there? Or we are at a higher levels of production capacity?

No, no, no. We are still at 5,000 capacity -- from a capacity standpoint, at 5,000 only. Like I said, there was a huge surge and it started all of a sudden. The market also took its toll. The more expensive, the more higher it was, the bigger will be the hit on you. So we are still in that phase. But some normality -- normalcy has now come in because the BS-IV have gone away and the BS-VI have come in. So we'll see from a trend perspective how it behaves, because there also it's gone up by the way.

And just a follow-up on the earlier question on the platform side. So why not -- what was the thought process behind not introducing a new platform along with BS-VI, because that would have really bring a notable amount of excitement? Is it more to do with costs? It's more to do with demand environment? Or how do you look at that part? And when can we expect you gaining confidence that this is a time to launch new platforms or transition to new platform?

I don't think my confidence has anything to do with launching of a new buyers to a new kind of platform. But like we've said, given the product pipeline that we have, the product thinking that we have, and I'm going with many years now, we're saying that we have a plan for the next 5, 7 years. In that whole scheme of things, you sort to understand the first one off the block. Then you see the risk as we have, kind of, comes along. It's absolutely -- it's silly to talk about new bikes, new platforms, when and all the stuff. When it happens, I hope we convince you that these are damn good bikes.

The next question is from the line of Pravin Yeolekar from CGS-CIMB.

Sir, my question was specific to Classic 350 BS-VI. Now in Classic 350, we have provided a better value proposition to customers with the alloy wheel and -- but it seems like it costs around 17,000. So is it -- just wanted to understand, so is it just we have passed on the -- it is fully passed on? Or it's just a cost -- we have absorbed some of the costs initially?

So you know, it's not about passing, but the portfolio as a whole, the intention is to pass on a large part of the cost. So that's where it stands. So like I said, within Classic or X or Bullet, there are many SKUs. So some we'll pass on cost plus a few margins. Some we'll pass on costs. So therefore, as a portfolio as a whole, we will pass on the cost.

But is it right understanding that this is the initial pricing and going forward we will just raise it as we go ahead? Considering a better proposition to...

It all depends on how the commodities are behaving, and how our own internal cost structures are kind of going through. So that's really a #1 function of that.

Okay. And my second question was on 500cc product portfolio. So how do we look at that? Because it's not doing well. I mean we have seen a large part of decline in that portfolio. So considering the basic challenges, so how are we going to -- ahead with this in BS-VI ?

I think we did announce last week, including with the press releases of 500 portfolio in India will be discontinued, it's not going to BS-VI, because we have our 650 Twins which will do this job in an exceedingly better manner.

Sure. And sir, what was the proportion of BS-VI in our Jan dispatches?

In Jan...

1/3.