Eicher Motors Limited (505200) Earnings Call Transcript & Summary

Yes. Good evening, everyone. Thank you for joining us today. On behalf of Edelweiss Securities, I would like to welcome you to Q3 FY '21 post results earnings call for Eicher Motors. Eicher Motors is represented by Mr. Siddhartha Lal, Managing Director, Eicher Motors; Mr. Vinod Dasari, Chief Executive Officer, Royal Enfield; Mr. Kaleeswaran, Chief Financial Officer, Eicher Motors, along with the IR team. I would like to thank the management for taking out time for the call and giving us the opportunity. We shall start the session with the opening comments from the management and then she shall move to Q&A. For Q&A, I would request everyone to use the raise hand option, and accordingly, we will take questions turn by turn. I would like now like to hand over the floor to Siddhartha for initial comments. Over to you, Siddhartha.

Yes. Good afternoon to you, and welcome to our Q3 results for FY '21 for the earnings calls for Eicher Motors Limited. As you know, the automotive industry has finally had a good festive season after a very tough period previously, and we're seeing signs of growth coming back. At -- yes, and also further demand in this coming period that we've seen now. So at Royal Enfield, we saw strong demand from across the country. Of course, it was really aided by a new launch of Meteor, which has turned out extremely well and has had a lot of traction in the market. So we've had a very good launch of our new motorcycle. In addition to that, our international markets are also now finally rebounding well. We've opened our first stand-alone store in Japan, and it's a flagship store, and we're really ready to take on the middleweight market in the home of the biggest motorcycle manufacturers in the world. So it's a very proud moment for us to be in Japan and to get the kind of response that we've had in Japan. Moving over to commercial vehicles. The truck industry, especially the medium and heavy-duty segment is rebounding well after a long downturn and then the -- COVID downturn as well, which added to it. Finally, we're seeing some rebounding in medium and heavy-duty as well as a good pickup in economic activities. So we have -- in VECV, which is our joint venture with Volvo, we've gained market share in the segment with our wide range of offerings and are extremely solid BS-VI switch over that we did. And it's absolutely best-in-class. We've done really well in BS-VI. And we've therefore gained share and gained margins on the BS-VI products. So it's been a very good BS-VI for us in heavy -- in trucks. On our financials, talking about the consolidated financials for EML for the third quarter ended December 2020, these don't include our VECV numbers. So these are only for the Royal Enfield business in EML. So it's been a very promising quarter. We've had a highest-ever revenue at INR 2,828 crores. So that's up 19% from INR 2,371 crores last year. Our EBITDA was at INR 672 crores, which is up 13%. Our EBITDA margin is at 23.8% versus 25% at last year. And profit after tax is INR 533 crores, which is up 7%. That's the overall financials for the quarter. And now I'll hand over to Vinod Dasari, the CEO of Royal Enfield, to speak about the performance of Royal Enfield.

Thank you, Siddhartha. As far as the motorcycle sales go, we did 199,000-odd motorcycles, up 5% over last year. Our exports were up almost 30% at 10,800 motorcycles. In India, the demand was very strong, and the overall bookings were substantially higher than last year, especially aided by Meteor as Siddhartha said, and we had a healthy booking run, which has resulted in a very large order book, which we are very pleased with. And the demand was across the countries and now the matured states like Tamil Nadu, Maharashtra have also started to come back. In India, the market share is that we look at greater than 125cc actually improved from 25% to 27%. Our production, which was having trouble, picked up quite nicely, and we increased the production run rate to 75,000 in the month of December. We picked up production in Classic and Bullet, hence the waiting period is coming down a little bit. Ramping up the production of Meteor continues to be very strong demand and the waiting period is high. The supply situation has been a bit of a concern. I mean, it was for some parts earlier. Now it's some electronic components occasionally. Something or another keeps coming up, which is holding us back. We couldn't do more. And the recent commodity price -- cost increase has been a cause of concern. This has improved -- increased our input costs. We've taken 3% to 5% price hikes over the last few months. We've actually taken one again just 2 days ago. And we will continue, so that we can offset these commodity price increases. Even for U.K. and Europe, because of the success that we've had in India, we also transitioned there to Euro-5. And now from January 1, our vehicles are doing Euro-5 in Europe. As far as our network is concerned, we opened 43 large stores in India and 129 studio stores during the quarter. Now we have a total of almost 1,900 touch points across 1,500 cities in India. And outside India, we've opened 13 exclusive stores during the quarter. Now we have nearly 100 exclusive stores and we're continuing to focus on LatAm, ASEAN. So we grew, for example, opening 1 in Dominican Republic, added 4 stores in Argentina, 3 in Colombia, 2 in Thailand. And we are very proud of the fact that we became possibly the first automobile company from India, which has a stand-alone flagship store in Tokyo. This is something a matter of pride, not just for Royal Enfield but for Indian auto industry. The Meteor launch was a very successful digital launch of a fantastic product. We've got an outstanding response from customers in India. As you know, it's an easy relaxed cruiser, but it's also ground-up thorough-bred motorcycles, all new. And we've got such great feedback from the customers on how comfortable it is, its smooth riding quality, very refined technology of the engine and the new tripper navigation pod that we had was doing very well. The booking rate of Meteor continues to trend at a much higher level than Thunderbird. And we see potential in expanding the middleweight segment, both in India as well as international markets. So hence, we've now launched it in Europe, Australia and -- as well as in Thailand. But the key thing with Meteor was that it was launched in a new initiative called digital solution called Make It Yours. We launched it first with Twins and then we went furlong with the Meteor. And it takes us much closer in redefining the customer purchase experience. It's one of a kind to -- it's nowhere else done in the 2-wheeler industry. It allows the customer to personalize and accessorize the motorcycle to their requirements. Using a 3D configurator on the RE app or the website or on the mobile phone, the customers can choose a huge variety of permutation combination. And to give you just an example on the Meteor alone, they can have 500,000 permutation combinations, just on the Meteor. So like that, it is significantly different than anybody else. The key difference, however, is that it's not that we keep an inventory of all of these vehicles. We actually make to order. So right now, the demand is very, very high. But otherwise, we said that whatever is ordered, within 24 to 48 hours we will manufacture it and ship it. So a large portfolio of our motorcycles, the Twins and the Meteor and the Classic have also moved to the MiY. And we're getting a very good response. Penetration of personalization and accessorization is increasing. And most -- almost all the customers at Meteor opt for it. We give them a wider choice. And since the launch of RE app in August, the daily usership of RE app is now tripled and the amount of timing that the customer is spending on our app is doubled in the last 1 quarter. So we're very excited about it, both of the RE app as well as MiY. This new digital frontier is helping us in leaps and bounds. So we decided that all new models in future will now come with the MiY feature. And inspired by how successful the MiY was on the motorcycles, we launched the MiY on apparel also. So this Make It Yours initiative is now application to our entire range of gear and apparel as well. One minor product launch that we had was the Classic CTG launch, the color trim and graphics change, now available in two new colors. It's fantastic. It's doing -- it's looking very nice, the Orange Ember as well as the Metallo Silver. We continued on the digital engagement pick up in the last quarter. For example, the share of online inquiry has increased 3x the pre-COVID level. And the booking is 5x the pre-COVID level, so 1 quarter to another quarter. And the website visits is now almost 8 million compared to, it was about, 3 million before, so tripling in every aspect. And our voice of share because of this digital engagement has gone up by 8% to 34% of the motorcycles. Interestingly, we just launched a rewind to 2020 video on YouTube, and it won the Top 10 Most Watched Videos on YouTube in the best videos on YouTube. So we are very excited about the kind of work that we are doing on the digital front. We won many awards, the interceptor was awarded MCN's Best Retro Bike of the Year, second time in row. And it also won the Bike Sales Year of the award in Australia. So strong endorsement of the popularity on the customers' confidence. In India, meteor has started to win awards just 3 months since its launch. And it was adjudged the best motorcycle in the category by almost all the top auto publications. So we're very excited by it. One sad point about all of this COVID is that all the marquee wins and our rides, they have been put on hold due to the present situation, but we are hopeful that things will resume soon as the situation improves. So back to you, Siddhartha.

Yes. So I'll just take you through the financials and business update for VECV, which is our joint venture with Volvo. The revenues for VECV were at thread INR 2,615 crores, which is up 24% from same quarter last year. The EBITDA was at INR 226 crores, which is up 67%, and the EBITDA margin was at 8.6% against 6.4% last year, resulting in a profit after tax of INR 58 crores, which is up 89%. The total sales of trucks and buses stood at 12,800 units, which is up 3.3%, which is better than the 7% decline that the industry still had in this quarter. VECV, therefore, gained market share in heavy-duty and bus segments. Our exports volume grew at 2% against an industry drop of 17%. So that's on the sales. Some large developments are -- we had -- VECV inaugurated its all new fully digital and state-of-the-art manufacturing unit in Bopal. We've been working on this for a couple of years, and it will deliver the entire light and medium-duty range of Pro 2000 series, which has come into market recently to amazing reception, which has been replacing Pro 1000 series -- largely replacing Pro 1000 series in India, which is our mainstay product in. So Pro 2000 has come in and is doing exceedingly well, and these are being made in Bhopal. We're delighted about that. These will all be BS-VI trucks and buses and will be supplied to 40 countries. So that's our overall mobile plant, which is up and running and doing really well. We've also had an extremely strong digital focus in the last couple of years, culminating in a very strong activity last quarter as well. It's really helped us in improving our market penetration, customer response. We've had -- we're the only company in India now to have only CV company to have 100% connected trucks. Every single one of our trucks since August 2020 is 100% connected. So that means we have data coming from those trucks at any point given -- based on the customers' acceptance. And we're able to support the customer based on signals from the truck and the Eco and the management. So it's a very, very advanced level of trucking and connectivity that we have at this point. What it also helps us do is have advanced diagnostics coming in from the trucks, which comes into India's first and industry-first uptime center, as we call it, for better customer response. We're able to predict customers' problems even before some of them happen. So some of these -- that's the direction in which we're going. Before a breakdown, we're able to support the customers. So that's how we're trying to do these things. It's very, very progressive, and it really feeds into our concept of modernizing of commercial transportation in India and emerging markets. We've also been able to advance tremendously our digital sales and marketing and including our much improved website experience, our product content, engagement, online customer engagement. And we're able to really meet hundreds and hundreds more customers due to video conferencing rather than traveling as much. So I'm seeing from the top management and as a result we are able to have face time with these people and able to understand their issues and also resolve and do extremely well with that. So we expect that the industry will continue to improve over the next few quarters. It is certainly -- we've had a long downturn and then COVID also further reduced -- further cut volume. So there is a pent-up demand in our opinion. We've added strong network, 41 touch points for the 9 months, that means YTD December 2020. And we continue to expand and add service and parts and reach through introduction of new digital tools and enhance customer experience. So that's really our focus. There's another big news. We had acquired Volvo Bus India business last quarter, which was completed last quarter. Volvo Bus, as you know, is an extremely strong brand in India, the absolute premium brand of buses in the country without any share ruled out. And VECV has acquired that entire business. So the plant, the distribution of the business from our partners, Volvo, who are running it by themselves in India, but now VECV is running it. We've started the integration process. It will be -- that unit is in Hoskote in Bangalore, and we will be working on really taking the Volvo bus business to the absolute next level in India. But also in working jointly with Eicher trucks and buses because it gives us then the most comprehensive range of buses in the entire country between -- in VECV between the 2 brands that we run now, which is Volvo and Eicher buses. So we're delighted that Volvo Bus has also joined the VECV family now. And that's the update and news from us. So over to you for questions, please.

[Operator Instructions] The first question is from the line of Kapil Singh from Nomura.

Hello. Can you hear me?

Yes.

Sorry about that. I think I was on mute. Sir, firstly, could you share how are the booking trends, what is the booking on hand that we have currently?

We don't give out specifics on booking, but all I can say is it's very healthy, and it's more than a month. I don't want to give out much more specifics than this.

We had shared it last time, sir.

Yes. I'm still new to the company, so I'm allowed to make some mistakes. Kalees is even new. So I didn't let him answer that question.

Okay. Secondly, I wanted to check, just in terms of demand over the last 2, 3 years, we have seen that it's been, for the industry and for Royal Enfield, a bit, somewhere in the same zone over the last 2, 3 years. So just your thoughts on what has been the key reasons for that? And how are we planning to address that?

Demand has been strong. So the vehicle addressed that is through increases in capacity and debottlenecking and managing our supply chain well. But the 3 reasons that I would say, Kapil, why our demand has been strong is, first and foremost, an incredible pipeline of gorgeous motorcycles. I mean, the Twins was a huge hit, then the Himalayan upgrade with a huge hit. Then of course, the Meteor that you're now seeing and the whole range of products that we're talking about. If you recall our previous chats, we had said that we want to have now a new model every quarter from here on. So that's been lined up. We had -- despite the challenges of COVID, we've been able to execute that. And the second major thing is our expansion of network, both in India as well as overseas, we have more than doubled our network in the last 2 to 3 years. And we are growing internationally also very well. And the third is the huge focus on digital, it's been truly transformational. And the digital is not just about digitalizing internally or having factory automation and that kind of stuff. But enhancing customer experience by leveraging digital. So that has -- those 3 things, in short, have been the real key reason why our demand has been going up.

Sorry. Sir, my question was actually over a slightly longer period. If I look at over -- I mean, last 2, 3 years, the industry as well as Royal Enfield volumes are somewhere in that, like, say, 65,000 per month kind of rage. So that's what I was trying to understand that what do you think is the key reason for that? And how are we addressing that? How do we head to 70,000, 75,000 per month?

In December, we were at 75,000 a month.

I think the answer is the same, Kapil, to what Vinod said, anything, the 3 points are absolutely spot on in terms of what all we are doing. And those activities are only accelerating. So the products are improving more and more or, let's say, better and better new products are coming out. The distribution is improving more and our ability to reach people digitally is -- and engage people digitally, has also gone up multifold. So these are the main parameters over the coming -- so I mean, of course, there's been a lot of turbulence over the last 6, 8 months, which is not showing the exact picture, obviously, because we are also not able to make enough motorcycles at this time as we would like to. So -- but yes, the demand picture is strong, and that's what's fueling the growth from what you were saying, the 60,000 level to the next levels that we are working on. And all the products, the distribution and the reach, the distribution -- the digital and people reach customer reaches, it's all working very strongly in our favor. And generally, we are seeing that the upgrading is continuing in a strong way. That means people are continuing to want to upgrade to better motorcycles.

The next question is from the line of Mr. Nitin Arora from Axis MF.

Sir, just a question on the demand, like you said in the last quarter, our backlog is some 125 or 120 plus. I'm not asking the number for this, as you said you don't want to give it. But we thought that it's like a 2 months waiting period, and RE would be doing some 75,000, 80,000 retail because that kind of a backlog is what's shared. But when we look at the retail which is trending around, you can correct me if I'm wrong, I think on an average whether impressive or on a nonspecific period has not crossed 60,000. And the backlog was 125, something like that. Now when we speak to the channel, the waiting periods are almost back to 5, 7 days or even 0 days in case of Classic and Bullet. I am talking about ex Meteor. Sir, I just want to understand you always guide us in the right way. Who are these customers who are booking and the booking numbers, which were shared are actually not taking the bikes. How we should read this? That will be really helpful. That's my first question.

Nitin, I think you've got some facts wrong somewhere. If what you are saying is true, we should see a very high level of cancellation. We are not seeing that. Cancellation is whatever, low digits, low single-digit numbers that we always had, it's the same level. So bookings continue to be high. Our channel inventory continues to be very low, less than 2 weeks and we -- I don't know where you're saying 50,000 retail. I think in December, we reported that's...

60,000 retail on an average.

But in December, we had 70,000 retail. January, we had nearly 70,000 retail. And yet, we continue to have a very strong booking pipeline in the backlog.

Okay. Then sir, what is the reason the waiting period is coming down there?

Well, waiting period on some models is coming down, some models is very long. And we are working towards resolving the waiting period. When customer wants a bike, we want to be able to deliver the bike. We don't want the customer to be waiting forever.

Okay, sir. And this retail, sir, I'm talking more on domestic, not on the total exports. So when you said 70, that is including exports. Is that right?

Exports is very less, no, exports.

Okay. Okay. Okay. And sir, my second question is, we talked about making the customization as a theme, people will order and what bike they want, they will make it. Sir, generally, we have increased our capacity a few years back. And obviously, there was a demand issue. And then again, as you guided, the demand is coming back. But generally, don't you think that the making customization, actually half your capacity utilization, if that trend goes up, because already, we have never done our full capacity utilization in any of the year. So don't you think it's like a challenge taking such orders? I understand orders will be very minimal. But this kind of a thing really works, sir? Just need your guidance on that.

Absolutely. I mean, we had the best-ever December and we did a lot of Make It Yours, both on Classic as well as Meteor as well as on Twins. So it's how you do it. We are not saying that you can choose your engine and gearbox or something like that. Lot of it is accessories and all of that. So some of them color changes, graphic changes, bin changes, seat changes, sometimes the wheel change. To us picking a right wheel and a right component from the bin and making the right motorcycle as chosen is the art of doing MiY properly. If you go to a restaurant and order something, which is something customized and personalized for you, he doesn't take extra long. He just continues -- just picks the right amount of spices and right amount of ingredients to make it right just for you. And that's how we do it.

I would just add that this is what in the industry is called as late commit personalization. This is only the peripheral items that we are personalizing, one. Second, it would be within -- I'm guessing, I'm not sure, and I've been to the line recently. So I have seen it, new bikes coming out and all the MiY bikes, they're going alongside the regular bike. So there's no difference like that, the same cycle time. So it's within 1%, 2% of cycle time. So this is not adding to any capacity constraints. It's probably even 0.5% or something in terms of plus/minus cycle times. So there is no change in cycle time. These are bind and sent and assembly is putting them the same way that they would put a normal product. If there is an additional item like a windshield to be added or something, that's actually great revenue for us. It may take a few seconds more to add, but that's amazing revenue for us. So it's not an issue though.

And that doesn't take up the TAT time of the conveyor. It does -- so it doesn't hurt capacity.

Got it. And sir, just lastly, just one last question. While the ASPs are going down when we are so excited on the apparel sales and customization, something we should read from there on the ASP? That's my last question.

Kalees?

No, we did not see the ASPs going down with them. I'm not sure as to where are you're referring to. The ASPs are going up. And as you look at it, it's a combination of one mix. Also, the price increase has also been taken up.

I would say ASPs are actually going up. I don't see why they are down.

Yes.

So I mean, on a quarter-on-quarter, I think ASPs are just flattish versus other 2-wheelers are way higher, so I just thought I will ask you. No problem. I got your answer.

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

And Siddhartha and team, congratulations on the great response to Meteor. And I'll actually start the question on that point. Given that we've just continued the 350 Meteor in Thailand, and if you can just help us understand how has been the response there? And by when do you expect Meteor to see more foray into emerging markets? Because historically, 350 hasn't been a big export push for us, though it's the most affordable and the most accessible within our price line, it hasn't been a big export thrust, right? So if you can just help us the learning there and the response there. And what does it mean in terms of future export potential for the 350CC family? That's my first question.

Thanks, Pramod, for the nice words on Meteor. It has done extremely well, and we are very pleased with it. And so we've already launched it in several countries in Europe and Australia and Thailand as well. So all markets where we play has, there is a 350CC demand and we will take it to all the markets where we want to be in the world.

Vinod, is there something in terms of quantification? Historically, it's been one-fifth of our exports but -- and now with the new platform, far more kind of quality levels which are far more superior, is there a potential that this can be a much bigger export opportunity, the 350CC family?

I wouldn't say just on 350, I think I'm not specifying what model will give us a higher growth in export markets. I think even the Interceptor did fantastically well, right? So 350 is also doing well. And I think maybe we didn't do as many 350 in some of the European markets. But in the ASEAN markets, we were doing very well, let's say, 350CC LatAm markets, we were doing well. So hopefully help us do even more in 350CC. Long run, if you recall, Pramod, we had said that international markets, we should target 20% of our revenue. But that's just a target for us to remind ourselves that we need to grow faster in international markets than we've ever done before. So I don't know if I've answered your question. Sid, if you would like to add something?

Yes, I can certainly add because there's a lot of historical element to this also. 350 traditionally was a type of product like our first Himalayan also, which was meant for Indian market. And 350, we never developed with fuel injection, for example, in the past, right? So we slowly sell 500s overseas. Now as we've come up with our premium product, let's say, our highest products or the 650s, the Twins, the Interceptor and the GT and we've had great offtake, an amazing response for the Himalayan around the world as well. Of course, that was only initially it was carbureted. Then after that, it was always fuel injected, the Himalayan. There was a space which is always going to be there because of the Classic singles not being available. And the 500s and all of that eventually going out of the market, which was a very popular segment. But also from a price positioning perspective, we had to change the game in international market. So when you see now the 350s, they are also priced as city plus motorcycles, right? They're not meant for highways, really in western markets. So in India, Meteor 350 is meant for the highway in because it's going at 100 kilometers, 110 kilometers an hour, but that's not adequate for international markets where these are more positioned as city plus. So we have a -- and the price positioning has -- is different. It's less than what we were selling 500s in those markets because the 650s have come in just above the 500s, what the 500s were at, right? So there's a space below which we are able to do. We're still making great margin on the 350s that means on the -- I'm talking about Meteor, sorry, because that's the only one, which has a fuel injection and is ready for Euro-6 and BS-VI and all of that. So absolutely, we think we can open up new markets. I mean, one, the 650s were always meant for international markets. So there's no question, those are our lead products for most international markets. Second, the Himalayan is already -- despite our initial reluctance to sell Himalayan overseas, it has really, really, really picked up, and people love it across the world. I just got a photo from Berlin of people in snow riding, just randomly riding our Himalayan. So it's really -- I mean it's gone much beyond what we ever had imagined, the Himalayan would have in international markets. And now the 350s as well, we believe, will be strong players, especially in the city, city plus markets in Western countries. But in countries like Latin America, Southeast Asia, you can -- it's for upgraders, like it is for India, when we go long distance as well. So it's certainly an important segment that we're opening out internationally, which was not available in some markets internationally with 350s, like you rightly said.

The second question is on the domestic. Because if you look at Meteor, the Thunderbird used to do 5,000, 6,000 units a month. Now you're -- you opened up Meteor with close to 10,000 production a month. What I understand talking to dealers is, is 35%, 40% of the bookings are for Meteor and the waiting period has extended -- extends up to 4 months plus. So what is the lesson here? Is it like -- is it entirely pent-up demand of Thunderbird, which is coming and hitting you now? You see opportunity for you to expand the portfolio volumes or the volume share of the cruiser segment within your volumes? And B, what it means for incremental new launches? Whether this should be prepared for higher demand, given the fact that Thunderbird in the new avatar has seen a much higher offtake and attracting far more new customers as well? So how should one read about the read across from Meteor for the incremental new launches?

If Meteor is any example, I don't think many of our launches will be incremental in nature. I think all of those will hopefully be...

Sorry, Vinod, I meant the upcoming launch.