Eicher Motors Limited (505200) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. On behalf of Emkay Global Financial Services, I take the opportunity to welcome you all to Eicher Motors Q1 FY '22 Earnings Call Webinar. From management team, we have Mr. Siddhartha Lal, MD of Eicher Motors; Mr. Vinod Dasari, CEO of Royal Enfield; Mr. Kaleeswaran Arunachalam, CFO of Eicher Motors. We thank the management for providing us the opportunity to host the call. We request management for opening remarks, which can be followed by Q&A session. Over to you, sir.

Yes. Good afternoon, evening to everybody, and welcome to the Eicher Motors' earnings and quarterly call. Before I get into the financials and business update, I just want to -- you would have seen the announcement that Vinod Dasari has decided to leave Royal Enfield and to start -- I mean, to get into -- continuing with his own hospital project that he has been working on and his wife has been working on. So I just want to take the opportunity to tell you that Vinod is going to be leaving. And this is his last call in -- at Eicher Motors. I want to wish him all the very best, and we'll ask him to say a few words after this. I just want to also confirm that B. Govindarajan, who's been with Royal Enfield for over 22 years. And who's currently the Chief Operating Officer, will be taking over as Executive Director in charge of all Royal Enfield business after Vinod leaves. So Vinod, would you say a few words first, and then we can get on to the business update.

Thank you, Siddhartha. I appreciate the kind words. I think it has been a fabulous, though short journey at Royal Enfield. We had many external challenges like COVID and all that, we came through all of that and continued on our path to what we wrote down as RE 2.0 goals, which was to grow significantly outside India, which was to grow significantly in non-motorcycle and it was to substantially expand our digital transformation. All of that, we did quite well. And I think the long-term plans of the company are solid. We, as a company, have always thought very long term. So I'm super excited about the future of Royal Enfield. It's just that many years ago, we moved back to India and we wanted to do something for the society. My wife was running a charity clinic for quite some time. And we -- she was not able to serve the purpose completely because -- we didn't have a hospital. So we invested what we saved into a hospital. And when we did this thing, she realized that she can't run it herself and it's a not-for-profit hospital. And Siddhartha, just to correct you, it's not a hospital I build. My new boss will be quite upset. It has got some picture. My wife built it, I'm going to be working closely with her and trying to at least bring this not-for-profit hospital to sustainable things, and all your best wishes will certainly be useful.

Yes. I'd like to, Vinod, thank you very much for all your tremendous contributions at RE and we will certainly take on from there and myself and Govind and the team, and we'll make you proud. Moving on to the financials for -- and business update for Eicher Motors Limited. The first quarter of this financial year like last year was impacted by the pandemic. With the second wave of COVID running through most of April and May and some parts of June, our manufacturing and retail operations were affected due to lockdown and other restrictions. We've continued to stay resilient and deliver on all our focused areas and underscored by our best ever quarterly performance in export markets. We actually had an absolutely stunning quarter from export perspective. We delivered a very large number of motorcycles across the world, including the Americas, Europe, Asia. We saw fourfold increase year-on-year and around a 28% increase from the previous quarter, that means the quarter ending March 31. And if you remove COVID comparisons because they are a low base to base, we actually have an 83% increase over Q1 of FY '20. So it's still a very large increase from pre-COVID. And of course, even in the domestic market, we had a good growth of 91%, but that was on a very low base over last year. On the VECV side, the trucking industry has witnessed extremely tough quarter 1 after a relatively decent performance in Q4 last year. But despite that, VECV registered a year-on-year growth of 167% in domestic market and 189% in international markets, again, on a low basis previous year. And overall, as the economy recovers from the second wave, we do foresee the challenges easing out in this quarter already and in H2. The supply of parts and components and the growing pressure of escalating commodity prices continues to be an issue, particularly the semiconductor shortage, which is continuing to affect us across the board. We are -- we have lots of action plans for that. We are working steadily towards improving the situation. Our suppliers are working towards that. We have alternate sources also in the works. So there's a lot of action in the works, but that is still one of the bottlenecks because our demand position is strong on motorcycles, for sure. And now we have to -- the supply has to [ raise ] to meet the demand. The financials of -- the consolidated financials for EML for the first quarter, we had a revenue of INR 1,974 crores, which is up 141% from a low base last year. We had an EBITDA of INR 363 crores against INR 4 crores last year. And the EBITDA margin was at 18.4% despite, of course, a much lower volume because of COVID situation and resulting in a profit after tax of INR 237 crores this year against a loss last year. So that's our overall backlog and business update -- or I'll say, the overall update. And now, Vinod, if you could maybe give us an overview of Royal Enfield and it's first quarter of this financial year.

Thank you, Siddhartha. As far as Royal Enfield is concerned, we sold 122,000 motorcycles, more than double of last year, where we had 58,000 motorcycle. Highest ever exports, as Sid mentioned in a quarter, an increase of more than 400% at 17,500 motorcycles. In India, sales were impacted due to the nationwide lockdown, COVID waves doing all. But our market share remains at about 28%, similar to where we were the year before at about 30%. But at our end, we significantly enhanced our focus on non-motorcycle business, apparel, accessories as they delivered tremendous growth. And we are on track to achieving our objective of increasing the share of non-motorcycle into total revenue by 220%. As Sid mentioned, the international success shows continuous progress on our vision of becoming a global motorcycling brand. We had a fourfold increase in exports year-on-year, but more than 28% increase sequentially and an 83% increase compared to Q1 of FY '20. The solid performance was -- in Americas is what supported the overall growth. But even in the U.K., Royal Enfield topped segments for 2 segments for June, both in Customs as well as the Modern Classic, where the Meteor did very well on the Custom segment and the Interceptor did very well on Modern Classic. We were the top-selling motorcycle brand in New Zealand in June, and we are among the top 3 motorcycle brands in midsized segment in Thailand. As you might have seen in the news, we commenced local assembly operations in Colombia. The third biggest motorcycle market in Latin America and with the dedicated unit in [indiscernible], this is our second CKD plant in international markets after Argentina and will continue to work towards more. But to begin with, the plant will locally assemble the Royal Enfield Himalayan from this month. As far as production is concerned, it was impacted due to the lockdowns in the supply chain disruptions. As you might have heard, the ABS and semiconductor shortages continue to affect the ramp-up effects. We're working towards quickly resolving these issues with our partners, and we are also finding some alternate sources. On the retail network, though, we continued our domestic network expansion plan over the last 2 years or so. We have more than doubled our network, and we have now more than 2,000 stores. International, we continue to expand in international markets with an addition of 8 exclusive stores and 19 new multi-branded outlets. With this, the total or exclusive stores outside India is 140, and we have 650 multi-branded outlets. In all this, Meteor continues to be a tremendous success. It was launched in U.S., U.K., Europe, Asia Pacific and Lat Am after the successful launch in India last year. It has got great reception and strong Q1 performance across Europe and Americas. It's won almost every award that you can think about, including International Motor Show Award in Indonesia, Motoring World Awards and Bike India Awards and so on. And it does deliver on our commitment to grow and expand the size of motorcycle. So we're truly excited because it's not just a motorcycle, but a whole platform that we are launching in. Along with this platform, we had, for the first time, launched it on the Meteor kiosk digital platform. It was an industry-first personalization where people can design their motorcycles, and we make it specifically for them. They can design it on their mobile phone and place the order. And complete paradigm shift. Nobody had to go to the stores anymore and so on. So all our 2,000 stores are now MiY enabled, and MiY adoption has the parallel benefit of all the accessory penetration going up significantly. 80% of our bookings now for Meteor, Classic, Himalayan, and Twins are now coming via the MiY. And we're going to upgrade this and take it to the next level in the near future as we -- with future launches. We slowly started coming back to the rise as we continue to nurture the spirit of pure motorcycling to enable stronger connect between riders and their machines. Royal Enfield got the top 2 places in the inaugural races of the Dirt Track Riders Association in U.K. And our first ever mile -- half mile win at American Flat Track in Lima, Ohio, half mile race. And to encourage more and more enthusiasts from diverse backgrounds to embrace riding, we introduced a second edition of BTR, or Build Train and Race. This is our women's-only racing program in the U.S.A. The market recovery has started well. The market is still recovering from the second wave of pandemic. We foresee the simulation of production and supply chain constraints to be slowly coming back. It will persist for a little bit, but it will come back. We continue to be on track with our expansion plans and product-related initiatives. None of our long-term plans were affected by all this pandemic. We continue to work harder. And in fact, it gives us an opportunity to accelerate several things. We expect the production to scale up and the sales to improve in the second half of the year as the chip situation starts to growth. Over to you -- back to you, Siddharta.

Yes. Thanks. I'll just give you an update on the VECV financial business performance. The revenue for VECV was INR 1,639 crores, which is up 156% from a low base last year. The EBITDA was at INR 18 crores versus a loss of INR 72 crores last year, resulting in a 1.1% EBITDA margin. And profit after tax, there's a net loss of INR 72 crores against a loss of INR 120 crores last year. The total sales were at 5,800 units, up 173% from last year. Of course, the second wave has impacted business a lot at VECV, quarter 1 was challenging. However, with the improvement in COVID situation and the economy looking up, we are certainly seeing an improvement in the entire CV industry and in the CV performance as well. We are expecting that already in Q2 and beyond. We've been working closely with partners and suppliers and customers in various regions. There is an extending warranties for our customers and supporting our dealers and medical support and financial support. So there's been a lot of work going on to get everyone back on stream. We had had a few very successful product launches in the meanwhile as well. The Eicher's Skyline ambulance has come into the market with very good life-saving features, et cetera. We've also introduced the Eicher Pro 3015XP, which is India's first 17.5 tonne truck, which expands our light- and medium-duty product range from earlier 15 tonnes to now 17.5 tonnes. We also have been doing very well on CNG because the opportunity is very strong in light- and medium-duty trucks on the CNG side. And because of support from government and very good cost economics. And VECV has really strengthened its position in the CNG segment through a wide range of offerings now. So that's the overview for VECV, for Royal Enfield and for EML is a whole. Now on to the question-and-answers.

[Operator Instructions] Firstly, can you give some color on current production situation? Can you talk about ramp-up of production in coming quarters in light of the semiconductor shortages, Media reports today are indicating revised production schedule or target of 650,000 to 690,000 for FY '22. My second question is, Mr. Dasari's exit has come as a surprise considering various strategic plans, how do you see the smooth transition process?

Maybe I'll take the -- sorry, go ahead.

No, you can do that, Kalees...

On the first question, Raghu, typically, we don't give a full year plan of where do we land on the volume, et cetera. But having said that, there has been constraint that you have seen on account of COVID and then on account of the chip shortage that has been coming in. You would see there are plans that we are working on to see what are the opportunities on alternate vendors, how the existing vendors can scale up over a period of time. As an output of that, you would see the supplies gradually resuming back and coming back to its original levels. Q3 of last year, you would have already seen we touched a peak of about 80,000-odd in terms of production. So we are moving in the -- there are challenges at this point of time, but we are confident that as the long term, it will get addressed and our plans are intact for the long term. Sid, you may want to add and take up the second question.

Vinod, you could start and then I can take on the rest of the second part of the question.

I mean as I've had said that earlier, we, as a company, always take long-term decisions and long-term strategic calls. In some cases, we made substantial progress, whether it was international growth or digital transformation or the non-motorcycle portion of the growth. Sid likes to refer to me as a pinch-hitter in cricket. So I came and played my Hardik Pandya innings or something like that and got things moving. And I think the COVID was in a way, sort of a blessing, but we were able to accelerate a lot of other things that were otherwise stalled. And now we have a fantastic team, I mean, I was there merely for 2 years. This is a fantastic company with an amazing track record of success. And these short-term things like chip shortage and all are not going to burden this company. We have strong plans, a very strong team, an excellent brand and they'll go forward and make success a habit again.

Yes. So absolutely. Thanks, Vinod. I think in the last couple of years, Vinod has made some absolutely tremendous contributions at Royal Enfield and put us on a very good track. Govindarajan who's been the CEO for -- since 2013 is now taking over, running of the business at Royal Enfield. And I will, of course, continue to work with him and directly and work on all of our plans in Royal Enfield. So we're very confident of our future, of course, and we wish Vinod all the best.

Moving ahead to the question queue. First off, we have the first question from [ Vinay Singh ].

Best wishes to you, Vinod. It's been a long time since we've been interacting with you. Best wishes for the new venture. I'll go back to the question that Raghu asked. There's a very specific number given in the article today in media that the company is talking about 650,000 -- targeting 650,000 to 690,000 units production this year. Are you denying that? Are you -- as per your internal estimate, is it going to be higher than that? Because it's a very specific number given out. So which is why I do appreciate your comment that production will improve from here on. But then how would you look at it in terms of range that is being commented on?

[ Vinay ], we firstly -- sorry, we don't give forward guidances. So whatever you're reading is speculative. It's not come from us. And therefore, we can -- I mean, that certainly hasn't come from us directly. I mean as we see it, we have a strong demand position. We've got an order book. We've -- and now we have -- and as you can see, our exports is really flying high and we've got a lot of export orders as well. So really, it's all about improving our production. And honestly, the real -- the one bottleneck -- I mean, there will be smaller bottlenecks because it is extremely turbulent times. So it's not business as usual at all in any respect, as you can understand. But the main bottleneck I would say, to increasing our production is semiconductor shortage. We are working on it on many different fronts. We've got a lot of actions going on in order to improve that position, whether it's with our current supplier, where there's also traction of improvement. By the end of the quarter, perhaps and certainly in H2, but it's not a straight, let's say, increase. It's more of a step increase that we're going to see over the next many months. And we also have been working over the last year, in fact, on alternates as well. So we could see traction there. So we have all hands on deck in getting our production numbers as high as we can at this point.

My second question is on the gross profit per unit. As per my estimate, it seems like Royal Enfield has posted an all-time high gross profit per unit this quarter. I assume it would have come from a combination of factors. So could you talk a little bit about the export number that we are seeing almost 18,000 a quarter? Is it sustainable? And secondly, linked to that, Vinod talked about accessories reaching 20% of the target. Is that already becoming sizable that it's contributing to this gross profit? So could you talk a little bit about that?

So [ Vinay ] in terms of gross profit, as you rightly said, it's a combination. So partially, the gross profit has improved on account of international mix being higher and also on account of model mix that has happened in India. And most importantly, the pricing actions have also started easing results in terms of at least getting back to a margin trajectory that we wanted to. So it's a combination of all the 3. We do see our export business as a sustainable one. The demand has been quite good and as we move forward, we should see good traction. And on apparel and accessories, the growth has been strong post-MiY. We have seen our GMA business going up significantly. The long-term targets that we've always been discussing about as a range, I think we would be able to achieve that both on exports and in non-motorcycle.

Next, we have a question from Jinesh Gandhi.

Sir, my question pertains to “apparels and accessories. So our target of 20%. Where we are currently with respect to those numbers? That's my first question. And second question pertains to the order book, which Siddhartha was referring to, so what level of order book we have currently? And lastly, with respect to the new classic launch, if you can share the time lines given that it has been getting deferred because of unforeseeable circumstances?

So Jinesh, unfortunately, I think your questions have got numbers, which, typically, as you would now, we don't discuss. But at this point of time, the non-motorcycle business is pretty small in terms of size. But we are seeing significant progress in terms of let it be the penetration of GMA or the average bill value going up. So we do see that to sustain over a period of time driven by MiY coupled with the new launches that will come in. We don't talk about our new product launches and calendar. You would hear more about it as you go through the quarter. So if there was 1 more question, anything I've missed out?

Order book.

Yes. Again, we don't follow specific numbers on order book. We have a healthy order book at this point of time. We would see as to how do we cater that linked to production as we move forward to the third quarter.

Next, we have a question from Kapil Singh.

Vinod, wonderful initiative. Wish you all the best for the same. May I clarify if the company plans to hire anyone in the CEO position?

We are not hiring anyone in this CEO position. Govind is taking full charge of Royal Enfield business, and I plan to work very closely with Govind on everything, and the same management team continues. So there's no new hires planned at the senior level at Royal Enfield.

Sure. I have 2 questions. So firstly, can you please comment on the demand environment currently because we are not able to see the real volumes because of these shortages. So where is the underlying level of demand right now, if there were no production constraints, what would you be shipping? So that's the first question. And second is on electrification, how do you think about electrification in your segments in the long run? Is it very far off? Or do you think it could happen in next 5, 7 years?

So on the demand side, I think it's a mixed pack to comment as to what has caused what. So even as we speak right now, there has been intermittent lockdowns that you're seeing in many states, Karnataka is into a weekend lockdown and a night curfew. Tamil Nadu has got a lockdown after 5 PM, et cetera. So I think wherever we have opened the traction has been good, and it will be linked to production as to how do we cater to the demand as we go forward. On the EV side, from a business strategy perspective, both on the product and business development, we have got our teams in place. Having said that, for the segment that we operate, specifically, which is the mid size, we think it will be a slightly a long-term process in terms of when EV would fructify and the vehicle would be on road. But we are not leaving any stones unturned from our perspective in strategizing and operationalizing our EV business model. Sid or Vinod, if you'd like to add anything?

Yes, just to reiterate, of course, demand position is continuously improving as the second wave is dried down in the country in India. And as you've seen in international markets, is -- it's very healthy for us. So again, we can't make out numbers, but it is growing well. We have a strong order book and it really -- all focus is on production at this point. I like the way you framed the EV point. You said, is it a long term or 5 to 7 years? I really like that because those are the kind of time lines we're looking at. It's not next year or being year after. That's not when things will happen in our opinion. Of course, there will be products, there will be ups and downs, there will be some headway here and there. But we are really focused on the long term, and that's 5 to 7 years and beyond. We've taken the opportunity to take many steps back to look at a clean sheet of paper, and we've been going that for 3 years. We've got a very good team, capable EV team, working on the consumer side, working on the technology side, working on the business side and we're really confident of our approach to EV. Having said that, we are extremely deliberate. As you've seen in the last many years, it's not the number of launches, which is as important as the quality of the motorcycles and the precision of the motorcycle in terms of being able to penetrate the market and to take share and to pull the market in our case because in India, we are not really taking share much from people, we're just growing the market. So even in EV, that's very much the approach, which is that we're forming the product strategy, the game plan. We're working on technology. We are putting all those things together. It will be a few years before you see anything from us. But that's because it's a very deliberate plan because when we do come with the motorcycles at the right time, because I think you also intimated that the market is not really ready. In India, for sure, from a price value equation, currently it's way off. An equivalent EV is maybe still double the price if you were to be -- if you were to sell it with any margin than an equivalent petrol rate. So it's really not the right time to make a big entry into the market just because the economics don't work for consumers, even with all the benefits and other things. So we will, hopefully, time it right so that we're not in a position where we have to lose so much money or anything of the sort. But we are working tremendously on EV. We are extremely bullish about our own EV strategies. But it is in the 5- to 7-year horizon where a lot more will happen in Royal Enfield moving further.

Next, we have Venugopal Garre.

Firstly, best of luck, Vinod, for your new initiative. I have just 2 small questions. One is on the product launch cycle, now given the challenges you're seeing on the supply side, the last launch for us was probably around 11 months back. So I'm assuming that given that you had a fairly healthy pipeline, 2 things might be happening. One is bunching up of products. I'm assuming you would want to still keep some gap between 2 launches. And number two is, the shortages on the supply side, how does it sort of alter your next launch or the launch which is probably imminent? That's the first question.

Yes, there is, of course, that issue. I mean if you're not even produced enough, it's -- you can't really launch a product. You need enough stock to launch a new product because -- in our case now, we've seen that there's enormous demand in the early stages. And if you can't fulfill that, it's really sort of -- it could even have detrimental effect on the new product. So -- but that's only a couple of months here and there. It's not the biggest issue. We want to make sure that we do it right. So that's the approach you've seen from Royal Enfield in the last many years that no stock cuts do it absolutely right. And we believe that's really helping us in everything way possible. There will be some bunching up, but we are well aware of that. I mean there will be some pushback and other such things. But really, I think as we -- hopefully, if there's no other major situation, as we move forward in the next few months, the supply side, as you talked about, will also certainly improve. And then our product cycle should get back on track. There is no question because of the severe lockdowns that we faced also in the last few months that there has been some push back by a few months, but it's only a couple of months at most in most cases for our new product.

The second question is -- see, the chip shortage part. Sorry for asking this again, but is it worsening compared to what it was earlier? Because it's related just to you. We understand that other auto companies are also have been highlighting this fairly vocally of a long period of time now. So is it worsening compared to earlier? Number two is, when I speak to semiconductor companies, which we have done over the past months as well, we do indicate that usually auto companies to get an advanced alert because it takes about a few months of production cycle for the product to come out. So in that sense, what you're seeing today? Does it really surprise you in terms of the shortage that you're getting hit right now?

Well, the big thing is it's very turbulent impact because there's -- things have been evolving a lot. So while some parts of the supply chain has improved other parts -- and this is -- for chips, unfortunately, this is not at all under our control. It's not even in India. There's -- we were reviewing it recently in some cases, there's 7 different countries, 3 different continents where we -- where the thing gets processed before coming into our shows in Chennai. So it's quite complex. It is turbulent. So 1 day, we'll get better news. Next day, we'll get worse news. But the general trend now, as we're seeing, is that there will be step-by-step improvements, not 1 day enormous improvement over the next few months, but there's going to be a small step-by-step improvement in supplies for us, I'm talking about particularly in Royal Enfield. We've also activated over a year ago, additional suppliers and other things for different components that we have. So we should be making use of that as well in the coming months. So we do see a better situation in the coming months, but it's still a bit cautious because it's not really -- I would say, for the next many months, we're not going to get our peak requirement. So whatever our peak requirement is, that's not going to come yet. But it will be a step-by-step improvement over the, let's say, course of the rest of this year. Hopefully, by the end of the year, it should be nearly at the right level. Yes, that's how it is.

Next, we have a question from Gunjan Prithyani.