Q4 review: Can Royal Enfield sales boost Eicher Motors profitability?

Royal Enfield (RE) maker Eicher Motors will be announcing its fourth quarter ended March 31, 2017 financial performance on Friday.

On the back of strong Royal Enfield demand, the company has managed to outperform in both bottom-line (net profit) and top-line (revenue) in past three quarters of financial year 2016-17 (FY17).

In last quarter (Q3FY17), Eicher Motors saw a whopping 50% increase in consolidated net profit at Rs 418.20 crore as against Rs 278.70 crore a year ago same period.

During Q3, volume of Royal Enfield grew by 38% on year-on-year basis to 1.74 lakh units, while commercial vehicles volume dropped by 7% due to demonetisation drive.

However, this Q4, analysts expect the motorcycle to witness just 20% growth.

Analysts at Edelweiss Financial Service and Motilal Oswal expects Royal Enfield's volume to be at 178,228 units compared to 173,838 units of Q3FY17 and 125,744 units a year ago similar period.

Eicher Motors while announcing the March month sales numbers stated, that overall Royal Enfield volume stood at 666,490 units up 31% compared to 508,154 units of FY16. In March month, sales of RE grew by 17% yoy at 60,113 units.

Chirag Shah and Karthik Subramaniam, analysts at Edelweiss said, “We expect revenue growth of 23% YoY for Royal Enfield led by 20% YoY growth in volumes.”

Motilal report said, “Demand for RE at the retail level to access the impact post BS-III ban and demonetization on order book.” Adding it said, “Update on current demand trends for commercial vehicles, discount levels and channel inventory post BS-III ban.”

Going ahead, commercial vehicles are seen growing by 35.80% yoy and 46.21% qoq at 17,230 units this Q4. Motilal added, “Update on current demand trends for commercial vehicles, discount levels and channel inventory post BS-III ban will be key things to watch.”

For VECV, these analysts said volume will grow by somewhere 11% yoy on the back of pre-buying before BS-IV implementation. However, Edelweiss expects one-time impact of Rs 600 crore to factor in higher discounts to clear the BS-III inventory.

Further Motilal expects net realization to improve by 1.8% YoY but to remain subdued at 0.6 on QoQ basis, supported by price hikes. EBITDA margin should expand 240 basis points YoY to 32% and 50 basis points qoq, driven by operating leverage.

While the duo at Edelweiss expects operating margins to improve 30 basis points sequentially to 31.7% on account of benefits of operating leverage.

Overall Edelweiss expects Eichers net profit at Rs 4,685 crore, growing by 30% yoy and 12.02% qoq. Whereas revenue is seen at Rs 18,832 crore, rising by 22.90% yoy and 2.63% qoq.