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Eicher Motors to ride on Enfield's success

Eicher Motors has emerged as one of the most sought-after stocks in the Indian automobile sector due to the raging success of Royal Enfield bikes. The company's impressive set of financials for the first quarter of 2013, mainly due to the runaway success of the niche, premium bike, vaulted the stock to a new high of Rs 3,285 on Tuesday.

When other 
two-wheeler makers are offering heavy discounts and extended warranties to clear inventories, Enfield bikes command a six-month waiting period. While this is likely to come down this fiscal as the company's new plant at Oragadam, Chennai, commenced production last month, the demand for the bike is only likely to grow stronger; this already appears to have been factored into the stock's price, which has risen by over 57% in the past year and by over 160% in the past two years.

The strong demand for Enfield bikes has been improving not only the company's revenues but also its realisations; in Q1 2013, the average realisations for Enfield improved by 3.5% year on year, and by 3% sequentially. The surprising element of the quarter, however, was the significant improvement of about 400 basis points in the company's EBITDA margins, led by commodity cost benefits. On a standalone basis, the raw material cost in relation to sales contracted by 160 bps, while other expenditure as a percentage to sales declined by over 250 bps resulting in the margin expanding to over 17%.

On a consolidated basis, which includes Eicher's commercial vehicle (CV) business in a JV with 
Volvo, the impact on the company of the slowdown in the overall commercial vehicle industry was visible as CV sales volumes contracted 12% year-on-year. But, thanks to a better product mix, net realisations in the CV segment improved by about 8% over the previous year. There was, however, a marginal compression in EBITDA margins as discounting continues to be at elevated levels in the CV segment, though, according to management, it has stabilised over the previous quarter.

The upward movement of Eicher's stock may continue due to Enfield's success. The stock is already trading at a trailing 12-month P/E multiple of over 25 on a consolidated basis, making it an expensive buy, and limits upside at the current levels.

But with the company all set to increase production of Enfield bikes, and with the management seeking to tap the export markets in emerging nations aggressively, one can expect more fireworks from this stock in the coming months.

What can also help this counter in the coming months is the increased level of FII interest in the company. The FII shareholding in 
Eicher MotorsBSE 4.78 % has increased from 5.93% in Mar 2011 to 7.07% in Mar 2012 and 12.88% at the end of March 2013.