Why Eicher Motors has seen a 52 week low Share Price of Rs.18800 (on 30 January 2019)?

Eicher Motors Limited is a parent of Royal Enfield that offers middleweight motorcycles in India. The company is engaged in manufacturing automobile products and related components. The company operates in business verticals, including motorcycles, commercial vehicles and personal utility vehicles.

In the last 4-5 months, there is a downward trend in the share price of Eicher Motors.

Falling trend of Eicher Motors share price

Source: www.moneycontrol.com

What are the reasons behind this?

Let’s see sales numbers and financial ratios of Eicher Motors.

1.Sales Number(Royal Enfield):

Sales of Royal Enfield in last 3 Quarters

Royal Enfield ended the year 2018 with a decline in total sales for the month of December. The bike maker sold a total of (domestic + exports) 58,278 units in December 2018, a 13% drop in volumes as opposed to 66,968 units sold during December 2017. Royal Enfield faced issues like workers strike that resulted in a loss of production and sales number in the last two months of 2018.

For the first time in last 5 years, in the December 2018 the sales numbers came down from 58,278 from 76,000 in April 2018. This may not look a huge fall, but for a company whose sales numbers have only been growing every quarter, these sales numbers came down.

As mentioned in our earlier article: Why Ashok Leland’s share price is falling? The Auto industry is going through a negative cycle. Typically, the Auto industry has a cycle of good 4 years and this time it got extended to a 5th year. That is why the next 1 or 2 years may be a little sluggish.

As a result of this, the stock (Eicher Motors) which was trading around Rs. 36,000 was come down now trading down to a 52-week low at Rs. 18,800 on January 30,2019. While it was trading with a PE ratio of 48-50 earlier, is now being traded with a PE ratio of 31.2.

2.Return on Capital Employed = 49.40%
Return on capital employed measures the company’s profitability and efficiency with which its capital is employed.
Return on capital employed is very useful while comparing the performance of companies in capital-intensive sectors.

3.Return on Equity (ROE) = 31.68%
ROE is a measure of how effectively management is using a company’s assets to create profits.

Both the numbers of ROCE and ROE are very strong.

3.Debt-to-Equity (D/E) Ratio =0.02
Debt-to-Equity (D/E) Ratio is used to evaluate a company’s financial leverage. Since, Eicher Motor’s D/E ratio is 0.02, the company doesn’t have any kind of burden on them.

The market has over-reacted because of expectations. The market thought that the growth will remain the same. And now the market is reacting on month-on-month numbers rather than future expectations. And this how it will be right now because ultimately in short term the market direction is decided by speculators and operators.

In long term it is all about the numbers. These numbers will improve in the future after the revival of the cycle. But this particular year might be negative and might remain sluggish for the next 12-18 months.

Volvo & Eicher Motors (VE) Joint Venture :

A joint venture between the two companies in which Eicher Motors is 55% and Volvo is 45%. They sell commercial vehicles. The technological inputs of Volvo and the strong network and market share of Eicher Motors has created a nice synergy between the two.
In April 2018, they sold 3,900 vehicles and in December 2018 that number has become 6,200. When you compare these numbers with other vehicle industry numbers or particularly with truck industry numbers, they are in a slowed down manner. Thus, this is a silver lining here.
Because of this joint venture the other income percentage is increasing, and these numbers have provided the current support to Eicher Motors. This new venture will be of great use and will be very fruitful in the future with the numbers of these venture even reaching those of Royal Enfield numbers.

Summary :

  1. The Royal Enfield brand of bikes of Eicher Motor has a great market share. And these types of bikes can be very successful in developing and emerging countries (economies). Eicher Motors is trying to enter in the markets in multiple countries.
  2. Eicher Motors might soon experience a great run again, with so many things happening.

Market Scenario :

Generally, this is the current time for building the portfolios. There is a lot of pessimism in the market right now. Instead one should use this time to build their own portfolios and convert the pessimism of the market into the optimism.

Notes :

  • The numbers that are used are approximate and have been rounded for presentation purposes.
  • We are not in any way saying that these are bad companies, or the stock of these companies are bad
  • We are also not suggesting anyone to immediately go and buy these stocks or invest in the stock markets.

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