“Royal Enfield’s looking to create a new product every quarter”- Vinod Dasari, CEO, Royal Enfield

Update on the Indian Equity Market:

On Wednesday, NIFTY closed 0.5% higher at 11,999. Zee Entertainment (+8.1%), Sun Pharma (+5.3%) and IndusInd Bank (+4.9%) were the top NIFTY50 gainers. Infratel (-3.2%), IOC (-1.5%) and Kotak Mahindra Bank (-1.4%) were the top NIFTY50 losers. Among the sectors, NIFTY Pharma (+3.3%) and NIFTY Media (+3.2%) were the sectoral indices that closed positive. NIFTY Realty (-1.5%) and NIFTY PSU Bank (-0.7%) were the worst-performing sectors.

Excerpts from an interview with Mr Vinod Dasari, Chief Executive Officer, Royal Enfield published in  Livemint on 20^th November 2019.

• He looks at downturn or short term difficulties as a blessing in disguise and according to him, one should never let go of a downturn as an opportunity.
• Looking at the long-term picture, whether it is their processes or manufacturing plant, they continued with the capex and completed it.
• Vallam phase II is done now, they have the capacity of a million bikes, they are not going to build any new big plants anytime in near future.
• The first strategy that they had is that they connected marquee rides to their hobbies. Every rider can do something to support a cause. So, when one thinks about Royal Enfield rider, one thinks of a gentler soul.
• The second major thing was making the stores much more accessible. Over the last ten years, there were 900 outlets across the country and mostly in cities but they came up with this concept, a Studio Store and they initially planned to put up around 200 stores during the year.
• But by October, they put up 500 and those are doing extremely well. More than 90% of them are profitable within two months. That has increased the reach and more and more people who are worried about not getting service they now want to do.
• Historically, whatever Royal Enfield was making was selling. When the downturn came, it was a blessing in disguise. They thought why they should make this and tell the customer you must buy this, they will make whatever is available for customers to choose. So customer chooses the colour, the branding etc.
• In November 2019, they launched ‘Make-Your-Own’. This is the first time in the world somebody can actually – on their mobile phone choose graphics, choose accessories, choose all of that and the order goes directly to the factory. So they brought down stock so much, they have less than three weeks stock now.
• In our country like many other places, a lot of things happen on sentiment. When they see that they had a record retail sale that helped boost the morale, reduce inventory, our dealers are excited.
• All those 500 studio stores that they have, 100% of them were done by existing dealers. That shows the confidence their dealers have in Royal Enfield and the product plans and things that they are willing to do.
• 90% of their sales were coming from products sold in India, less than 5% was from outside; this is a year ago, and less than 5% was from the aftermarket. In the long term, they will significantly want to grow that percentage from outside India and as much they get from the aftermarket.
• They had 900 stores in India, they have 600 outlets outside India, and in places like Barcelona, Madrid, Paris, London, all of these places where people go and visit and they see a Royal Enfield and they say this is our country’s product and I should buy it in India or wherever they go from.
• They are proud of the fact that an Indian company based in Chennai exporting worldwide and giving riding experience worldwide.
• The CKD plant will be announced shortly in the next few months. It is very small; it is maybe a USD 1 million investment. So, no plan changes.
• Good thing is even though they had a 20% volume drop in wholesale, revenue drop was only 9% and that was because they had newer products like the Interceptor with much higher average selling price than compared to a Bullet.
• They have had growth in the export market that has a much higher revenue base. So, according to him, they will not see a 10% growth, but they will continue to try and do as well as they did last year.

Consensus Estimate (Source: market screener and investing.com website)

• The closing price of Eicher Motors Ltd was ₹ 21,485/- as of 20-November-2019. It traded at 28x/ 25x/ 22x the consensus EPS for FY 20E/ FY 21E/ FY 22E of ₹ 774/ 870/ 998 respectively.
• Consensus target price of ₹ 20,606/- implies a PE multiple of 21x on FY22E EPS of ₹ 998/-.