Company update: Eicher Motors (Outperformer) - Picking up lessons from Ashok Leyland?

Royal Enfield (RE) and Ashok Leyland (AL) seem far removed from each other - the former is a highly brand-driven C2C business, while the latter has a nuts and bolts-focussed B2B approach. Even so, a perceptible shift in RE’s strategy, after the recent appointment of Mr. Vinod Dasari (formerly CEO of AL) as CEO of Royal Enfield, reminds us of AL’s turnaround during FY14-18. We highlight some of the strategic changes that benefited AL, which could help RE regain its mojo.

New distribution formats: One of the key aspects of AL’s turnaround (between FY14 and FY18, M&HCV truck market share rose from 23% to 32%) was the introduction of new differently-sized dealership formats,  which helped the company nearly triple its dealership network. RE with its underpenetrated dealership network (only 2 states have more than 3 dealers/district), seems to be mirroring AL’s strategy. Over FY20, the company will expand dealerships by ~50% (from 915 currently to 1,350), with the addition of 350 smaller outlets (~1/6^th the area of current dealers) in interior regions. The new formats would ensure dealership viability with monthly sales of 12-20 units.

Focus on underpenetrated regions: During FY16 to Q4FY19, AL gained over 600bps market share in non-South markets, where it was underpenetrated (~25% in FY16), while its share in the Southern market was constant (at 52%). We believe RE will likely follow a similar strategy, i.e, focus on under-indexed markets with more localised approach. If RE successfully increases its market share in underpenetrated markets to its India share of 6%, this would imply ~22-25% growth in volumes.

Capturing value over product lifecycle: AL focussed on gaining a share of a vehicle’s lifecycle cost. The company increased revenues from spare parts (+55% over FY16-18), raised dealer revenues from servicing and significantly scaled up its financing arm. Given that RE’s spare parts sales at ~6% of revenues is one of the lowest amongst peers, the scope for growth is high. Additionally, RE’s accessories revenues at just ~3% of sales, which could rise meaningfully (21% for Harley Davidson).

Reiterate Outperformer: We see learnings from AL’s turnaround being replicated at RE, notwithstanding their diverse business models, which will likely complement RE’s brand-led strategy with a nuts and bolts execution paradigm. Despite near-term concerns (weak demand environment), we remain positive on Eicher Motors, given the 2W premiumisation trends and RE’s brand strength. Maintain Outperformer with a target price of Rs23,500 per share.