Eicher Motors has witnessed a sharp fall in stock by a huge 25% from its peak position in July and this fall has supposedly arisen due to growing discomfort among investors over the rich valuation of the company and falling waiting periods for its bike division.
Eicher Motors, the iconic makers of Royal Enfield motorcycles, has witnessed a fall of 25% in its stocks from their peak level in July when the stocks surpassed Hero Moto Corp’s market capitalization to become the second most two wheeler company after Bajaj Auto in terms of value. The fall of the stock is mainly being attributed to the growing discomfort amongst investors in relation to the rich valuations of the company and the falling waiting periods for its bikes which may lead to considerably lower production volumes in the near future. Eicher’s earnings-price ratio of 43 was deemed higher for a two wheeler stock prior to the recent stock price fall. The stock is currently trading at a P/E of 32 which is double that of the industry average P/E. This may be sustainable though with growth and earnings visibility better than other industry competitors.
Investors are wary over the lowered 1-4 month waiting period for bikes as compared to 4-5 months about a year ago. The company has been scaling up installed capacity over the last five years. The capacity of the company should be rising to 620, 000 units by 2016 from 50, 000 units per annum as per projections. This has brought down waiting periods hugely. Royal Enfield has already sold 44, 138 units in October and the board gave approval to increase installed capacity to 900, 000 units by 2018 after the September results.
The management of the company has issued a statement saying that they are receiving higher incremental orders compared to deliveries in spite of the lowered waiting period. This clearly points to strong demand for the product. The company is also expanding its retail portfolio in areas where premium bike penetration is still on the lower side. It is expected to have around 500 retail outlets by 2015 and 550 by end 2016 as compared to 400 in 2014.