The traditional way of doing business in the Automobile industry is falling short of creating extra ordinary shareholder wealth. The time and tested formula of all Original Equipment Manufacturers (OEMs) to sell huge volumes of passenger cars and two wheelers is yielding only marginally good results for companies.
Consider the example of Maruti Suzuki in the small car category in the passenger vehicle segment where it is the market leader. The company achieved growth and maintained its leadership position in the segment because it catered to the mass market of small cars which people bought as a result of rising disposable income in the last decade. The company is finding it difficult to grow in double digits in the current scenario even though it intends to now shift focus on catering to the premium segment of passenger cars as well.
On the other hand consider the example of Eicher Motors, which manufactures light commercial vehicles which are sold domestically and are also exported to other countries. Eicher Motors also manufactures tractors, two-wheelers and automotive gears.
It owns the iconic Royal Enfield motorcycle business, which leads the premium motorcycle segment in India. Royal Enfield has witnessed a huge surge in demand in the recent past, and is charting its course to be the leading player in the mid-size motorcycle segment globally. The two wheeler segment of Royal Enfield maintained strong growth momentum reporting sales of 44,491 units in the month of September with a 59% year on year growth driven by production ramp up at the new Chennai plant.
Royal Enfield continues to witness strong demand traction with the current waiting period of 4-6 months despite steep increase in production. This cult following among biking enthusiasts has earned the midsize motorbike maker with British roots the status as India’s fastest-growing motorcycle brand. While the country’s two-wheeler industry hit a speed bump in 2014 and continues to struggle in 2015, Royal Enfield roared ahead, registering a 70% increase in revenues. It sold a record 300,000 bikes, beating mighty Harley-Davidson for the first time which sold 267, 999 units worldwide in 2014. The motorcycle unit accounts for a third of the firm’s annual sales of USD 1.4 billion and contributes 70% to net profits.
Demand shows no sign of slacking, and despite a production ramp-up, Enfield still is not able to produce enough; buyers have to wait up to five months for certain models.
Bajaj Auto and Hero Motocorp are two other major players in the Two Wheeler segment of the Automobile industry. Two Wheeler sales for Bajaj Auto during September 2015 declined 5% to 330,228 units from an off-take of 347,010 units in the month of September 2014. Two Wheeler sales for Hero Motocorp during September 2015 rose marginally by 0.44% to 606,744 units from an off-take of 604,052 units in the month of September 2014. The two wheeler segment of Royal Enfield reported sales of 44,491 units in the month of September with a 59% year on year growth driven by production ramp up at the new Chennai plant. The category of cruiser bikes is what contributes to the sales of Royal Enfield which is absent in case of Hero Motocorp while Bajaj Auto has only one product that is being offered. Royal Enfield is the market leader in India in the cruiser bike category of the Two Wheeler segment of the Automobile industry.
Bajaj Auto stock has given a return of 5.57% on a year on year basis and commands a price to earnings multiple of 23 in the current scenario. Hero Motocorp stock has declined 8% on a year on year basis and trades at a price to earnings multiple of 21 in the market. Two Wheeler sales in the rural areas is expected to remain muted in the FY 2015-16 as below average monsoon has dampened demand. On the contrary capacity expansion for Royal Enfield coupled with high demand for its premium products (cruiser bikes) in the urban and rural areas would drive phenomenal growth in the future as well.
Eicher Motors stock has given a return of 63% on a year in year basis as compared to a tepid rise of 4% in the BSE Sensex. The market is giving very high valuations to Eicher Motors due to the differentiated product that is being offered to customers. Royal Enfield continues to grow significantly higher than the industry average of two wheelers for the company to command a price to earnings multiple of 83 in the market. Even though the company faces competition from international players such as Harley Davidson the combination of product features and its pricing appeals to the Indian buyer.
Tesla Motors, Inc. (USA) designs, manufactures, and sells high-performance electric vehicles and electric vehicle powertrain components. The Company owns its sales and service network and sells electric powertrain components to other automobile manufacturers. The earnings for the company are in the red zone but the niche area in which this company specializes and innovates its products always keeps the stock in the green zone. The company expects to sell 55,000 electric vehicles in the year 2015 according to the guidance given by the management. The technological innovation is what drives growth for this stock as each and every model launched in the market being electric in its operation is challenging the powerful petrol and diesel engines for rest all car manufacturers.
The point to understand here is that instead of waiting for the market to respond to the products that are launched in the market these companies like Eicher Motors and Tesla have altogether created a separate product category which has an inherent demand for a long time to come. Such a thinking from these companies drives value in investing which can create long term shareholder wealth.