Eicher Motors Limited

1 Eicher Motors Limited All successful investors have one thing in common. They are passionate in reading the annual reports of several businesses including the ones they don’t want to invest in the near future. Consider the case of Warren Buffett, who was reading the annual reports of IBM and Bank of America for 50 years before buying a single share. Why would anyone do that? I was reflecting on this question for a very long time. I got this question answered while reading the fantastic book Curious authored by Ian Leslie. Read, reread, and reflect on what Ian wrote. Creativity starts in combination. Scottish Enlightenment philosopher David Hume pointed out that there is nothing particularly interesting about the idea of gold or about the idea of a mountain. But a gold mountain? Now you have something. Progressive educationalists like Robinson frame existing knowledge as the enemy of new ideas. But at the most basic level, all of our new ideas are made up of old ones: to imagine a winged horse, you first need to be familiar with the ideas of horses and wings; to create a smartphone, you need to know about computers and phones. The more existing ideas you have in your head, the more varied and richer will be your novel combinations of them, the greater your store of reference points and analogies. A fact is a particular class of idea about the world, and it can be put to work in a lot of different ways. We romanticize the curiosity of children because we love their innocence. But creativity doesn’t happen in a void. Successful innovators and artists effortfully amass vast stores of knowledge, which they can then draw on effortlessly. Having mastered the rules of their domain, they can concentrate on rewriting them. They mix and remix ideas and themes, making new analogies and spotting unusual patterns, until a creative breakthrough is achieved. [Emphasis mine] Researchers who study innovation have found that the average age at which scientists and inventors make breakthroughs has increased over time. As knowledge accumulates across generations, it takes longer to acquire it, and thus longer to be in a position to supersede or add to it. Even geniuses have to accumulate knowledge of their field for years before they can produce masterpieces. Mozart, the archetypal child prodigy, was in the twelfth year of his career when he composed his first piece of enduring artistic value. As Steven Pinker puts it, “Geniuses are wonks.” Without knowledge, including factual knowledge, a child is like a sculptor with no clay to work with — she is creative, but only in theory. Here are a few examples of people whose curiosity and creativity were fed by factual knowledge: In an 1844 letter to his friend J. D. Hooker, Charles Darwin makes it clear that his great insight emerged from the methodical accumulation of facts: I was so struck with distribution of Galapagos organisms ... that I determined to collect blindly every sort of fact which could bear in any way on what are species. I have never ceased collecting facts — At last gleams of light have come, and I am almost convinced (quite contrary to the opinion I started with) that species are not (it is almost like confessing a murder) immutable. 2 Jacob Rabinow, a prolific inventor with more than two hundred registered patents, was interviewed by psychologist Mihaly Csikszentmihalyi about the requirements for creative thought. Rabinow thought the most important was “a big database” of memorized knowledge: “If you’re a musician, you should know a lot about music. If you were born on a desert island and never heard music, you’re not likely to be a Beethoven. You may imitate birds but you’re not going to write the Fifth Symphony.” The earlier you start building your database, the better: “So you’re brought up in an atmosphere where you store a lot of information. The small differences at the beginning of life become enormous differences by the time you’ve done it for 40, 50, 80 years.” [Emphasis mine] By reading several annual reports successful investors amass vast stores of business knowledge, which they can then draw on effortlessly to gain unique insights while analyzing a new business. Even a minion like me was able to experience it first hand when I was able to use some of the learnings I acquired while studying Bajaj Auto. Given below are a couple of things that I was able to reuse to analyze Eicher Motors, which is the subject of this post. 1. The motorcycle industry is less of a technology and more of a marketing industry. It is a game of brands. The industry is highly competitive both in domestic and export markets. The only way to create a durable competitive advantage in this industry is to specialize in a niche and create a brand out of it. 2. A motorcycle company which creates a new subsegment by introducing a branded product gets rewarded by customers with a very high market share, which is profitable and it lasts for a very long time. This is what Hero Honda’s Splendor did in the 90s by creating a new segment. It sells more than one million Splendors every year. Recently this happened to Royal Enfield, owned by Eicher Motors, which is the leader in the S2 subsegment with more than 90 percent market share. Business Eicher Motors Limited (EML) was incorporated in the year 1982. It is the flagship company of the Eicher Group and a leading player in the Indian automobile industry. The company designs, manufactures, and sells three kinds of vehicles. 1. Royal Enfield is one of the world’s oldest motorcycle brands, more than a century old, that is still in production. EML acquired the Royal Enfield (RE) motorcycles in the year 1991. RE commands 95 percent market share in midsized (250 750 cc) motorcycle segment. 2. It manufactures trucks and buses that are used for commercial purposes. It is a leader in the light and medium duty trucks with a 33 percent market share. In 2008 EML formed a joint venture [54.4 : 45.6] with Volvo Group to combine EML’s local market expertise with Volvo’s technological strength and bring high quality commercial vehicles to the cost conscious Indian markets. 3 3. It manufactures a four wheeled multi purpose vehicle called Multix. It is a 3in1 vehicle which provides comfortable seating for a family of five. It can also be used for business purposes and it has a power generation capacity of 3 kilowatts. In 2012 EML formed a joint venture [50 : 50] with Polaris Industries to manufacture this vehicle. Take a look at the shareholding pattern of the company given below. As an exercise I would encourage you to rediscover the shareholding pattern from the annual report. By doing this you will acquire a skill that can be employed while analyzing other businesses. If you don’t know how to do this then start with the standalone balance sheet Note 12. Royal Enfield motorcycle segment generates 35 percent of its overall sales and 80 percent of its overall profits. It commands 95 percent market share in the midsized motorcycle segment. Around 97 percent of the REs are sold in the domestic market. And the remaining 3 percent is sold in the export markets. There are four kinds of RE motorcycles — Bullet, Classic, Thunderbird, and Continental GT. Why do you need four kinds of motorcycles? The simple answer is that everybody is different. The image given below answer this question in more detail. The engine capacity ranges from 350 to 500 cc. The price of these vehicles ranges from Rs 1.07 Rs 1.95 lacs. Why would 4 anyone pay close to Rs 2 lacs for a motorcycle? It is a tough question to answer when you look at it uncritically. But it would all make sense when you see it through the lens of psychology. Customers of RE don’t view their motorcycle purely as a mode of transportation. They view it as a luxury good where they are used mostly for recreation, as a lifestyle accessory or a symbol of personal identity. These customers don’t care much about the mileage or price of the bike. They don’t mind paying Rs 1.95 lacs for the brand. Siddhartha Lal, who is the CEO and Managing Director of EML, explained this beautifully in his latest letter to the shareholders. Royal Enfield motorcycles are intended to bring back values that many people yearn for in the modern sterile context – authenticity, tactility, interaction, craftsmanship, physical experience and active pursuit. We will deliver that by firstly ensuring that the company itself is authentic in its approach and interactions; the motorcycles we make will be timeless in sensibility and appeal, yet approachable and relatively affordable and will encourage the owner to be hands-on. We will serve all relevant areas around the motorcycle – products and services with the same approach, in order to make the whole experience of motorcycling pleasurable – thereby, delivering a ‘Pure Motorcycling’ experience. Royal Enfield brand has an extremely rich global heritage of practical leisure motorcycling of over a hundred years. Royal Enfield is a cult brand globally and has pioneered the leisure motorcycling culture in India. The brand’s positioning and related marketing activities have both delighted the current customers and opened up avenues for attracting new customers. - 2014 Annual Report Take a look at the table given below. What do you see? From 2006 to 2010 the number of REs sold compounded at a rate of only 14 percent.

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