Eicher Motors – Post Q1CY10 Results Conference Call
30 April 2010
MODERATORS:
FROM B&K SECURITIES: Mr Pramod Kumar – Senior VP - Research
FROM EICHER MOTORS: Mr Siddharth Lal – MD and CEO
Mr Vinod Aggarwal – CFO
Eicher Motors Limited April 30, 2010
Operator: Ladies and gentlemen, good morning and welcome to the Eicher Motors Q1CY10 Results Conference Call hosted by Batlivala & Karani Securities India Pvt. Ltd. As a reminder, all participants’ line will be in the listen-only mode and there will be an opportunity for you to ask questions at the end of today’s presentation. If you need assistance during the conference, please signal the operator by pressing “*” and then “0” on your touch-tone phone. Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Pramod Kumar. Thank you and over to you, Mr. Kumar.
Pramod Kumar: Thanks, Faizal. Good morning, everyone on behalf of Batlivala & Karani Securities Ltd., I welcome you all to post results conference call for the first quarter for calendar year 2010 for Eicher Motors, and we have with us today Mr. Siddhartha Lal, MD and CEO of Eicher Motors and Mr. Vinod Aggarwal, Chief Financial Officer of Eicher Motors. Without wasting much time, I hand over the proceeding to Mr. Lal who will make a brief opening remark and then we can move on to the Q&A session. Over to you, Sir.
Siddhartha Lal: Thank you and very good morning to all of you. I would like to thank you all for coming to this call. I will be giving a brief update on what has happened in the first quarter ended Mar’10 and then we can get your questions. Clearly, we had a very good quarter(i.e January to March) in terms of commercial vehicles, the largest segment in Eicher Motors through our Joint Venture, VE Commercial Vehicles Ltd. It is pretty much all-time high in most segments in the Indian CV industry, certainly, in the 5-12 tonne and for the 16 tonne and above and we also have benefited tremendously from that. While the CV industry has grown by around 100% in volume terms in the current quarter as compared to quarter one of last year, in Volvo Eicher joint venture, we have grown by around 118%. So, we have gained further and have been able to get a lot of operating leverage out of the increased sales. We have sold close to 10,000 commercial vehicles in the quarter, around 9600 are of Eicher brand and just over 300 are of Volvo brand. So, that is the general performance that we had in the commercial vehicle segment. In motor cycles segment, we have been constrained by production. In Royal Enfield, that is the motor cycle business, there is a major change over
Eicher Motors Limited April 30, 2010 planned in April from old type of bikes to new ones, as a result we have grown by around 3 to 4% only in terms of actual volume, however, we continue to have large pending orders. We expect that in the coming quarters, we should be able to further increase our sales. For the first time in a quarter, EML had a consolidated net revenue in excess of Rs. 1000 crores. We had a highest ever profitability with a consolidated EBITDA of Rs. 91.2 crores i.e. 8.8% of net sales. We have been able to achieve a strong EBITDA, which is based on higher volumes and on good operating margins. I think the most important thing to note here from a futuristic perspective, is that we had a very good start to our new VE series of trucks and buses. We have launched the heavy duty range from Eicher Trucks and Buses called VE Series in January’ 10 at the Auto Expo. We have been since rolling it out in various locations. We are still focusing on very few locations and despite focusing on lesser number of locations, we have experienced initial success. Still a lot more work is to be done from our side. In domestic markets, in 2009 Q1, we had sold less than 300 heavy duty trucks, however this year in Q1, we have sold nearly 1000, that is a three-fold increase, admittedly on a small base. Within that, in the month of March’10 alone, we had sold approximately 500 heavy duty trucks, the momentum has been building up. The heavy duties are doing very well in the market and we have got a very good response wherever we have launched. We certainly expect this to continue and to improve further in terms of sales volumes in the coming months .In the core segment of light and medium duty vehicles , we have gained market share upto 27% in 5-12 tonne and upto 36% market share in 7-12 tonne. We have also played our bus strategy much better this year and have a much better availability of buses for the bus season where Eicher is particularly strong in school buses. . So to summarize, we had an excellent quarter and have shown the power of the operating leverage which some of you have been asking as when that kicks in. Clearly, it is starting to kick in now and we expect that to continue to do well. However, there are some issues on the horizon. I don’t think the subsequent quarters from an industry perspective will be as buoyant as this quarter. While it will be much better than last year, industry will start slowing down as compared to 100% growth that we had in Q1 2010. The other worry, of course, in the coming time is that of
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inflation. We see commodity prices going up, particularly steel, rubber and other such commodities. It is going to affect the sentiments perhaps but clearly as we have done before from VECV, and from Eicher, we have managed to pass on most of the inflation to the customers & we expect that we will be able to pass on the inflation once again. However, with increase in prices, we need to see whether this will have an effect on these demands. Clearly, there is a strong intrinsic demand because of the industrial production, GDP growth and low commercial vehicles sales in the last 18 months, and there is a need to build up some capacity from the transporters, we expect the capacity increase to continue from the transporters. Yet, all these factors could have an adverse impact and the industry may not grow at the same rate that it has been growing currently. .We are now open for the questions .
Operator: Thank you very much, Sir. Ladies and gentlemen, we will now begin with the question and answer session. The first question is from the line of Mr. Saurabh Das from Sundaram BNP Paribas. Please go ahead.
Saurabh Das: Good morning, Sir, and congratulations on the set of numbers. I just wanted a few clarifications on the new launch of the heavy duty range. Sir, this is regarding which particular segments? Is it the MAV, the tippers or the tractor trailers or is it all of it? Which is the focused segment? and can you broadly give us the tonnage profiles of these new vehicles?
Siddhartha Lal: Sure, we have launched the VE Series which is a full upgradation of our entire heavy duty range and this was done in January of this year. It basically spans all the existing products which we have, 16 tonnes 4x2 vehicles, 6x2 which is 25 tonnes heavy vehicles, 8x2 which is 31 tonnes vehicles, 16-tonne 4x2 tipper and our 4x2 tractor which is the 40-tonne tractor, all these 5 familiy members have been launched under the VE Series. Our focus, is on 8x2 and we are pushing very hard. We expect that to become a very large part in the future. We have a very good brand and position in the 8x2 and it is also a higher value added segment. We are also looking at Terra 16 which is our 4x2tipper which has an excellent standing in the market and has a very good value proposition. We particularly, focus on very selective locations where we are able to get the right infrastructure, and right financing from financiers.
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We are rolling out in geographies one by one and are not pushing the vehicles in the entire country as of date. . In the coming quarters, that is in Q3, we will also be launching our 6x4 tipper which is a 25 tonne vehicle and we expect tipper segment to be doing very well due to the construction boom which is likely to start up once again. So, that’s a brief outlook on the VE Series which is the full new series of our heavy duty range.
Saurabh Das: Great. and Sir, I also wanted to understand how we are approaching the market share gain strategy? Because typically transporters do not like to experiment with new trucks, especially if he already has a particular brand in its portfolio. Hence, if you see Ashok Leyland, it has been a very, long haul for them to gain back market share and to increase its market share over a period of time. So, although we have been quite successful of late, where are we differentiating ourselves, whether it is distribution, overall cost of ownership of the products, or its power in the products which I guess is very critical in the 31-tonne segment. So, if you can just broadly elucidate that, it will be very helpful.
Siddhartha Lal: Yes, certainly, as part of market share gain strategy, we have an extremely focused approach in launching the vehicles geographically. Our idea is that while we make smaller market share in the national level, in most of the geographies in the segment we are having, at first we try to get around 10%. I think there is a slight misconception about experimentation with new trucks on part of the transporters because when I talked to lot of transporters, they are actually really looking forward to a third strong player coming into the market. They feel that incumbents have been taking them for granted for too long. They have not been providing the right levels of service and do not have the right level of customer interface and have not upgraded products well enough. So, all the big transporters are very interested in having a strong third player who pushes the incumbents to actually make this happen. I mean, if you see the heavy duty market, it has not progressed the way the medium duty market has. In medium duty market, you have superior and fully built products, having higher power density because power to tonnage ratio is much higher in medium duty. So, people are looking for upgradation in product and in service. We come with a very service-
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minded approach as we are a small player & make sure that the vehicles are absolutely well looked after. We have certainly got lot of benefits on the vehicle itself and have delivered benefits of better value. We are not following the initial cost approach & we are very clear about that. There are other players who are, maybe, stronger in providing better initial cost, however we follow the value approach. We can prove to our customers how they get better overall value from our products. Therefore, a lot of the big players are actually very interested in developing a third player in the industry as creates advantages to some extent, on the fact that there are only two players in the market currently.
Saurabh Das: I also wanted to check on JNNURM bus supply status . Do you think this is a segment which will also be quite strong in this particular year in terms of orders? And second, was there a conscious choice by us not to be present in that? If you can give us some idea on that?
Siddhartha Lal: Yes, this is a very good question. We believe in the long-term story of city buses and are convinced about that. We believe that the way urbanization and mobility is going, all cities will require bus traffic transport system. They are flexible, cheaper, quick to deploy and you can’t rely on cars or motorcycles for the main transportation of everybody. So, buses are going to be a large part of our future. I can’t give you a year-by-year, I mean, this year or next year but I know this and we certainly believe that in the next three, five, seven years, there is going to be huge demand for such buses. Yes, we had very purposely not entered into the JNNURM segment because we were not ready. I think some other players did enter when they weren’t fully ready and they faced huge consequences of that. I mean, they may want to get into the market early, but they faced a lot of trouble from these vehicles. As part of our new product introduction approach, we have taken extremely cautious approach in introducing new products. We make sure that the product is absolutely road worthy, it has absolutely no issues. We do not have a problem in waiting to ensure that our product is spot on before we introduce it. We are willing to bid out any immediate opportunity, which we have shown with the JNNURM. We could have easily bid for the JNNURM and could have found the way of making these buses, which we have already developed, but we made sure that we are not hasty on
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this. We make sure that we have an excellent product before introduction and now we have a very robust 650 mm floor height rear entrance, semi- low floor bus, which I believe is going to take up large chunk of the JNNURM requirements in the future. This year alone, we will be absolutely ready by the end October with the vehicle. We will be starting to bid for JNNURM contracts at the end of this year . We have, in fact, been running these vehicles already in some cities including Indore, which is the home city and have got an excellent response on all the vehicles in terms of performance, fuel efficiency and reliability. We have to still take a slower approach in the sense that we do not want to ramp up too fast because that also causes problems . So, we will try and bag a few good orders and deliver and make sure that the city sees the benefits and then we will start bagging more and more orders.
Saurabh Das: Right. Sir, just a small clarification on this. On the way the JNNURM orders are bid, is it that you bid at the central level and then each state has a particular quota which they have to abide by or you have on biddings on a state level basis and then you get allocations on that?
Siddhartha Lal: The JNNURM program is set by Ministry of Urban Affairs. Each of the cities getting the funding from the JNNURM must buy the vehicle as per the norms of the JNNURM in the terms of numbers, the timeframe and the specification within the overall framework of the JNNURM. This would be tendered individually by state or each state transport undertaking.
Saurabh Das: Okay. So, it could be so that in Delhi there is a certain mix between Tata Motors, Leyland, Volvo, and Eicher. Similarly, it could be different in Bombay etc
Siddhartha Lal: Yes, absolutely. You have to buy for order separately.
Saurabh Das: And everything is through bidding. It is not through negotiated contracts.
Siddhartha Lal: It’s all through tenders.
Saurabh Das: Okay. Great. Thanks a lot and just one final question on the balance sheet. On the CAPEX for this year and next year and what is the cash on our books on a consolidated level?
Eicher Motors Limited April 30, 2010
Vinod Aggarwal: Overall cash, in VECV, it is Rs. 1100 crores and EML will be Rs. 400 crores.
Saurabh Das: Okay. And CAPEX for this year, calendar year 2010, what is the plan CAPEX for Calendar year-11?
Siddhartha Lal: We have said that we will be doing a capital expenditure of around Rs. 500 crores in the next three years for ongoing projects and businesses. Rs 500 Crs is the approximate ballpark that we are looking at in the next 2010, 2011, and 2012. That is from a VECV perspective. There will certainly be further capital expenditure also in EML, which will be for the expansion of Royal Enfield motorcycle business..
Saurabh Das: Right. So for motorcycles that would be at 50,000 capacity ?
Siddhartha Lal: We are at 50,000 capacity but we are certainly working towards 100,000 quantity.
Saurabh Das: Great. Thanks and all the very best for the future. Thank you.
Operator: Thank you, Mr. Das. The next question is from the line of Mr. Abhinav Khandelwal from Aegon Religare. Please go ahead.
Abhinav Khandelwal: Hello, sir. This is Abhinav here. Sir, in terms from a quarter-on-quarter if you see, in a way margins have expanded for standalone from 7.7% to 13% and in consolidated , it was 5.1% to 8.8%. Just trying to understand, how sustainable these margins are? This is my first question I want to ask.
Vinod Aggarwal: The margins are sustainable based on the toplines. If you look at this time the increasing margin, it is based on three things. One is the volume growth, second is cost reduction and third is the operating leverage. So, these three things, have contributed to the increased margin. I think if the volume continues to grow like this, the margin should be sustainable barring the uncertainties on inflation..
Abhinav Khandelwal: Okay. and sir, last question. The consolidated net sales on a quarter-on- quarter basis, shows growth of around 19%?
Vinod Aggarwal: In this quarter our consolidated net sales was Rs.1038 crores. And in last quarter ie quarter ended Dec’09, it was Rs 873 crores. So, it is around 19% growth.
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Abhinav Khandelwal: In terms of number wise?
Vinod Aggarwal: In CV, this quarter we have sold 9586 Eicher trucks and Busses and in October to December quarter, we had sold 7221 numbers i.e. 33% growth.
Operator: Excuse me, sir. This is the operator. We lost the line for Mr. Khandelwal. Should we move on the next question? So the next question is from the line of Mr. Rajat Malhotra from Franklin Templeton. Please go ahead.
Rajat Malhotra: Hi, Siddhartha. I have a few questions. First, it is housekeeping question. What is the level of consolidated debt you have right now?
Vinod Aggarwal: It will be around Rs150 crores.
Rajat Malhotra: Okay. I wanted to get an idea about the 5-12 tonne . I mean, you talked about market share gain. Now how has that worked out for you? Have you launched some new products? What is the sort of CAPEX and product pipeline there and what are your utility levels in that particular segment?
Siddhartha Lal: Well, we had launched variants of our existing vehicles in this segment this year. Actually we have been able to penetrate better in lot of geographies, Our market share is not the highest right now; it is second. We are number two in segment, purely because we perhaps lack the full muscle that may be our competitor does. Now we are increasing on the distribution points, the strength of our dealers and the number of dealers. So all of that is helping us in penetrating better and currently we have a 36% market share in the 7-12 tonne segment and around 27% market share in the 5-12 tonne segment which is expected to increase further
Rajat Malhotra: Right. What was the Y-o-Y market share gain in the 7-12 tonne and the 5-12 tonne?
Vinod Aggarwal: If you look at 5-12 tonne this quarter, we had a market share of 26.6%. Last year Q1 was 24% and last full year CY’09 was 25.6%. If you take 7- 12 tonne, in Q1 we had market share of 36.3%, last year Q1 was 33.1% and last full year was 35.8%.
Rajat Malhotra: Okay. Are you running close to capacity in this segment?
Eicher Motors Limited April 30, 2010
Siddhartha Lal: We were certainly running up against capacity, however it was based on the supplier capacity also. As a result of the downturn last year where suppliers had very deep problems, a lot of them have not invested in higher capacities right now. So a lot of suppliers were really struggling in the quarter one. We expect that to start becoming better in the coming quarter and we expect that the suppliers will start increasing the capacity towards the quarter one of next year..
Rajat Malhotra: Alright. This question is on the aftermarket operations. I mean, how much have they contributed to revenue? What growth have you had?
Siddhartha Lal: We don't give the separate figures for aftermarket but aftermarket constitutes major portion in the Volvo trucks verticals and for Eicher trucks also, aftermarket is a good sizeable number. So we are going to have our plans and we have performed better than the previous year.
Rajat Malhotra: Right and in terms of being able to finance your vehicles both for your JV and for EML, I mean have you taken any concrete steps in that direction in the last couple of quarters?
Siddhartha Lal: EML has no such requirements, the motorcycle division has absolutely no requirement for support and financing. So that is taken care of. In the JV, maybe Vinod, you could add.
Vinod Aggarwal: In the joint venture, we have the tie-ups with various banks and the private finance companies. There are enough financiers available and we have the tie-ups wherever required.
Rajat Malhotra: Is Volvo also helping in that regard? Are there any plans there?
Vinod Aggarwal: No, Volvo has not taken any decision in this regard presently
Rajat Malhotra: Just one final question on Royal Enfield. When you talked about expansion plans, is it purely capacity or you want to have a host in tie- ups, new products coming in as well?
Siddhartha Lal: We are currently having backlogs especially for Classic vehicles, I think we are behind by 6 months right now in terms of order and that is the concern. We are trying to increase the capacity very soon. We have spate of new products as our entire line of old products is being discontinued because of the emission norms. Although the emission norms have been slightly delayed which have given us slightly more time
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but by and large we are moving everything to new platform. We have also announced the new products coming in the next months which are ready.
Rajat Malhotra: Right, thanks a lot.
Operator: Thank you, Mr. Malhotra. The next question is from the line of Govind Chellapa from Credit Suisse. Please go ahead.
Govind Chellapa: Good morning. I have a couple of questions. It is a follow up actually to what Rajat asked. Now, we all know that Volvo is a good standard as far as generating revenues and profitability from aftermarket sales is concerned. Now, could you give a sense of what is the size of opportunity that you are looking at? How much of your spare parts you actually sell yourself now and how much can that go up to? Who are you competing with and how would you go about it? That is my first question. I will take up the second question after this.
Siddhartha Lal: Yes, Volvo is certainly a good standard in aftermarket and we are working very closely with them in the aftermarket gain. It is not just spare parts, it is spare part with service. So we feel there is enormous potential there. Firstly, we are improving our entire delivery mechanism of spare parts because spare parts is a different game from trucks. We feel there is enormous potential to more than double the market share over the next three to five years and we are working on that and it is a long process and not something which happens overnight We have a very strong team within the joint venture working exclusively on developing the aftermarket business into very strong business for our venture in future.
Govind Chellapa: Are we talking about replacing, say your part supplier who is now supplying directly to the aftermarket? and procuring from that particular vendor and supplying through your own chain? Or is it just that now operators are buying from the unorganized market and you want to replace that?
Siddhartha Lal: It is an extremely complex issue. I don't think I can answer that very simply because there are hundreds of different suppliers out there in the market. some are good suppliers some are not, so I think the trick really is just to make sure that we are able to deliver extremely well and we
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are very sensitive to the issue of pricing. So, we are going ahead in a very systematic manner and feel that we can get a much higher market share for spares than we have been in the past.
Govind Chellapa: Okay and currently, I think most of the commercial vehicle companies derive between 3% to 5% of their revenues through spare parts. What do you think, I mean first of all, is that a right number and second what do you think the ideal number should be? What is that you are working towards?
Siddhartha Lal: I can’t divulge such numbers but if you do a benchmark of Indian industry, you are right. It may not much higher than what you said. But globally certainly people should be looking at 15% to 25% maybe, even more. I don't know if that is possible in India but certainly if it does happen, it has good margins. So our aim is also to move in double digits and beyond that I can't give full numbers right now.
Govind Chellapa: Okay, maybe you can discuss that some other time. my second question was on exports. I think you have been mentioning how Eicher could be the emerging market brand for Volvo. Have you started seeing any action there already either in terms or market studies or actual launches?
Siddhartha Lal: Yes, we are working towards it. We have no announcement currently in terms of particular geography or products that we are going ahead with Volvo Group in terms of their distribution. As I said before, we are working with Volvo Group very closely in terms of detailed studies and analysis and working with the importers. We are also upgrading our products, as the incumbent products may not be going to export market as it is , so it needs to be upgraded, to be changed to some extent, there is a lot of work being done. We will be entering some markets along with Volvo in the near future.
Govind Chellapa: My last question actually is a housekeeping question. I think before the crash, the annual tipper market use to be about 50,000 to 55,000 numbers I don't have the exact numbers but now that used to be the ballpark size of the market. Now what would be the current market size? Has it also recovered to the extent that the rest of the CV market has?
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Vinod Aggarwal: If you look at 2009-10 April to March, the tipper market was 34,000. It earlier used to be 56,000 in 2007-08 and dropped to 38000 in 2008-09. However, in the month of March, it was 4800. So, it’s coming back and it is expected to be 5000 plus in the coming months because lot of construction activities are going to happen. So, I think it should now regain its earlier peak of 55000 to 56,000 p.a..
Govind Chellapa: And the market was also shifting towards 6x4, towards the end of the previous cycle. Have you seen any drastic change in mix of late or has the trend continued of shift towards 6x4?
Siddhartha Lal: It is still closer to 60-40 or let’s say 55-45 in favor of 6x4. It may change marginally but not dramatically at this point. From the number’s perspective, I don’t have the exact mix right now of 4x2 and 6x4 in front of me but to give some aspect at most 60-40 seems to be ratio, in favor of 6x4.
Govind Chellapa: Okay. Thank you, sir. Thank you.
Operator: Thank you. The next question is from the line of Mr. Mitul Shah from First Global Securities. Please go ahead.
Mitul Shah: Very good morning. Sir, I want to know when is the raw material contracts due for renewal now?
Vinod Aggarwal: Raw material contracts renewal is a continuous process. We don’t have any specific date. This is applicable for the company as a whole and applicable for each supplier. So, for each supplier, we may have different dates. Normally, what happens is that it is linked to the commodity prices. So, whenever the prices go up, then they come back to us for the price increases.
Mitul Shah: In case of. tyre manufacturers.
Vinod Aggarwal: That’s also based on negotiation. So, whenever commodity prices go up, they come back. They ask for the price increase and there is a negotiation process because they also have lot of productivity improvements..
Mitul Shah: Thanks, sir.
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Operator: Thank you, Mr. Shah. The next question is from the line of Mr. Senthil Kumar from IDBI Fortis Life Insurance. Please go ahead.
Senthil Kumar: Just a small housekeeping question. I have just missed on the cash numbers for this current quarter ending. How much is that?
Vinod Aggarwal: We mentioned for VECV, it is Rs. 1100 crores and for Eicher Motors, it is Rs. 400 crores. Both put together, it is around Rs. 1500 crores.
Senthil Kumar: Okay. Thanks a lot.
Operator: Thank you, Mr. Kumar. The next question is from the line of Mr. Hitesh Goel from Daiwa Securities.
Hitesh Goel: Sir, basically i just want to get a sense on the raw material increase. Basically, what is the ballmark if the tyre price or steel price increases by 10%. What is the impact on margins per se, say for a light tonne vehicle?
Vinod Aggarwal: For each Re. 1 per kg increase in steel prices, impact is around Rs. 4000 to Rs. 6000 per vehicle
Hitesh Goel: Okay, on the tyre side, sir?
Vinod Aggarwal: If per tyre cost is around Rs. 6000 for LCV, then 10% would mean for seven tyres, Rs. 4000 or Rs. 5000. So, that’s a rough and broad calculation
Siddhartha Lal: But this inflation has always been passed on to the end customer.
Vinod Aggarwal: We have already increased the prices by 1 to 2% from May1.
Hitesh Goel: Okay, sir. Thank you.
Operator: Thank you, Mr. Goel. The next question is from the line of Mr. Naitik Modi from Angel Broking. Please go ahead.
Naitik Modi: Good morning, sir. Firstly, congratulations for posting such good numbers. My specific question is regarding your two-wheeler business of Royal Enfield, how do you see this business of Royal Enfield bike spanning out for you in the next 2 to 3 years? I mean, do you think this business could contribute say about 25% to 30% to your topline? Because considering the kind of waiting period that this product has in the market for a Rs. 1.5 lac bike for 6 to 8 months, I think it’s a great business going forward. Your views on it?
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Siddhartha Lal: Yes, absolutely. We always believe that it’s a great business and that’s why we have been continuing to invest in this business. Firstly, it has got an exceptional future because we are looking at practical leisure bike segment which basically means that we are not bogged down by the normal competitive pricing of the rest of the industry. So, we are able to command a much better pricing and therefore much better margins in our segment. We have seen the launch of UCE bike. We have been able to bring Royal Enfield, I would say, into the mainstream to the extent that upgraders of current bikes are actually getting converted to Royal Enfield very easily. In the next three years, I think we have an enormous potential in the domestic market . We are working very hard on export markets including the emerging markets. So, till now we have had to focus on OECD countries or developed countries. Now we are going to go to developing markets also. So, we expect to expand tremendously in both the markets. We will form a good base in the next 2 to 3 years and over the next 5 years, we can give a strong franchise in global markets and of course we have not even scratched the surface.of spare parts and accessories, really this business is also a good margin driver. So, we see an enormous potential here going forward. We are going to continue to invest here. Currently, from the topline of EML consolidated P&L, we have Rs. 100 crore of revenue from Royal Enfield for the quarter. Now, the question is, will it be 25%, is difficult to answer since we actually expect VECV to also grow equally fast, I can’t say if it will grow 10% or it will go to 15% or 20% but regardless of that we expect a very good growth over the next 3 to 4 years.
Naitik Modi: Okay, sir. How aggressively are you pursuing plans for putting that into place considering the production lag?
Siddhartha Lal: We are a different type of motorcycle company and have not seen this kind of the growth in the past. Our objective is to continue good & steady growth.. We are working very hard on the supply chain side and it is a big challenge for us. So, it’s not going to happen like a big manufacturer that is able to put a capacity in ‘x’ number of months for 500,000. We will take much more time to actually be able to expand our capacity to those levels but we will do it certainly.
Naitik Modi: Okay, sir. Thank you.
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Operator: Thank you, Mr. Modi. The next question is from the line of Basudeb Banerjee from Quant Capital. Please go ahead.
Basudeb Banerjee: Congrats on the good set of excellent numbers. Few things that I couldn’t understand, Eicher is now running almost at full capacity in this quarter, almost reached from the previous levels. But still I just wanted to know why this kind of disparity on the margin front compared to the peer set players. You see in the CV mix or in the two-wheeler mix, peer set in two wheelers are having those 15-16% kind of margins and this being a niche product in the two-wheeler segment and even in the CV segment for Medium and Heavy CV product mix. So, why this kind of huge margin discount to peer set?
Siddhartha Lal: To peer set?
Basudeb Banerjee: To other players in the industry.
Siddhartha Lal: I will answer on CV first.. Of course, if you look at the absolute volume, it is substantially less than maybe the top two players in the country.. But you must also look at return on capital employed because we actually outsource a lot more of our let’s say parts. We don’t have foundries. So, we hold an extreme advantage that in the case of downturn, we are able to cut back much faster. We are able to get much less heat on us but that also means that our operating margins percentage will not be same as in the peak levels because our capital employed is much lower. So, if you look at ROCE, I believe it is certainly benchmarked in the industry. Over time, of course, if you want to backward integrate, it’s possible that we will be able to do that. Clearly, as our volumes grow higher, as our heavy duty also starts improving in numbers, then get beyond the crucial thousand a month level which we believe is the point at which it starts returning substantial profitability, then certainly we should be looking at further kind of operating margins that we have today. That’s the outlook on the CV side that you were asking. On the two-wheeler side, frankly Royal Enfield has come from a background where it was a loss making company and it is only of late we have been able to turnaround. So, I think the of margins that we have right now hosting in the Royal Enfield is adequate . If you look at our standalone figures, it’s in double digits. So, it’s extremely good for the company which was actually making losses. Our return on capital is extremely high, there is a potential to
Eicher Motors Limited April 30, 2010
improve margins further on account of underexploited exports business, spare parts and accessories business. I believe we are already at a good margins level although we may not be as good as number one and two in the industry but we are probably not very far from some of the other players in the motorcycle industry..
Basudeb Banerjee: Sir, one more thing. As you are saying that your ROCE is one of the benchmarks in the industry, then any plans with this huge cash sitting on the balance sheet which is yielding somewhat like 7% kind of number. So, with better ROCs from the business, any plans for utilizing this cash?
Siddhartha Lal: I was talking about operating ROC and therefore, it brings up a very good question about surplus cash . We are working on a lot of different plans to be able to use this surplus cash in good projects and businesses which are closely related to our current CV business. As and when we are able to talk more about it, we will certainly tell you how we are going to deploy the cash.
Basudeb Banerjee: Sir, one more thing. I was going through your presentation. In the subsidiary level, surplus property is mentioned, can you highlight about that part?
Siddhartha Lal: Actually, we need to remove that. It's not a huge surplus property. We have a property in Jaipur which was there for motorcycles plant.. We have a couple of other similar properties, nothing very substantial.
Basudeb Banerjee: Any potential value you can get from selling those?
Siddhartha Lal: there is nothing which is really exciting & nothing in very large numbers. I certainly don’t think so. It’s just some small additional property is available.
Basudeb Banerjee: Okay, sir. Thank you, sir.
Operator: Thank you, Mr. Banerjee. The next question is from the line of Sonal Gupta from UBS Securities. Please go ahead.
Sonal Gupta: Hi, good morning. Just a question on the CAPEX, you said Rs 500 crores over next three years. So, how much would your capacity plan over the next three years based on the spending?
Eicher Motors Limited April 30, 2010
Vinod Aggarwal: If you look at our capacity right now in-house in Pithampur, it is 4000 plus capacity but then the second limitation is the capacity with the suppliers. Now, this 4000 in the first phase it will go up to 5000 and in the second phase it would go upto around 85,000 to. 90,000 p.a. So, finally we have to gear up for our capacity upto 85000 to 90,000 in the next 3 to 5 years’ time as and when the need arises. However, in the paint shop, we will have this capacity in the next two to three years with the investment in CED Paint Shop.
Sonal Gupta: Okay, sir. Secondly, I understand that you have a good market share in small operator sort of segment but for large operators, I have spoken to a couple of them, I understand that they are also looking forward now for a lot of AMC contract and those sort of things, so are you willing to provide those for large operators?
Siddhartha Lal: In our heavy duty segment, actually we are already doing it. We have very good relationship with some of the largest customers.. Actually we are going with much larger customers because they value higher performance much more as compared to individual operators to whom initial price and stock finance and other things are more important. Our focus is on big operators and transporters. As far as AMC is concerned, we already have a good competitive AMC package which we have started selling along with our trucks to our customers.
Sonal Gupta: Okay, sir. Thank you so much.
Operator: Thank you, Mr. Gupta. The next question is from the line of Mr. Ashish Nigam from Antique Stock Broking. Please go ahead.
Ashish Nigam: Yes, my question has been answered. Thanks.
Operator: Thank you. The next question is from the line of Shefali Doshi from KJMC Capital Markets.
Shefali Doshi: Good morning, sir. Congratulations on the good set of numbers. Sir, I just wanted to understand that , there has been exceptional increase in your tax. I mean what was the reason for it?
Vinod Aggarwal: No, tax rate is 32% for the quarter and last year normal rate was around 29 to 30%. Basically the variation is only because of the R&D related weighted deduction which we get. This quarter, I think, the R&D related
Eicher Motors Limited April 30, 2010
expenditure was lower and over the full year, it should come back to around 30% or so.
Shefali Doshi: Okay. Thank you, sir.
Operator: Thank you. Due to time constraints, that was the last question. At this moment, I would like to hand the floor back to Mr. Pramod Kumar. Thank you and over to you, sir.
Pramod Kumar: Thanks, Faisal. I would like to thank all the participants and especially the management of Eicher Motors for taking time out to participate in this call and thanks a lot and have a great day. Bye.
Siddhartha Lal: Thank you.
Vinod Aggarwal: Thank you.
Operator: Thank you very much, sir. On behalf of Batlivala & Karani Securities, that concludes this conference call. Thank you for joining and you may now disconnect your lines.
DISCLAIMER Certain statements in this call describing the Company’s views about the industry, expectations/predictions, objectives etc may be forward looking within the meaning of applicable laws and regulations. Actual results may differ materially from those expressed in the statements. Company’s operations may be affected with the supply and demand situations, input prices and their availability, changes in Government regulations, tax laws and other factors such as industrial relations and economic environment etc. Investors should bear in mind these risks and uncertainties while going through this transcription.
Note: The document has been edited to improve readability.