The stock price of Eicher Motors hit an all-time high of Rs.33,328 today amid reports that the Siddhartha Lal-led company is in the final stage of negotiations to acquire Italian superbike maker Ducati for $1.8 billion. While the company is yet to make a formal announcement, analysts feel that such a deal augurs well for Eicher Motors. “The deal would give Eicher a larger global footprint. The company wants to increase its exports and this deal should facilitate that,” says Sneha Prashant, analyst at HDFC Securities Institutional Research. In August 2017, the company exported 1,105 units of Royal Enfield. Eicher has already opened exclusive stores in US and Australia. In the international market, the company has 26 exclusive stores and a presence in 600 multi-brand stores. “For Eicher, it would give them presence in 500 cc and above where it has no offering as yet. For Ducati, it would be an ideal way to enhance its India presence,” Prashant adds.
Given Eicher’s track-record with Royal Enfield, its management seems keen to replicate its success with Ducati. The success of Royal Enfield has been driven by two models – Classic 350 and Bullet 350. The other models have seen their volume decline on a year-on-year basis. Royal Enfield’s new models – Continental GT and Himalayan – launched in the past three years have not gained much traction. Meanwhile, the waiting period for Royal Enfield’s top brands is coming down. The 500cc Bullet is available off the shelves. “The waiting for Classic 350 is 15-30 days and that for Bullet 350 is 0-30 days. This implies that the total order book has reduced to 80,000 – 90,000 from 150,000 as of FY16. As operations commence at the new third plant, we expect this order book to largely deplete by FY18-end,” says Joseph George, analyst at IIFL Institutional Equities.
As the company stretches its dealer network beyond the top tier I/ tier II cities, volume could come under pressure. “About 70% of the new dealerships are outside the top 100 cities. Outside these cities, the volume per dealer is lower than the company average. As the company expands into smaller towns and cities, dividend from network expansion will reduce materially,” George adds. As of June 2017, the company had a network of 700 dealers. Eicher is going to add 150 dealers in the next two years.
So far growth has not been a problem for Eicher, over FY12-17, Royal Enfield’s sales volume has grown at 52% CAGR. Revenue has grown 14x over the same period with operating margin at 30%. While Ducati is an iconic brand, its financial performance is below par than Royal Enfield’s. In 2016, volume growth was flat as it delivered 55,400 bikes around the world with an operating margin of 7%. “Having Ducati’s product range in its stable gives Eicher access to new levers to sustain its growth momentum which could moderate going ahead,” points out George. At the same time, the fast growing premium segment in India could help Ducati improve its volume.
The synergy aside, the all-important question is how will Eicher fund the acquisition? Analysts believe it could be a mixture of cash and debt. Eicher has about Rs.3,300 crore in cash and liquid investments and given its negligible debt, there is room to stretch the balance sheet. In the absence of a bidding war, the tab could well stay around $2 billion. It would be interesting to see how the Eicher management deals with one if it comes to that.