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Sunday, May 16, 2004

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Eicher Motors: Hold

S. Muralidhar

Mr S. Sandilya, Chairman and CEO, Eicher group -- Profiting from new products.

SHAREHOLDERS of Eicher Motors (EML) can continue to hold the stock at the current price of Rs 220.Subject to political stability and macro-economic indicators such as the continuance of the current high growth of the economy and the buoyancy in the commercial vehicles segment, the EML stock still exhibits upside potential in the medium term.

Traditionally a light commercial vehicles (LCV) manufacturer, EML made inroads into the heavy and medium commercial vehicles (HCV) segment last year. The successful launch and, later, the market acceptance of its new HCV — Eicher Jumbo 20.16 — has made the company a contender of considerable strength in this emerging segment.

Despite the spike in material costs and higher excise duty, EML managed to post a 24 per cent jump in its net profit for 2003-04. The company's performance during the year was also affected by an internal, company-specific development. EML's sales in August and September last year were constrained by disruption in supplies from a key vendor because of labour unrest. The company recorded a sale of only 1,110 vehicles in September 2003 as against 1,254 in September 2002. The sales during the quarter would have been higher but for the supply limitations.

Similarly, the two industry-related factors that had a negative impact on EML's performance during the just-concluded fiscal were the sharp increase in raw material costs and excise duty applicable for bus and cargo bodies. The company's (as has been the case for other companies in this segment) margins were also affected by the steady appreciation of the rupee.

Higher consumption cost of raw material and components, one of the most important input cost factors, has hit EML's performance during the year. Cost of raw material consumed per vehicle sold in 2003-04 was Rs 3.7 lakh compared to Rs 3.44 lakh in 2002-03. This 7.6 per cent increase in raw material costs would have had a direct impact on the margins for the company.

Similarly, the total outgo for excise duty in 2003-04 was Rs 116.9 crore compared to Rs 72.44 crore in 2002-03. This rise is much higher than the 24.9 per cent increase in the number of vehicles sold and was clearly due to the increase in excise duty on bus and cargo bodies.

The point to note is that the increases in duties and raw material costs would have been passed on to EML's customers, but the higher costs and, as result, higher product prices could affect the future competitiveness of the company, since Eicher is a more niche player in the CV segment compared to the bigger players such as Tata Motors and Ashok Leyland.

EML's total incomegrew 28 per cent to Rs 797 crore in 2003-04, up from Rs 629.5 crore during 2002-03. The net profit was up 24 per cent at Rs 46.45 crore from Rs 37.46 crore in 2002-03. Similarly, the earnings per share of Rs 23.2 was up about 24 per cent.

However, EML's performance is likely to be influenced by the Eicher group's restructuring plans for the company and Eicher Ltd. According to the restructuring plan that is pending a few approvals, the tractors, two-wheelers, gears and engines businesses of Eicher Ltd will be de-merged into EML. The demerger, when given effect, is likely to lead to a consolidation of the automotive businesses of the Eicher group.

There are a few synergies that this move will attempt to leverage, but there are also a few inherent business risks that could increase the pressure on EML's margins.

However, with the possibility of the tractors and two-wheelers business looking up this fiscal, the overall impact on EML's bottomline may be positive.

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