Shares of two-wheeler maker Eicher Motors Ltd declined around 4% to ₹2793 in Thursday’s opening trade on the NSE. Although the company’s December quarter earnings were a tad below expectations, a key concern for investors has emerged on the margins front.
Given the rising cost of inputs, the Street had pencilled-in an operating margins contraction of 60-80 basis points (bps). One basis point is one hundredth of a percentage point. However, the company’s operating margin contracted by 110bps in Q3FY21.
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In a post earnings conference call, the company’s management said that increase in commodity prices and precious metal was hurting margins, which fell 170 bps year-on-year (y-o-y) to 23.5%. The impact of high raw material cost on margins was around 80-100bps, which was partially offset by tight fixed cost control, the management said. The cost of raw material consumed by the company rose by more than 50% on a year-on-year basis. Further, the company’s employee cost also rose due to salary increments.
To mitigate this impact, the company has taken a price hike of 2-3% in January and February in its Royal Enfield Classic 360 model. This was in addition to the price hike of ₹2,000-3,000 taken in September and ₹3,000 announced in April last year.
The management expects prices of base and precious metals to be a headwind going ahead. It further added that it is working on value engineering to reduce costs.
“Margins are likely to be affected in the medium term due to commodity inflation and BS-VI cost impact. We expect margins to remain around the lower end of the guided range of 25%-30% even in FY23,” analysts at Nirmal Bang Securities Ltd said in a report on 11 February.
Meanwhile, the company’s management said it is seeing good demand recovery across India, driven by its product Meteor. Overall, its bookings are stronger than last year and demand is reviving even in its matured markets of Tamil Nadu and Maharashtra.
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