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Emkay Research | 09 August, 2011 1
Eicher Motors Transcription
Moderator
Ladies and gentlemen good day and welcome to the Q2 CY11 post results conference call of Eicher Motors hosted by Emkay
Global Financial Services Limited. We have with us on the call today Mr. Siddhartha Lal, MD and CEO of Eicher Motors and
Mr. Lalit Malik, CFO Eicher Motors. As a reminder all participants will be in the listen-only mode and there would be an
opportunity for you to ask questions at the end of today’s presentation. If you should need any assistance during this
conference call please signal an operator by pressing * and then 0 on your touchtone telephone. Please note that this
conference is being recorded. I would now like to hand the conference over to Mr. Chirag Shah from Emkay Global, thank you
and over to you sir.
Chirag Shah
Thank you Marina. We would like to welcome the management of Eicher Motors Limited and also thank them for giving us the
opportunity. I would now like to hand over the call to Mr. Lal for initial remarks and then we can start the Q&A, over to you sir.
Siddhartha Lal
Thank you Chirag .As you can see we had another quarter of growth both for the industry and particularly for our company
Eicher Motors Limited and what I will do is I will start with the update on our sales volumes in various segments of the industry
and then provide a brief update on the financial performance.
The CV industry this quarter, if you are looking at the 5ton above segment which is the segment which Eicher Motors
represents grew by around 7.8% over the same period last year and like ithas being doing for the last many quarters, we have
continued to beat the industry growth rate and we have grown by 23.8% which is of course very heartening. In our Q2 which is
April to June2011 which is this quarter just ended, we had a good growth in the 5-12 ton segment which is our traditional
strong hold and we sold 6641 units and grew by around 20.4%, which is similar to that of the industry growth and therefore we
held on to our market share of 30.4% same as Q2 of 2010. So there we held on to those market shares, of course for the half
year we have had a better market share than last year. So we continue to stay strong in our traditional segment.. Tthen we
move on to obviously what is the most crucial segment for us in the coming years, which is the heavy duty segment, there we
continue to build on our strength and to build on let say our starting point which we got in and we continue to build volumes .
In the quarter, we sold 1407 units , which is 60% improvement over last year and of course 60% versus market growth of of
5%. Of course our base is very small, so that helps . Our market share as a result has improved from 1.8% to 2.8% over last
year and now we are increasingly gaining presence in more and more segments and more and more geographies in the heavy
duty truck segment. So we continue to receive also a very positive feedback from our channel partners and customers on
product reliability, performance and, features . Although we are not spreading ourselves too thin at this point, we continue to
stay focused on the product segments in the location in areas where we are providing better value propositions . So we are not
going let say pan-India, pan product range at this point, so it is a very focused approach it continues to be, there as you can
see we have pushed hard now on the 16 ton segment, which is even an area which we are going strong in, we have a market
share of 5.9% which is up from 3.4% last year so in 16 ton cargo, in 16 ton tipper, our market share is up to 9.1% actually .so
that is a very good market share close to 10% now. And of course in some geographies where we are present our 16 tons
tipper is well over 15-20% ,also in some cases . So we are not presence pan-India yet, we are taking it slowly but we are
making sure that wherever we are present we try and get a higher market share.
As far as bus segment is concerned, we had a very good quarter as well we capitalized on the momentum that we built in
quarter one. In quarter two, we actually sold 2127 units which is an increase of 22%, where as the market actually declined by
8.1%, so here we gained very good market share from 9.3 to 12.3% in the bus segment and in export also we have grown to
732 units which is an 8.5% growth. The only area where we have seen a dip is , our European trucks segment which is where
Volvo truck operates . As all of us know that there have been issues relating to mining sectors and our 80% of our exposure is
the mining sector whether it is coal or iron ore, lignite all these other areas . So we had problems there in quarter two, we sold
only 122 units , which is a drop of over 50% from last year. But we still have market leadership here and we continue to have a
market share and we remain hopeful that if as and when the mining comes back on stream ,we will continue to have very good
growth in this segment as well.
We move to our projects, main project is medium -duty engine project which we are manufacturing the engine for Volvo Groups
Global requirements . The project is going extremely well, we are really on track to make absolute Global quality engines of
course ranging from Euro 3 upto Euro 6 standard engines . The production will start by the end of 2012. So that project is going
09 August, 2011
Eicher Motors
Q2CY11 Conference Call Transcript
Transcript
Emkay Research | 09 August, 2011 2
Eicher Motors Transcription
exceedingly well and I am very satisfied with that. Then moving on from a joint venture to our motor cycle division Royal
Enfield. As we have been discussing, lately we have been in the process of expanding our capacities in Royal Enfield. There
are two parts, one is our standalone capacities in our current plant and the other is new capacities which we are looking at.
As far as new capacity is concern which will be ready also let’s say around first quarter 2013, we have procured finally a land
in Chennai for 50 acres in Oragadum which is right in the heart of Chennai automotive area ,that has been handed over to us
recently. We are now working on the final paper works, so it will take around 18 months or so to get the plant up and running.
So the project is on, it is live and we have just started moving forward, so we will continue Chennai as our next location. This
allotment was done actually on July 12th, so just over two weeks ago.
As far as the current plant is concerned we are currently at, last year we produced 54,000 motorcycles approximately. This
year we are on track to producing just over 70,000 motorcycles and we should continue to push that forward even next year
and exceed 70,000 next year. And of course, as when we the new plants will up and running, our capacities in the new plants
will be 150,000. So we will have that capacity to look forward to in the coming years . So the good news of course is in the first
half we had a very good performance in motorcycle production. In the last quarter two, we have actually produced 18,581
motorcycles, sorry that is our sale number but it corresponds exactly or very closely to our production number and in that
quarter, we produced over 6000 motorcycles per month and which is a growth of nearly 50% over last year. So we produced
just over 12,000 last year, we produce over 18,000 this year, so it is very strong growth that we saw and we see no reason
why we should do anything but 6000 plus to the coming year as well for the rest of the year.
Now given these volumes and I guess there is a price increase we have done, we have done price increases twice this year
for both our businesses that is , I believe in January and July we have done prices increases . So given all of that, we have
actually our financial performances is also very satisfying. we had our overall sales net sales nearly touching 1300 crores, so
1298 crores with a growth of 25% over the same period last year
Our EBITDA was at 126 crores , which is a growth of 47% over last year and it translates from operating margin of 9.7% and
9.7% is incidentally the second highest ever percentage margin that we have achieved in a year and this is in a quarter which
is regarded normally in automotive terms as slightly sluggish, of course the coming quarters will be hopefully increasingly
better. We had a profit after tax for the quarter at 116 crores which is at 8.9%, I believe it is a highest ever other than when we
have had extraordinary income and it is a growth of 40% over the same period later year. So, in the working capital domain we
continue to have negative working capital now for the seventh consecutive quarter, so it continues to grow strongly for us and
overall I believe a satisfying financial performance as well for Eicher Motors this quarter, as again laying a good foundation for
the coming quarters which look to be quite interesting. before I end may be a small point on the industry outlook in the rest of
the calendar year 2011. Given the recent hike in rates etc I believe that is in everybody’s mind, the organization continues to
be cautiously optimistic about the industry’s volume growth plan over the medium term and extremely optimistic I would say
over the long term . I believe in the next 2, 3, 4, 5 year horizon, there is a lot of growth potential in the industry and from my
interaction with channel partners and customers , we find that they have been till now able to pass on the price increases to the
customer and the customer has been able to pass it on to the end customer of the trade.. So there is of course some
sentiment issue right now since it is going on, the sentiment is slightly weaker at this point but the fundamental seems to be
reasonably good.
I don’t see as yet a down turn or anything of that sort. there is a little bit of flattening out which is happening, so the growth
rates may not be in high double digits certainly, it could be in single digits or low double digits we don’t know but certainly we
don’t see a normal growth rates in the industry for the next few months but that is more sentimental related. The underlying
business is still reasonably good. the pricing power of truck owners is also reasonably good. Actually the momentum is
reasonable to give us a good run into the next couple of quarters , which are the better quarter especially October-November-
December and beyond. So we are reasonably optimistic not withstanding obviously one or two smaller issues which may
happen on a monthly basis at the industry level, one doesn’t know exactly month-to-month what can happen but overall I
believe it is reasonably good.
Yeah, that is it from my side at this point so Chirag may be back to you and on for question and answer.
Moderator
Sure sir, we will now begin the question and answer session. The first question is from Kunal Bhatia from Dalal & Broacha,
please go ahead.
Emkay Research | 09 August, 2011 3
Eicher Motors Transcription
Question and Answer Session
Kunal Bhatia
Sir just with regards to the last year closing comments, you did mention that on a long term basis, you see that growth could
be in a positive figure, so just wanted to understand what factors are you looking for as in, I am not talking about six or one
year down the line but on a long term basis ,what factors do you see that would lead to another growth phase in this industry.
Siddhartha Lal
There is transportation which is closely linked and especially to commercial transportation and GDP. So as long as there is
good GDP growth in the sustained manner in the long term ,there will be huge requirement for the freight movement and
obviously there is a multiplier effect actually on GDP growth. So GDP growth is 7 or 8, there should be good multiplier effect
on that for freight movement in terms of ton kilometer which are required to move. Our industry is cyclical by nature, so at
some point there will be some downturn ,there will be some upturn but on a compounded growth rate we should see it as a
multiplier of GDP. The other of course important factor is that in India logistics , if you see as a percentage of GDP is actually
quite high. Whereas the actual truck transportation, in individual truck transportation is low but logistic cost is very high
because of the higher inventory cost, very slow timing, very slow travel all of that. So overtime, if the logistic cost as in
percentage of GDP starts coming down much more, it becomes much more easy to do transportation. so people start having
one hub or let’s say one plant in the country rather than having multiple plants and therefore they do a lot more transportation.
So obviously we track a lot of things but I would say GDP and you know the opening out of logistics are the two main factors
that we believe in the long term will affect the industry growth.
Moderator
Thank you. The question is from Pramod Kumar from JM Financial, please go ahead.
Pramod Kumar
I had just one query on this semi-low floor bus launch as in, I believe that you have done an introduction of the product. So just
wanted to understand, how is the experience so far in terms of response from STUs and any number visibility as to when this
particular segment will start ,what do you say adding to the numbers on a monthly basis and I think probably after this I have
further questions on the HCV side so.
Siddhartha Lal
As you know, we have launched the semi-low floor bus which we are extremely excited about. it is a scene of the urban
transportation in India there is I believe an enormous potential and we really tried to hit the middle of the market which is a
very value conscious and good area of the market. We are going after second tier town and cities right now and while the bus
is ready ,we really now on the marketing phase of the bus . As you know sales to government have long gestation period, so
we have participated in tenders, we have been showing around our bus to many, many different cities, we have them on trials
in different cities . So we have got one order of 20 buses I believe at this point from Gujarat, I can’t remember where exactly
but is in Gujarat. lets say having our first full commercial running of our buses, currently there are running on semi commercial
bases in the sense they more on trial in different places . So it is not an extremely fast start because these things do take some
time to get going but the bus is good, it is ready and now we are actively marketing it. So we are looking it ,we are bidding for
every single tender which comes in for semi-low floor buses and hopefully we should start winning more and more as time
goes by.
Pramod Kumar
And this is the product which has been in a way tested and validated by Volvo, right?
Siddhartha Lal
Now of course it is part of our joint venture, which is the Volvo Eicher Joint Venture, so we got lot of support from Volvo Group
in validating this . Yes we have got their support in the validation process.
Pramod Kumar
No it helps a lot in terms of the perfection of the product especially given the fact that the other two companies are struggling
with lot of complaints and suites from STUs. So I think that is good to hear. And Siddhartha generally on the HCV side how
has this increased acceptance for the product helped in whether the discounting vis-à-vis, say the main stream players are the
Emkay Research | 09 August, 2011 4
Eicher Motors Transcription
No.1 and No.2, it is narrowing or in way are we seeing better realization coming out this business and specially considering the
fact that discounts I believe are generally higher now because of the slackness which has come into the sales . So how that is
having an impact on our whole HCV game plan in terms of hitting the 1000 volume mark and also on the pricing side and the
profitability of the segment?
Siddhartha Lal
As you know, generally we not big discounters and we don’t like to be seen or we don’t like to position our brand as much
discount but clearly the only reason why we do have to discount a little bit these days more in HCV than we do in other
segments , is purely because of a slightly lower resale price that we have of our product at this point, which is because it is new
product.
Pramod Kumar
Exactly.
Siddhartha Lal
So in order to counter that we do offer some slightly low price today. I think there is a enormous potential in obviously once we
gain good traction in heavy duty of good volumes and of sustainable volumes then of course we see a huge possibility in
increasing margins as time goes by but that still I would say is step 2, right now we are still one step 1 which we have talked
about, which is to get to a consistent 1000 volumes a month. So we are starting to hit 500, 600 plus which is excellent
compared to may be 100, 200 we were doing around 12, 18 month ago or may be 300. So the volumes have picked up a lot
we have not reached a 1000 volume at 1000 we believe it’s the right time when all the good situations are ticking in. so we will
be able to get some better cost from our vendors .we will be able to get better cost from internally in our manufacturing. we will
be able to lower our discounts . so I would say we all plan for the second phase which is post regular 1000 a month. which
hopefully we should see sometime soon. So that is really the situation on our heavy duty pricing and number situation.
Pramod Kumar
And generally the 1000 mark, would you expect that will it be achievable by this calendar year or ideally the first quarter of the
next calendar year?
Siddhartha Lal
I can’t, unfortunately I can’t predict that. we have always said that we have never given any guidance on this but we have
always said that we would love to see it happen within 2011 itself ,to trying to hit a 1000 number but we are not going to just
push it just to prove everyone that we hit a 1000, we will only do it when we find it sustainable and when there is a proper pull
for it. So a month a two here and there doesn’t matter to us as much as the sustainability of it. We have had in the past in
2006-07, we have gone up on numbers in heavy duty but we weren’t able to sustain it. So we know that sustenance is the
most important thing. Once reaching a 1000 so we are going to do it, when we do it, it is going to be sustainably.
Pramod Kumar
And finally on the non-vehicle business with others , if you guys can just throw some light as to how has been the performance
there during the quarter, if not exactly in terms of absolute revenue but if not that actually is the growth how it has panned out
in this particular segment.
Siddhartha Lal
Are you talking about spare parts?
Pramod Kumar
Yes spare parts , as in generally the non-vehicle spare parts services.
Siddhartha Lal
I don’t even have the numbers of that in front of me but it continues to grow very well. We have put lot of emphasis as
aftermarket business because we believe there is enormous potential. it tends to grow slightly higher than the volume growth
in vehicles but sometimes it is plus/minus you cannot say exactly but certainly, it is going at pace with everything else right
now.
Emkay Research | 09 August, 2011 5
Eicher Motors Transcription
Pramod Kumar
And any price increases plan in the CV side or you are looking at this particular quarter?
Lalit Malik
Yeah so Pramod, in July we did announce a price increase ranging between 1-2% across the board for various models . So no
price increase in the near future so far.
Moderator
Thank you. The question is from Pritesh Vora from Equanam, please go ahead.
Pritesh Vora
Sir can you elaborate on your engine, you have some engine manufacturing plant?
Siddhartha Lal
Volvo has chosen, this joint venture to be its manufacturing base for a new medium duty engine platform ,which Volvo Group
is in the process of developing right now. So it is an extremely prestigious project for us . They were looking at, traditionally
they only manufactured engines of this nature especially of Euro 6 truck requirements in Europe, so this is the first time, in
fact globally that such an engine is going to be made in a country like India whether from Volvo Group or anywhere else. So in
that way it is extremely forward, extremely prestigious , we will be supplying engines from our Pithampur factory where it is
being set up to Europe. So they will actually be installed in Euro 6, European engines from 2013 and 2014 onwards . The plant
is coming up - the factory shed is now getting made. The orders for all the equipment has sort of come through, lot of the
purchase orders have gone out. We are in the first phase, we are making 85,000 engine capacities ,this includes of engines
from Euro 3 all the way to Euro 6 but basically it is four cylinder and a six cylinder engine. So the four cylinders is 5 liter and
the six cylinder is an 8 liter engine. The CapEx on the plant itself is approximately 300 crores for phase 1. So that is the sort of
general layout. The start of production will happen by December of 2012, so we should have a full year in 2013. of course
there will be ramp up in 2013 and that is when we will have a year of full production of diesel engine.
Pritesh Vora
And what can be the approximate value of this 85,000 engine annually?
Siddhartha Lal
I don’t have an approximate value at point Pritesh of course these are very high end engines so, you can look at comparative
figures in the market but we are not giving out the number on value at this point.
Pritesh Vora
And this year say calendar year 13 is it?
Siddhartha Lal
Yeah calendar year 13.
Pritesh Vora
And when does it start in calendar year 12?
Siddhartha Lal
Yeah December 2012 is the current start of production date.
Pritesh Vora
And this is for all of the Volvo requirement in Europe for four and six cylinder?
Emkay Research | 09 August, 2011 6
Eicher Motors Transcription
Siddhartha Lal
Currently Volvo is making their medium duty engine in collaboration with a company called Deutz which is German company.
It is not going to happen in one shot but over time our engines with the Euro-VI engines will be replacing a lot of the engines
which are being made by Deutz currently. So it is not for all the requirement of four and six cylinders, in fact it is for the
medium duty requirement they also make, I mean all their heavy duty is also six cylinders but that they make in Sweden itself.
So we will be catering to the medium duty requirement for Europe, As ia and quite a few other markets.
Pritesh Vora
Correct and is it what kind of JV it is? Is it an equal equity partner?
Siddhartha Lal
The engine plant falls within our joint ventures, which were set up in 2008. So the joint venture its run as 50:50. Eicher Motor
Limited owns actually in real terms it owns 54.4%, AB Volvo and in real terms it owns 45.6% of this joint venture but the
agreements the understanding everything is 50:50 down the line. So the economic interest if you buy into Eicher Motor is
54.4% of the engine company.
Pritesh Vora
One more question, this regarding the larger CV industry. once the GST comes in a line there will be lot of rationalization
happening in terms of logistic center and transportation hubs and all that. So how do you see this development affecting your
company.
Siddhartha Lal
When GST comes on line it of course it changes a lot of things , you are very right to say from the logistics stand point of view
and in fact it, what happens is that if you remember the first ques tion which I believe Kunal Bhatia asked about the factors of
GDP, I said two points GDP and opening out of logistics . So basically what GST does is it opens out logistics . It becomes
much easier to do logistics, logistics as a percentage of GDP comes down dramatically hopefully. It encourages transportation
a lot more. So, people find it cheaper to transport than to set up multiple plants, other such things. So we see it as an
extremely positive effect on the commercial heavy duty.
Pritesh Vohra
I am just curious to understand that, is there any study which you have done like say if they go for hub and spoke model
regarding logistics there will be more heavy duty truck plying rather than medium, so is there any impact on your business
model in terms of product chosen by the logistic operator or it is too early to determine all that?
Siddhartha Lal
There is lots of modeling done but India is a peculiar country, we will never have a very sort of formal and well defined hub and
spoke model, only because it’s s o large and the distance and the travel time, the numbers of days taken are 5-6 days between
certain type or even 7-8 days. So if you see of course for the long distances more and more obviously only heavy duty trucks
are going to be used, so there is huge growth in that. But in all the regional transportation that means south to south, that
means within four south states, from west to west, from west to central or central to central and north to north, we see very
large medium duty requirements . so these will be all point to point, there will be no hub and spoke in these. So you want to
travel 400 km, it will be done on medium duty trucks. So we see an increased, a very good potential and growth for medium
duty truck, we are continuing to invest heavily in medium duty as well, a new platform for medium duty because basically
people want to get instead of 300-350 kilometers , they want to get 500 kilometers in one day out of the medium duty truck and
that covers all regional transportations. It makes it extremely efficient to do regional transportation. With the economy , we see
a growth in all segments, in small, medium, and heavy of course there will be different growth rates but we see no concern to
our business model at this point.
Pritesh Vohra
And my las t question if you look in horizon of 3 to 5 years , where do you like to place Eicher Motors in a longer-term horizon,
would you continue to do the product segment which you continue to do, where do you see yourself fitting into the entire
product structure because you do MHCV, LCV, motorcycle, and also mining trucks , so wide variety of the products which you
do?
Emkay Research | 09 August, 2011 7
Eicher Motors Transcription
Siddhartha Lal
Obviously you can take Eicher Motors as two very distinct parts; one is the joint-venture Volvo-Eicher with Volvo, so that is
entirely to do with commercial vehicles and one is Royal Enfield. So we keep those two aside there is nothing much in
common. The truck joint-venture, we will focus entirely on trucks and commercial transportation of all types, buses all other
commercial areas , engines other such things. At this , where we see ourselves in 2015 time horizon because that timeframe
you asked about is, that our ambition is to get 15% market share in heavy duty. it is very large ambition but we believe we
have the wherewithal to get us there and that will be the one that will be a huge multiplier affect on our top-line and grow our
top-line to the next multiples that we are looking at. We plan to be in every segment of the commercial vehicles of course our
focus is right now on 5 ton and above and for the foreseeable future for the next 3-4 years horizon I don't see any change in
that focus of 5 ton and above. We plan to get much stronger in buses, much stronger in heavy duty, continue our strong
platform in light and medium duty but also we are looking at getting into increasing our soft product or non truck business as
well. So it means after market, it means various other areas that we are looking at in order to ensure that we have a noncyclical
business also which is very strong. So that is what we are growing in the CV side of it and we feel confident that we
should achieve our targets . so maybe well over 30% in light and medium duty and certainly 15% in our heavy duty and ahead
of that in our bus as well. And of course motorcycle as we said, we are now putting another plants to at least 150,000
motorcycles but if things go as they are in the current trajectory ,we should probably looking at increasing that also by 2015
and there as you can see ,if you look at the standalone number. We had very strong margin growth in the motorcycle business
and we believe that the peer level in motorcycle is even higher than what we have today in EBITDA level. So we should
certainly be targeting to get closer to our peer levels a best-in-class for margins in motorcycles.
Moderator
Thank you. The next question is from Vikram Mahajan from Bay Capital. Please go ahead.
Nikunj Doshi
Hi this is Nikunj Doshi from Bay Capital. just wanted to understand this engine plant once it starts production do you need to
go through a cycle of approval from parent and will it take some time or you can straightaway start selling it?
Siddhartha Lal
Approval of what nature?
Nikunj Doshi
Engines projects , once it starts and when we start exporting engines to Europe is there a cycle of approval which takes time or
you can straightaway start selling?
Siddhartha Lal
The engine project is being handled of course by the joint-venture and because it is of such high strategic importance to Volvo
group because it is not only going for some output engines in Asia and all of that, it actually been used for the European
trucks. Volvo Powertrain, which is a very strong organization within Volvo group is hands on working with us. They are in fact
leading a lot of projects which go into a manufacturing of this. So it is not that they have just given us the project and say now
you complete it, they are working with us very closely, we work extremely closely with each of their people, their engineers,
their team members to get this project on so. The approval is all in-line. I don't know any other approvals stage. It is not like
there is any option but to buy this. It is not like they have a second plant also which they could lean on. So there is no question
but the engines will have to come to this plant for their global requirement.
Nikunj Doshi
And in terms of CapEx, what is the CapEx plan say in Eicher standalone and in JV over next two years?
Lalit Malik
In the standalone business the plan is to invest in the new plant which Siddhartha has just spoke about With the land we have
got, there will be an investment to the tune of 120 to 140 crores, the plans have not finalized yet in terms of the exact size of
investment but it will be in that range. As far as the joint-venture is concerned over the next two and half to three years there
will be an investment of close to about 500 crores in capacity expansion, parts of which are already going on including the new
paint shop which is coming up and the medium duty engine of course the first phase will consume about 300-350 crores. So
these are the three large CapEx plans that we have right now.
Emkay Research | 09 August, 2011 8
Eicher Motors Transcription
Moderator
Thank you. The next question is from Sanjay Doshi from Reliance Mutual Fund. Please go ahead.
Sanjay Doshi
Just wanted to understand what efforts are we putting on the distribution and servicing areas , we are not yet at 15% market
share, if you can talk about the 3 to 5 years perspective?
Siddhartha Lal
Very good question Sanjay because distribution I would say one of the enabling or constraining factors whichever way you
look at it, for us to achieve the 15% and it’s a extremely crucial aspect of our future where we have a huge focus on getting our
distribution right and we already have a very strong distribution for light and medium duty. But obviously there is an enormous
upgrade, which we have been doing in order to make sure that it is ready for heavy duty. So firstly on the qualitative side what
we do is ,we have a very strong process by which we actually put a green signal for any dealer that he is ready to sell heavy
duty. So one is his own financials and other readiness then is the screening, facilities, the base, the spare parts availability, the
service, the technicians, the sales people all of that availability, we do at a very good level. Then of course it is the routes
which the heavy duty truck will take from this particular dealership area or the catchments area of the dealership. So if there
are 15 identified routes which are of high frequency, then we need to make sure that their service availability on all those
routes . so all that work we do at every single dealership basis, we have currently 145 commercial vehicle dealers of which
more than half or around half are now heavy duty ready and what we are obviously attempting to do is , one is we are
increasing the number of dealers themselves at a total level so from 145 we are planning to go to 155 dealers this year and
the goal let us say in a 2 years’ horizon is around 200 odd numbers for dealers. But very importantly it is the readiness as for
the heavy duty that we are now on the monthly basis we are adding 3-4 dealers to become heavy duty ready. So that work
which is happening because it is not as dealer points, it is actually interim points of service which we are also putting up, we
have many different models of either AFCs offering service points or we have our own points which we are also looking at
putting up. We also have container workshops for very quick band-aid type of job. So this is not only service points that we are
putting up. We wanted to make sure that the service and spare parts is available and all the routes that we want to follow.
Sanjay Doshi
And in terms of region, if we have to look at is there any particular region that we are focused on in the near term?
Siddhartha Lal
It’s very difficult to describe again on the phone because there are lots of different pockets that we are focusing on. It's not a
general region like South or West but you can say within that we look at each individual area. So within that also we look at
different products .so for example some parts of West are very strong now in tippers so Goa and maybe Kerala and other
places are very strong in tippers. But other parts in between Hyderabad and other places , we are very strong in another
segment. So it's not a very easy picture to look at but actually now North has also picked up very good on heavy duties -
North, West and South maybe but general area, I would say if anything which is slightly weaker in Central and East at this
point but that’s why we are focusing on to the north, west and south but overtime we are also building up our presence in
Central and East.
Moderator
Thank you. The next question is from Vaishali Jajoo from Aegon Religare. Please go ahead.
Vaishali Jajoo
This is the broader question on how the trend in buying, in the fleet operators side. it is small operators right now buying more
or larger one that is first and how is the financing trend in the CV market going?
Siddhartha Lal
It is very difficult to answer, since I don't have any information, since the rate hike the very reason .so I don’t know the if there
is any change from earlier but certainly there has been across the board buying till now. In fact we have seen from all levels of
operators that has been buying. so I don't see in the particular difference at this point of course, it is now really the right time to
see after the rate hike that what’s going to be a change in terms of the mix of operators who are buying. As far as financing is
concerned the general availability of financing has not been a problem since the downturn in 2008-09, financing is available.
There are public sector banks, there are private banks, and there are NBFCs, so a huge amount of financing is still available.
Emkay Research | 09 August, 2011 9
Eicher Motors Transcription
The rates have gone up, we are seeing rates of maybe 13% have started for prime customers going up to maybe 17% for the
retail smaller customers, that of course is getting high now and there are some questions also around it for some of the
customers. But as long as we're able to pass the price on they will still be buying but that is the only concern right now, it could
be a sentiment issue that maybe we will postpone our purchases.
Vaishali Jajoo
Because there are couple of announcement of LTV going down from financiers side, so that could be a concern for the fleet
operators who usually have more of financing in the 80%-90% coming down to suppose 70%. it will be an issue for industry
and second in the long run, it is fine 7%-8% GDP growth will have a multiplier effect on the commercial vehicle but I think the
deceleration in the growth of GDP itself has a little bit higher effect on the CV industry if I'm not wrong?
Siddhartha Lal
I am not worried about the LTV issue at all because actually if it is at the slightly lower level, I would say 70 or 80 or whatever
you say as it goes to 90. I think long term it provides us a much more stable industry rather than a much more cyclical industry.
Because when finance is too easily available too many people buy in the upturn and then suddenly there is lots of
repossession and other problem in the downturn because we have very little equity invest in the truck. Of course short-term
there could be some volume if the LTV goes down but I'm actually extremely happy in the long-term you say that the LTV is at
70% ,all players are playing by that and it helps the industry actually a lot and then you see the right type of people coming into
these business, who are really logistic people rather than opportunistic people who just want to try and make big bucks. So we
are happy with the LTV situation actually.
Vaishali Jajoo
I am just asking about it, it is 70 or not but there are couple of announcements which have come in from the financiers side. I'm
just confirming on that whether it will have depreciation or not?
Siddhartha Lal
It will very well could. Some of the retail buyers will not be able to afford 30% equity, so it will cut out retail buyers certainly. Of
course, we look at but I am not concern too much about smaller cycles which happens within the scheme of things but it is the
medium term that we are really concerned about and there we see reasonable growth potential.
Moderator
Thank you. The next question is from Vasudev Banerjee form Quant Capital. Please go ahead.
Vasudev Banerjee
Your employee expense on a consol level, seemed to move up by almost 12 crores sequentially, whereas on the volumes
front everything was seasonal. So was there any one-time outgo in the employee expense or there has been wage inflation, so
one can take current levels to be sustainable?
Siddhartha Lal
Obviously with the type of activities and growth that’s happening in all of our divisions , we have also been hiring quite
aggressively in last 6 to 12 months but you are right in April we have done all the salary increases , which have been
reasonably large this year because of the inflation and that has hit us a little bit more in April to June quarter. So there has
been some of that.
Lalit Malik
No this is it. It was largely due to wage inflation, becaus e of the annual increment cycle and we have also added people every
quarter.
Vasudev Banerjee
So nothing related to one-off bonus outgo as such?
Emkay Research | 09 August, 2011 10
Eicher Motors Transcription
Lalit Malik
Nothing.
Vasudev Banerjee
And secondly sir this tax rate coming down primarily because of the higher other income?
Lalit Malik
Higher other income from FMPs yes.
Moderator
Thank you. The next question is from Bharat Gianani from Asit C Mehta Investments. Please go ahead.
Bharat Gianani
I just wanted to ask a question regarding the two-wheeler business. In this quarter, we have seen a realization go up. so is it
more to do with the better product mix that we have seen?
Siddhartha Lal
Yes I imagine it would be because of a better product mix yes, since our capacities have come more on stream , we have been
selling more classic motorcycles and more 500 cc motorcycles both of those command substantially a higher price than other
models and specially the 500. So yes it would happen from that.
Moderator
Thank you. The next question is from Viraj Choksey from ARM Research. Please go ahead.
Viraj Choksey
How do you plan to utilize your 1200 crores cash on the books?
Siddhartha Lal
It is on the VECV books and on the standalone books , it is around 500 crores of cash. So Viraj ,cash utilization you can split it
up mentally at least into two buckets, one is in the joint-venture and one is in the standalone. In the joint-ventures our aim and
purposes furthering of commercial vehicles interest in India and emerging markets, so we're looking at all sorts of different
opportunities where we can invest this fund. So we got a big break when we got to medium duty engine projects, we're looking
at other investments which can further improve our for commercial vehicles interest. So there are a lot of things , which we
were discussing, which are in pipeline. We are in no hurry to spend the cash which is lying around because we believe that
there are always opportunities which will come up. There are always strategic opportunities which could be there. So we are
working on many of them, out of every 10 opportunities if you look at 9 go off the site, so where thing fructify we will of course
we will talk to you about it. Like I said we're looking at many other strategic projects, one which we have got in recently the
medium duty engine project. On the standalone front, of course the way things are going now in the motorcycle business, we
are also looking at how things moves in that project. Some of this cash is going into the new plants but we are very strong
cash generation also from our Royal Enfield business and again there could be different opportunities which are either to do
with motorcycle or within contribute areas that will help us for this. We're looking at different opportunities. In fact Lalit and I
have been spending a lot of time now to look it at but there is nothing concrete at this point to talk about.
Chirag Shah
One was other income, it’s just for housekeeping, you said there were some FMP maturities but is it slightly on the higher side
and that kind of a run rate would not be there going ahead, is there a right way of looking at it, if the treasury income matured
in this particular quarter?
Lalit Malik
If you look at the consolidated accounts, the other income comprises of 2-3 different things , one is the fixed deposits that are
lying in the VECV books. Entire money over there is invested in fixed deposits. So there the flow of other income is regular and
little predictable every month but on standalone books about 70%-80% of cash is tied up with FMPs. There the income tends
Emkay Research | 09 August, 2011 11
Eicher Motors Transcription
to be a little irregular, the last quarter that has gone by Q2, clearly we had large sum of FMPs maturing and hence the large
part of other income may not happen next quarter.
Chirag Shah
This was helpful and I also had one question, you indicated that you have developed some strength on select routes and
different routes your strengths lies in different products. One question was how are you geographically spread in terms of
ensuring the downtime time ,compared to Ashok Leyland or Tata Motors, how that geographic spread has increased for you
and also if I'm correct, you are right now a large player in 16 tonner in the HD, if I look at your portfolio 16 tonner accounts for a
very big chunk in the HD segment. How and when can we expect ramp up to happen on the higher tonnage side in next 3
years or 4 years’ timeframe?
Siddhartha Lal
On the geography points being a discussion on heavy duty right now, heavy duty goes to every nook and corner of the
country, so we have no choice but to be present in every is single nook and corner of the country. The only discussion we are
having right now, we do is about the prioritisation of that because you can’t do everything in one go. So the end outcome has
to be you have to be present in every single part of the country, there is absolutely no debate or question about that. What
we're doing is that we are looking at the high-density routes where our trucks will go to and we are predicting that and
therefore we are putting more service points there and what we're doing is that when we lack in certain areas service for
maybe over 100 kms or 200 kms. so in those places we are putting up either third-party service points or only service and
spare part points not a full dealership. when it is required we are even investing ourselves because we think that the small call
investments in service points are certainly worthwhile for the larger aim of becoming big in heavy duty. So whatever is required
we are doing in order to put these service points along and to get the geographic spread. So there can be more geography in
the country where we are fully absent, that cannot be the case and that's not the case anymore. But we are now densifying it
further, that's what we're doing. In heavy duty yes, we are now reasonably successful and in the geography where we are
present we have been quite successful in 16 ton now and it is becoming more and more interesting from a value preposition,
customers are liking the value preposition that we offer so therefore they are buying more and more of our trucks. Already in
the 25 and 31 ton if you look at the breakup of stand numbers , we have already seen some increase. So from sub 1% we are
now, in last few months we have been well over 1% going to 2% plus . so the battle for the higher tonnage is also very much
on, it's not in a 3-4 years’ time horizon. it is certainly happening in the next, for us to reach 1000 numbers per month on a
regular basis and for us to reach 10% on a 2-3 years’ horizon on a regular basis we have to be present in the 25 and 31 ton as
well. So that is also ongoing. We're already some traction in the 16 ton, we are now going strongly after 25 and 31 ton as well.
Chirag Shah
But you must be putting the proposal to the same customer who are taking the 16 ton, right?
Siddhartha Lal
It is to all type of customers, the guys who buy 16 ton but sometimes it’s quite a different customer who buy 16 and 25.
Because the end use is very different ,16 goes a lot to the volume market for us, with the scooter carrier and other such
markets but 25 goes a lot more to the general haulage and other categories..
Chirag Shah
This was helpful, Siddhartha if you would like to have some closing comments.
Siddhartha Lal
Firstly thank you Chirag for hosting this for us and thank you all for participating and I would just add in the closing that to
please remember everyone, that we are extremely long-term focused company. We have no intention and no need to show
anything, we make sure that everything we do is towards our long-term objective, the pie that we are looking at or the price
that we are looking at ,is not month a number or quarterly number ,the price that we are looking at is becoming very strong
across the boards commercial vehicle player, becoming a global major motorcycle brand .so these two are the prices that we
are looking at in 3 to 5 year horizon. There is a lot of background work which we are doing in all of our divisions right now, so
whether it is from quality, aftermarket and becoming absolute India number-one in all the areas such as aftermarket and
quality and all that. So lot of work is going on, our customers, our dealers have extremely good responses. So we are really
setting the right foundations I believe to becoming a long-term, extremely successful player and there is a potential to
differentiate in the Indian market. The Indian market is not so mature that the game is won and lost already, there is a huge
potential for new players or emerging players to do extremely well and we want to make sure that we are one of those
Emkay Research | 09 August, 2011 12
Eicher Motors Transcription
emerging players which actually captures the market. So a lot of work being done in the background and hopefully the
company will see good progress in the numbers because of that.
Chirag Shah
Great, thanks a lot Siddhartha and Mr. Malik for your time and on behalf of Emkay I would also like to thank everybody for
joining us today. Have a great day.
Moderator
Thank you. On behalf of Emkay Global Financial Services Ltd that concludes this conference call.
Note: 1.This document has been edited to improve readability.
2. Blanks in this transcript represent inaudible or incomprehensible words.
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Eicher Motors Transcription
Moderator
Ladies and gentlemen good day and welcome to the Q2 CY11 post results conference call of Eicher Motors hosted by Emkay
Global Financial Services Limited. We have with us on the call today Mr. Siddhartha Lal, MD and CEO of Eicher Motors and
Mr. Lalit Malik, CFO Eicher Motors. As a reminder all participants will be in the listen-only mode and there would be an
opportunity for you to ask questions at the end of today’s presentation. If you should need any assistance during this
conference call please signal an operator by pressing * and then 0 on your touchtone telephone. Please note that this
conference is being recorded. I would now like to hand the conference over to Mr. Chirag Shah from Emkay Global, thank you
and over to you sir.
Chirag Shah
Thank you Marina. We would like to welcome the management of Eicher Motors Limited and also thank them for giving us the
opportunity. I would now like to hand over the call to Mr. Lal for initial remarks and then we can start the Q&A, over to you sir.
Siddhartha Lal
Thank you Chirag .As you can see we had another quarter of growth both for the industry and particularly for our company
Eicher Motors Limited and what I will do is I will start with the update on our sales volumes in various segments of the industry
and then provide a brief update on the financial performance.
The CV industry this quarter, if you are looking at the 5ton above segment which is the segment which Eicher Motors
represents grew by around 7.8% over the same period last year and like ithas being doing for the last many quarters, we have
continued to beat the industry growth rate and we have grown by 23.8% which is of course very heartening. In our Q2 which is
April to June2011 which is this quarter just ended, we had a good growth in the 5-12 ton segment which is our traditional
strong hold and we sold 6641 units and grew by around 20.4%, which is similar to that of the industry growth and therefore we
held on to our market share of 30.4% same as Q2 of 2010. So there we held on to those market shares, of course for the half
year we have had a better market share than last year. So we continue to stay strong in our traditional segment.. Tthen we
move on to obviously what is the most crucial segment for us in the coming years, which is the heavy duty segment, there we
continue to build on our strength and to build on let say our starting point which we got in and we continue to build volumes .
In the quarter, we sold 1407 units , which is 60% improvement over last year and of course 60% versus market growth of of
5%. Of course our base is very small, so that helps . Our market share as a result has improved from 1.8% to 2.8% over last
year and now we are increasingly gaining presence in more and more segments and more and more geographies in the heavy
duty truck segment. So we continue to receive also a very positive feedback from our channel partners and customers on
product reliability, performance and, features . Although we are not spreading ourselves too thin at this point, we continue to
stay focused on the product segments in the location in areas where we are providing better value propositions . So we are not
going let say pan-India, pan product range at this point, so it is a very focused approach it continues to be, there as you can
see we have pushed hard now on the 16 ton segment, which is even an area which we are going strong in, we have a market
share of 5.9% which is up from 3.4% last year so in 16 ton cargo, in 16 ton tipper, our market share is up to 9.1% actually .so
that is a very good market share close to 10% now. And of course in some geographies where we are present our 16 tons
tipper is well over 15-20% ,also in some cases . So we are not presence pan-India yet, we are taking it slowly but we are
making sure that wherever we are present we try and get a higher market share.
As far as bus segment is concerned, we had a very good quarter as well we capitalized on the momentum that we built in
quarter one. In quarter two, we actually sold 2127 units which is an increase of 22%, where as the market actually declined by
8.1%, so here we gained very good market share from 9.3 to 12.3% in the bus segment and in export also we have grown to
732 units which is an 8.5% growth. The only area where we have seen a dip is , our European trucks segment which is where
Volvo truck operates . As all of us know that there have been issues relating to mining sectors and our 80% of our exposure is
the mining sector whether it is coal or iron ore, lignite all these other areas . So we had problems there in quarter two, we sold
only 122 units , which is a drop of over 50% from last year. But we still have market leadership here and we continue to have a
market share and we remain hopeful that if as and when the mining comes back on stream ,we will continue to have very good
growth in this segment as well.
We move to our projects, main project is medium -duty engine project which we are manufacturing the engine for Volvo Groups
Global requirements . The project is going extremely well, we are really on track to make absolute Global quality engines of
course ranging from Euro 3 upto Euro 6 standard engines . The production will start by the end of 2012. So that project is going
09 August, 2011
Eicher Motors
Q2CY11 Conference Call Transcript
Transcript
Emkay Research | 09 August, 2011 2
Eicher Motors Transcription
exceedingly well and I am very satisfied with that. Then moving on from a joint venture to our motor cycle division Royal
Enfield. As we have been discussing, lately we have been in the process of expanding our capacities in Royal Enfield. There
are two parts, one is our standalone capacities in our current plant and the other is new capacities which we are looking at.
As far as new capacity is concern which will be ready also let’s say around first quarter 2013, we have procured finally a land
in Chennai for 50 acres in Oragadum which is right in the heart of Chennai automotive area ,that has been handed over to us
recently. We are now working on the final paper works, so it will take around 18 months or so to get the plant up and running.
So the project is on, it is live and we have just started moving forward, so we will continue Chennai as our next location. This
allotment was done actually on July 12th, so just over two weeks ago.
As far as the current plant is concerned we are currently at, last year we produced 54,000 motorcycles approximately. This
year we are on track to producing just over 70,000 motorcycles and we should continue to push that forward even next year
and exceed 70,000 next year. And of course, as when we the new plants will up and running, our capacities in the new plants
will be 150,000. So we will have that capacity to look forward to in the coming years . So the good news of course is in the first
half we had a very good performance in motorcycle production. In the last quarter two, we have actually produced 18,581
motorcycles, sorry that is our sale number but it corresponds exactly or very closely to our production number and in that
quarter, we produced over 6000 motorcycles per month and which is a growth of nearly 50% over last year. So we produced
just over 12,000 last year, we produce over 18,000 this year, so it is very strong growth that we saw and we see no reason
why we should do anything but 6000 plus to the coming year as well for the rest of the year.
Now given these volumes and I guess there is a price increase we have done, we have done price increases twice this year
for both our businesses that is , I believe in January and July we have done prices increases . So given all of that, we have
actually our financial performances is also very satisfying. we had our overall sales net sales nearly touching 1300 crores, so
1298 crores with a growth of 25% over the same period last year
Our EBITDA was at 126 crores , which is a growth of 47% over last year and it translates from operating margin of 9.7% and
9.7% is incidentally the second highest ever percentage margin that we have achieved in a year and this is in a quarter which
is regarded normally in automotive terms as slightly sluggish, of course the coming quarters will be hopefully increasingly
better. We had a profit after tax for the quarter at 116 crores which is at 8.9%, I believe it is a highest ever other than when we
have had extraordinary income and it is a growth of 40% over the same period later year. So, in the working capital domain we
continue to have negative working capital now for the seventh consecutive quarter, so it continues to grow strongly for us and
overall I believe a satisfying financial performance as well for Eicher Motors this quarter, as again laying a good foundation for
the coming quarters which look to be quite interesting. before I end may be a small point on the industry outlook in the rest of
the calendar year 2011. Given the recent hike in rates etc I believe that is in everybody’s mind, the organization continues to
be cautiously optimistic about the industry’s volume growth plan over the medium term and extremely optimistic I would say
over the long term . I believe in the next 2, 3, 4, 5 year horizon, there is a lot of growth potential in the industry and from my
interaction with channel partners and customers , we find that they have been till now able to pass on the price increases to the
customer and the customer has been able to pass it on to the end customer of the trade.. So there is of course some
sentiment issue right now since it is going on, the sentiment is slightly weaker at this point but the fundamental seems to be
reasonably good.
I don’t see as yet a down turn or anything of that sort. there is a little bit of flattening out which is happening, so the growth
rates may not be in high double digits certainly, it could be in single digits or low double digits we don’t know but certainly we
don’t see a normal growth rates in the industry for the next few months but that is more sentimental related. The underlying
business is still reasonably good. the pricing power of truck owners is also reasonably good. Actually the momentum is
reasonable to give us a good run into the next couple of quarters , which are the better quarter especially October-November-
December and beyond. So we are reasonably optimistic not withstanding obviously one or two smaller issues which may
happen on a monthly basis at the industry level, one doesn’t know exactly month-to-month what can happen but overall I
believe it is reasonably good.
Yeah, that is it from my side at this point so Chirag may be back to you and on for question and answer.
Moderator
Sure sir, we will now begin the question and answer session. The first question is from Kunal Bhatia from Dalal & Broacha,
please go ahead.
Emkay Research | 09 August, 2011 3
Eicher Motors Transcription
Question and Answer Session
Kunal Bhatia
Sir just with regards to the last year closing comments, you did mention that on a long term basis, you see that growth could
be in a positive figure, so just wanted to understand what factors are you looking for as in, I am not talking about six or one
year down the line but on a long term basis ,what factors do you see that would lead to another growth phase in this industry.
Siddhartha Lal
There is transportation which is closely linked and especially to commercial transportation and GDP. So as long as there is
good GDP growth in the sustained manner in the long term ,there will be huge requirement for the freight movement and
obviously there is a multiplier effect actually on GDP growth. So GDP growth is 7 or 8, there should be good multiplier effect
on that for freight movement in terms of ton kilometer which are required to move. Our industry is cyclical by nature, so at
some point there will be some downturn ,there will be some upturn but on a compounded growth rate we should see it as a
multiplier of GDP. The other of course important factor is that in India logistics , if you see as a percentage of GDP is actually
quite high. Whereas the actual truck transportation, in individual truck transportation is low but logistic cost is very high
because of the higher inventory cost, very slow timing, very slow travel all of that. So overtime, if the logistic cost as in
percentage of GDP starts coming down much more, it becomes much more easy to do transportation. so people start having
one hub or let’s say one plant in the country rather than having multiple plants and therefore they do a lot more transportation.
So obviously we track a lot of things but I would say GDP and you know the opening out of logistics are the two main factors
that we believe in the long term will affect the industry growth.
Moderator
Thank you. The question is from Pramod Kumar from JM Financial, please go ahead.
Pramod Kumar
I had just one query on this semi-low floor bus launch as in, I believe that you have done an introduction of the product. So just
wanted to understand, how is the experience so far in terms of response from STUs and any number visibility as to when this
particular segment will start ,what do you say adding to the numbers on a monthly basis and I think probably after this I have
further questions on the HCV side so.
Siddhartha Lal
As you know, we have launched the semi-low floor bus which we are extremely excited about. it is a scene of the urban
transportation in India there is I believe an enormous potential and we really tried to hit the middle of the market which is a
very value conscious and good area of the market. We are going after second tier town and cities right now and while the bus
is ready ,we really now on the marketing phase of the bus . As you know sales to government have long gestation period, so
we have participated in tenders, we have been showing around our bus to many, many different cities, we have them on trials
in different cities . So we have got one order of 20 buses I believe at this point from Gujarat, I can’t remember where exactly
but is in Gujarat. lets say having our first full commercial running of our buses, currently there are running on semi commercial
bases in the sense they more on trial in different places . So it is not an extremely fast start because these things do take some
time to get going but the bus is good, it is ready and now we are actively marketing it. So we are looking it ,we are bidding for
every single tender which comes in for semi-low floor buses and hopefully we should start winning more and more as time
goes by.
Pramod Kumar
And this is the product which has been in a way tested and validated by Volvo, right?
Siddhartha Lal
Now of course it is part of our joint venture, which is the Volvo Eicher Joint Venture, so we got lot of support from Volvo Group
in validating this . Yes we have got their support in the validation process.
Pramod Kumar
No it helps a lot in terms of the perfection of the product especially given the fact that the other two companies are struggling
with lot of complaints and suites from STUs. So I think that is good to hear. And Siddhartha generally on the HCV side how
has this increased acceptance for the product helped in whether the discounting vis-à-vis, say the main stream players are the
Emkay Research | 09 August, 2011 4
Eicher Motors Transcription
No.1 and No.2, it is narrowing or in way are we seeing better realization coming out this business and specially considering the
fact that discounts I believe are generally higher now because of the slackness which has come into the sales . So how that is
having an impact on our whole HCV game plan in terms of hitting the 1000 volume mark and also on the pricing side and the
profitability of the segment?
Siddhartha Lal
As you know, generally we not big discounters and we don’t like to be seen or we don’t like to position our brand as much
discount but clearly the only reason why we do have to discount a little bit these days more in HCV than we do in other
segments , is purely because of a slightly lower resale price that we have of our product at this point, which is because it is new
product.
Pramod Kumar
Exactly.
Siddhartha Lal
So in order to counter that we do offer some slightly low price today. I think there is a enormous potential in obviously once we
gain good traction in heavy duty of good volumes and of sustainable volumes then of course we see a huge possibility in
increasing margins as time goes by but that still I would say is step 2, right now we are still one step 1 which we have talked
about, which is to get to a consistent 1000 volumes a month. So we are starting to hit 500, 600 plus which is excellent
compared to may be 100, 200 we were doing around 12, 18 month ago or may be 300. So the volumes have picked up a lot
we have not reached a 1000 volume at 1000 we believe it’s the right time when all the good situations are ticking in. so we will
be able to get some better cost from our vendors .we will be able to get better cost from internally in our manufacturing. we will
be able to lower our discounts . so I would say we all plan for the second phase which is post regular 1000 a month. which
hopefully we should see sometime soon. So that is really the situation on our heavy duty pricing and number situation.
Pramod Kumar
And generally the 1000 mark, would you expect that will it be achievable by this calendar year or ideally the first quarter of the
next calendar year?
Siddhartha Lal
I can’t, unfortunately I can’t predict that. we have always said that we have never given any guidance on this but we have
always said that we would love to see it happen within 2011 itself ,to trying to hit a 1000 number but we are not going to just
push it just to prove everyone that we hit a 1000, we will only do it when we find it sustainable and when there is a proper pull
for it. So a month a two here and there doesn’t matter to us as much as the sustainability of it. We have had in the past in
2006-07, we have gone up on numbers in heavy duty but we weren’t able to sustain it. So we know that sustenance is the
most important thing. Once reaching a 1000 so we are going to do it, when we do it, it is going to be sustainably.
Pramod Kumar
And finally on the non-vehicle business with others , if you guys can just throw some light as to how has been the performance
there during the quarter, if not exactly in terms of absolute revenue but if not that actually is the growth how it has panned out
in this particular segment.
Siddhartha Lal
Are you talking about spare parts?
Pramod Kumar
Yes spare parts , as in generally the non-vehicle spare parts services.
Siddhartha Lal
I don’t even have the numbers of that in front of me but it continues to grow very well. We have put lot of emphasis as
aftermarket business because we believe there is enormous potential. it tends to grow slightly higher than the volume growth
in vehicles but sometimes it is plus/minus you cannot say exactly but certainly, it is going at pace with everything else right
now.
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Pramod Kumar
And any price increases plan in the CV side or you are looking at this particular quarter?
Lalit Malik
Yeah so Pramod, in July we did announce a price increase ranging between 1-2% across the board for various models . So no
price increase in the near future so far.
Moderator
Thank you. The question is from Pritesh Vora from Equanam, please go ahead.
Pritesh Vora
Sir can you elaborate on your engine, you have some engine manufacturing plant?
Siddhartha Lal
Volvo has chosen, this joint venture to be its manufacturing base for a new medium duty engine platform ,which Volvo Group
is in the process of developing right now. So it is an extremely prestigious project for us . They were looking at, traditionally
they only manufactured engines of this nature especially of Euro 6 truck requirements in Europe, so this is the first time, in
fact globally that such an engine is going to be made in a country like India whether from Volvo Group or anywhere else. So in
that way it is extremely forward, extremely prestigious , we will be supplying engines from our Pithampur factory where it is
being set up to Europe. So they will actually be installed in Euro 6, European engines from 2013 and 2014 onwards . The plant
is coming up - the factory shed is now getting made. The orders for all the equipment has sort of come through, lot of the
purchase orders have gone out. We are in the first phase, we are making 85,000 engine capacities ,this includes of engines
from Euro 3 all the way to Euro 6 but basically it is four cylinder and a six cylinder engine. So the four cylinders is 5 liter and
the six cylinder is an 8 liter engine. The CapEx on the plant itself is approximately 300 crores for phase 1. So that is the sort of
general layout. The start of production will happen by December of 2012, so we should have a full year in 2013. of course
there will be ramp up in 2013 and that is when we will have a year of full production of diesel engine.
Pritesh Vora
And what can be the approximate value of this 85,000 engine annually?
Siddhartha Lal
I don’t have an approximate value at point Pritesh of course these are very high end engines so, you can look at comparative
figures in the market but we are not giving out the number on value at this point.
Pritesh Vora
And this year say calendar year 13 is it?
Siddhartha Lal
Yeah calendar year 13.
Pritesh Vora
And when does it start in calendar year 12?
Siddhartha Lal
Yeah December 2012 is the current start of production date.
Pritesh Vora
And this is for all of the Volvo requirement in Europe for four and six cylinder?
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Siddhartha Lal
Currently Volvo is making their medium duty engine in collaboration with a company called Deutz which is German company.
It is not going to happen in one shot but over time our engines with the Euro-VI engines will be replacing a lot of the engines
which are being made by Deutz currently. So it is not for all the requirement of four and six cylinders, in fact it is for the
medium duty requirement they also make, I mean all their heavy duty is also six cylinders but that they make in Sweden itself.
So we will be catering to the medium duty requirement for Europe, As ia and quite a few other markets.
Pritesh Vora
Correct and is it what kind of JV it is? Is it an equal equity partner?
Siddhartha Lal
The engine plant falls within our joint ventures, which were set up in 2008. So the joint venture its run as 50:50. Eicher Motor
Limited owns actually in real terms it owns 54.4%, AB Volvo and in real terms it owns 45.6% of this joint venture but the
agreements the understanding everything is 50:50 down the line. So the economic interest if you buy into Eicher Motor is
54.4% of the engine company.
Pritesh Vora
One more question, this regarding the larger CV industry. once the GST comes in a line there will be lot of rationalization
happening in terms of logistic center and transportation hubs and all that. So how do you see this development affecting your
company.
Siddhartha Lal
When GST comes on line it of course it changes a lot of things , you are very right to say from the logistics stand point of view
and in fact it, what happens is that if you remember the first ques tion which I believe Kunal Bhatia asked about the factors of
GDP, I said two points GDP and opening out of logistics . So basically what GST does is it opens out logistics . It becomes
much easier to do logistics, logistics as a percentage of GDP comes down dramatically hopefully. It encourages transportation
a lot more. So, people find it cheaper to transport than to set up multiple plants, other such things. So we see it as an
extremely positive effect on the commercial heavy duty.
Pritesh Vohra
I am just curious to understand that, is there any study which you have done like say if they go for hub and spoke model
regarding logistics there will be more heavy duty truck plying rather than medium, so is there any impact on your business
model in terms of product chosen by the logistic operator or it is too early to determine all that?
Siddhartha Lal
There is lots of modeling done but India is a peculiar country, we will never have a very sort of formal and well defined hub and
spoke model, only because it’s s o large and the distance and the travel time, the numbers of days taken are 5-6 days between
certain type or even 7-8 days. So if you see of course for the long distances more and more obviously only heavy duty trucks
are going to be used, so there is huge growth in that. But in all the regional transportation that means south to south, that
means within four south states, from west to west, from west to central or central to central and north to north, we see very
large medium duty requirements . so these will be all point to point, there will be no hub and spoke in these. So you want to
travel 400 km, it will be done on medium duty trucks. So we see an increased, a very good potential and growth for medium
duty truck, we are continuing to invest heavily in medium duty as well, a new platform for medium duty because basically
people want to get instead of 300-350 kilometers , they want to get 500 kilometers in one day out of the medium duty truck and
that covers all regional transportations. It makes it extremely efficient to do regional transportation. With the economy , we see
a growth in all segments, in small, medium, and heavy of course there will be different growth rates but we see no concern to
our business model at this point.
Pritesh Vohra
And my las t question if you look in horizon of 3 to 5 years , where do you like to place Eicher Motors in a longer-term horizon,
would you continue to do the product segment which you continue to do, where do you see yourself fitting into the entire
product structure because you do MHCV, LCV, motorcycle, and also mining trucks , so wide variety of the products which you
do?
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Siddhartha Lal
Obviously you can take Eicher Motors as two very distinct parts; one is the joint-venture Volvo-Eicher with Volvo, so that is
entirely to do with commercial vehicles and one is Royal Enfield. So we keep those two aside there is nothing much in
common. The truck joint-venture, we will focus entirely on trucks and commercial transportation of all types, buses all other
commercial areas , engines other such things. At this , where we see ourselves in 2015 time horizon because that timeframe
you asked about is, that our ambition is to get 15% market share in heavy duty. it is very large ambition but we believe we
have the wherewithal to get us there and that will be the one that will be a huge multiplier affect on our top-line and grow our
top-line to the next multiples that we are looking at. We plan to be in every segment of the commercial vehicles of course our
focus is right now on 5 ton and above and for the foreseeable future for the next 3-4 years horizon I don't see any change in
that focus of 5 ton and above. We plan to get much stronger in buses, much stronger in heavy duty, continue our strong
platform in light and medium duty but also we are looking at getting into increasing our soft product or non truck business as
well. So it means after market, it means various other areas that we are looking at in order to ensure that we have a noncyclical
business also which is very strong. So that is what we are growing in the CV side of it and we feel confident that we
should achieve our targets . so maybe well over 30% in light and medium duty and certainly 15% in our heavy duty and ahead
of that in our bus as well. And of course motorcycle as we said, we are now putting another plants to at least 150,000
motorcycles but if things go as they are in the current trajectory ,we should probably looking at increasing that also by 2015
and there as you can see ,if you look at the standalone number. We had very strong margin growth in the motorcycle business
and we believe that the peer level in motorcycle is even higher than what we have today in EBITDA level. So we should
certainly be targeting to get closer to our peer levels a best-in-class for margins in motorcycles.
Moderator
Thank you. The next question is from Vikram Mahajan from Bay Capital. Please go ahead.
Nikunj Doshi
Hi this is Nikunj Doshi from Bay Capital. just wanted to understand this engine plant once it starts production do you need to
go through a cycle of approval from parent and will it take some time or you can straightaway start selling it?
Siddhartha Lal
Approval of what nature?
Nikunj Doshi
Engines projects , once it starts and when we start exporting engines to Europe is there a cycle of approval which takes time or
you can straightaway start selling?
Siddhartha Lal
The engine project is being handled of course by the joint-venture and because it is of such high strategic importance to Volvo
group because it is not only going for some output engines in Asia and all of that, it actually been used for the European
trucks. Volvo Powertrain, which is a very strong organization within Volvo group is hands on working with us. They are in fact
leading a lot of projects which go into a manufacturing of this. So it is not that they have just given us the project and say now
you complete it, they are working with us very closely, we work extremely closely with each of their people, their engineers,
their team members to get this project on so. The approval is all in-line. I don't know any other approvals stage. It is not like
there is any option but to buy this. It is not like they have a second plant also which they could lean on. So there is no question
but the engines will have to come to this plant for their global requirement.
Nikunj Doshi
And in terms of CapEx, what is the CapEx plan say in Eicher standalone and in JV over next two years?
Lalit Malik
In the standalone business the plan is to invest in the new plant which Siddhartha has just spoke about With the land we have
got, there will be an investment to the tune of 120 to 140 crores, the plans have not finalized yet in terms of the exact size of
investment but it will be in that range. As far as the joint-venture is concerned over the next two and half to three years there
will be an investment of close to about 500 crores in capacity expansion, parts of which are already going on including the new
paint shop which is coming up and the medium duty engine of course the first phase will consume about 300-350 crores. So
these are the three large CapEx plans that we have right now.
Emkay Research | 09 August, 2011 8
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Moderator
Thank you. The next question is from Sanjay Doshi from Reliance Mutual Fund. Please go ahead.
Sanjay Doshi
Just wanted to understand what efforts are we putting on the distribution and servicing areas , we are not yet at 15% market
share, if you can talk about the 3 to 5 years perspective?
Siddhartha Lal
Very good question Sanjay because distribution I would say one of the enabling or constraining factors whichever way you
look at it, for us to achieve the 15% and it’s a extremely crucial aspect of our future where we have a huge focus on getting our
distribution right and we already have a very strong distribution for light and medium duty. But obviously there is an enormous
upgrade, which we have been doing in order to make sure that it is ready for heavy duty. So firstly on the qualitative side what
we do is ,we have a very strong process by which we actually put a green signal for any dealer that he is ready to sell heavy
duty. So one is his own financials and other readiness then is the screening, facilities, the base, the spare parts availability, the
service, the technicians, the sales people all of that availability, we do at a very good level. Then of course it is the routes
which the heavy duty truck will take from this particular dealership area or the catchments area of the dealership. So if there
are 15 identified routes which are of high frequency, then we need to make sure that their service availability on all those
routes . so all that work we do at every single dealership basis, we have currently 145 commercial vehicle dealers of which
more than half or around half are now heavy duty ready and what we are obviously attempting to do is , one is we are
increasing the number of dealers themselves at a total level so from 145 we are planning to go to 155 dealers this year and
the goal let us say in a 2 years’ horizon is around 200 odd numbers for dealers. But very importantly it is the readiness as for
the heavy duty that we are now on the monthly basis we are adding 3-4 dealers to become heavy duty ready. So that work
which is happening because it is not as dealer points, it is actually interim points of service which we are also putting up, we
have many different models of either AFCs offering service points or we have our own points which we are also looking at
putting up. We also have container workshops for very quick band-aid type of job. So this is not only service points that we are
putting up. We wanted to make sure that the service and spare parts is available and all the routes that we want to follow.
Sanjay Doshi
And in terms of region, if we have to look at is there any particular region that we are focused on in the near term?
Siddhartha Lal
It’s very difficult to describe again on the phone because there are lots of different pockets that we are focusing on. It's not a
general region like South or West but you can say within that we look at each individual area. So within that also we look at
different products .so for example some parts of West are very strong now in tippers so Goa and maybe Kerala and other
places are very strong in tippers. But other parts in between Hyderabad and other places , we are very strong in another
segment. So it's not a very easy picture to look at but actually now North has also picked up very good on heavy duties -
North, West and South maybe but general area, I would say if anything which is slightly weaker in Central and East at this
point but that’s why we are focusing on to the north, west and south but overtime we are also building up our presence in
Central and East.
Moderator
Thank you. The next question is from Vaishali Jajoo from Aegon Religare. Please go ahead.
Vaishali Jajoo
This is the broader question on how the trend in buying, in the fleet operators side. it is small operators right now buying more
or larger one that is first and how is the financing trend in the CV market going?
Siddhartha Lal
It is very difficult to answer, since I don't have any information, since the rate hike the very reason .so I don’t know the if there
is any change from earlier but certainly there has been across the board buying till now. In fact we have seen from all levels of
operators that has been buying. so I don't see in the particular difference at this point of course, it is now really the right time to
see after the rate hike that what’s going to be a change in terms of the mix of operators who are buying. As far as financing is
concerned the general availability of financing has not been a problem since the downturn in 2008-09, financing is available.
There are public sector banks, there are private banks, and there are NBFCs, so a huge amount of financing is still available.
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Eicher Motors Transcription
The rates have gone up, we are seeing rates of maybe 13% have started for prime customers going up to maybe 17% for the
retail smaller customers, that of course is getting high now and there are some questions also around it for some of the
customers. But as long as we're able to pass the price on they will still be buying but that is the only concern right now, it could
be a sentiment issue that maybe we will postpone our purchases.
Vaishali Jajoo
Because there are couple of announcement of LTV going down from financiers side, so that could be a concern for the fleet
operators who usually have more of financing in the 80%-90% coming down to suppose 70%. it will be an issue for industry
and second in the long run, it is fine 7%-8% GDP growth will have a multiplier effect on the commercial vehicle but I think the
deceleration in the growth of GDP itself has a little bit higher effect on the CV industry if I'm not wrong?
Siddhartha Lal
I am not worried about the LTV issue at all because actually if it is at the slightly lower level, I would say 70 or 80 or whatever
you say as it goes to 90. I think long term it provides us a much more stable industry rather than a much more cyclical industry.
Because when finance is too easily available too many people buy in the upturn and then suddenly there is lots of
repossession and other problem in the downturn because we have very little equity invest in the truck. Of course short-term
there could be some volume if the LTV goes down but I'm actually extremely happy in the long-term you say that the LTV is at
70% ,all players are playing by that and it helps the industry actually a lot and then you see the right type of people coming into
these business, who are really logistic people rather than opportunistic people who just want to try and make big bucks. So we
are happy with the LTV situation actually.
Vaishali Jajoo
I am just asking about it, it is 70 or not but there are couple of announcements which have come in from the financiers side. I'm
just confirming on that whether it will have depreciation or not?
Siddhartha Lal
It will very well could. Some of the retail buyers will not be able to afford 30% equity, so it will cut out retail buyers certainly. Of
course, we look at but I am not concern too much about smaller cycles which happens within the scheme of things but it is the
medium term that we are really concerned about and there we see reasonable growth potential.
Moderator
Thank you. The next question is from Vasudev Banerjee form Quant Capital. Please go ahead.
Vasudev Banerjee
Your employee expense on a consol level, seemed to move up by almost 12 crores sequentially, whereas on the volumes
front everything was seasonal. So was there any one-time outgo in the employee expense or there has been wage inflation, so
one can take current levels to be sustainable?
Siddhartha Lal
Obviously with the type of activities and growth that’s happening in all of our divisions , we have also been hiring quite
aggressively in last 6 to 12 months but you are right in April we have done all the salary increases , which have been
reasonably large this year because of the inflation and that has hit us a little bit more in April to June quarter. So there has
been some of that.
Lalit Malik
No this is it. It was largely due to wage inflation, becaus e of the annual increment cycle and we have also added people every
quarter.
Vasudev Banerjee
So nothing related to one-off bonus outgo as such?
Emkay Research | 09 August, 2011 10
Eicher Motors Transcription
Lalit Malik
Nothing.
Vasudev Banerjee
And secondly sir this tax rate coming down primarily because of the higher other income?
Lalit Malik
Higher other income from FMPs yes.
Moderator
Thank you. The next question is from Bharat Gianani from Asit C Mehta Investments. Please go ahead.
Bharat Gianani
I just wanted to ask a question regarding the two-wheeler business. In this quarter, we have seen a realization go up. so is it
more to do with the better product mix that we have seen?
Siddhartha Lal
Yes I imagine it would be because of a better product mix yes, since our capacities have come more on stream , we have been
selling more classic motorcycles and more 500 cc motorcycles both of those command substantially a higher price than other
models and specially the 500. So yes it would happen from that.
Moderator
Thank you. The next question is from Viraj Choksey from ARM Research. Please go ahead.
Viraj Choksey
How do you plan to utilize your 1200 crores cash on the books?
Siddhartha Lal
It is on the VECV books and on the standalone books , it is around 500 crores of cash. So Viraj ,cash utilization you can split it
up mentally at least into two buckets, one is in the joint-venture and one is in the standalone. In the joint-ventures our aim and
purposes furthering of commercial vehicles interest in India and emerging markets, so we're looking at all sorts of different
opportunities where we can invest this fund. So we got a big break when we got to medium duty engine projects, we're looking
at other investments which can further improve our for commercial vehicles interest. So there are a lot of things , which we
were discussing, which are in pipeline. We are in no hurry to spend the cash which is lying around because we believe that
there are always opportunities which will come up. There are always strategic opportunities which could be there. So we are
working on many of them, out of every 10 opportunities if you look at 9 go off the site, so where thing fructify we will of course
we will talk to you about it. Like I said we're looking at many other strategic projects, one which we have got in recently the
medium duty engine project. On the standalone front, of course the way things are going now in the motorcycle business, we
are also looking at how things moves in that project. Some of this cash is going into the new plants but we are very strong
cash generation also from our Royal Enfield business and again there could be different opportunities which are either to do
with motorcycle or within contribute areas that will help us for this. We're looking at different opportunities. In fact Lalit and I
have been spending a lot of time now to look it at but there is nothing concrete at this point to talk about.
Chirag Shah
One was other income, it’s just for housekeeping, you said there were some FMP maturities but is it slightly on the higher side
and that kind of a run rate would not be there going ahead, is there a right way of looking at it, if the treasury income matured
in this particular quarter?
Lalit Malik
If you look at the consolidated accounts, the other income comprises of 2-3 different things , one is the fixed deposits that are
lying in the VECV books. Entire money over there is invested in fixed deposits. So there the flow of other income is regular and
little predictable every month but on standalone books about 70%-80% of cash is tied up with FMPs. There the income tends
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to be a little irregular, the last quarter that has gone by Q2, clearly we had large sum of FMPs maturing and hence the large
part of other income may not happen next quarter.
Chirag Shah
This was helpful and I also had one question, you indicated that you have developed some strength on select routes and
different routes your strengths lies in different products. One question was how are you geographically spread in terms of
ensuring the downtime time ,compared to Ashok Leyland or Tata Motors, how that geographic spread has increased for you
and also if I'm correct, you are right now a large player in 16 tonner in the HD, if I look at your portfolio 16 tonner accounts for a
very big chunk in the HD segment. How and when can we expect ramp up to happen on the higher tonnage side in next 3
years or 4 years’ timeframe?
Siddhartha Lal
On the geography points being a discussion on heavy duty right now, heavy duty goes to every nook and corner of the
country, so we have no choice but to be present in every is single nook and corner of the country. The only discussion we are
having right now, we do is about the prioritisation of that because you can’t do everything in one go. So the end outcome has
to be you have to be present in every single part of the country, there is absolutely no debate or question about that. What
we're doing is that we are looking at the high-density routes where our trucks will go to and we are predicting that and
therefore we are putting more service points there and what we're doing is that when we lack in certain areas service for
maybe over 100 kms or 200 kms. so in those places we are putting up either third-party service points or only service and
spare part points not a full dealership. when it is required we are even investing ourselves because we think that the small call
investments in service points are certainly worthwhile for the larger aim of becoming big in heavy duty. So whatever is required
we are doing in order to put these service points along and to get the geographic spread. So there can be more geography in
the country where we are fully absent, that cannot be the case and that's not the case anymore. But we are now densifying it
further, that's what we're doing. In heavy duty yes, we are now reasonably successful and in the geography where we are
present we have been quite successful in 16 ton now and it is becoming more and more interesting from a value preposition,
customers are liking the value preposition that we offer so therefore they are buying more and more of our trucks. Already in
the 25 and 31 ton if you look at the breakup of stand numbers , we have already seen some increase. So from sub 1% we are
now, in last few months we have been well over 1% going to 2% plus . so the battle for the higher tonnage is also very much
on, it's not in a 3-4 years’ time horizon. it is certainly happening in the next, for us to reach 1000 numbers per month on a
regular basis and for us to reach 10% on a 2-3 years’ horizon on a regular basis we have to be present in the 25 and 31 ton as
well. So that is also ongoing. We're already some traction in the 16 ton, we are now going strongly after 25 and 31 ton as well.
Chirag Shah
But you must be putting the proposal to the same customer who are taking the 16 ton, right?
Siddhartha Lal
It is to all type of customers, the guys who buy 16 ton but sometimes it’s quite a different customer who buy 16 and 25.
Because the end use is very different ,16 goes a lot to the volume market for us, with the scooter carrier and other such
markets but 25 goes a lot more to the general haulage and other categories..
Chirag Shah
This was helpful, Siddhartha if you would like to have some closing comments.
Siddhartha Lal
Firstly thank you Chirag for hosting this for us and thank you all for participating and I would just add in the closing that to
please remember everyone, that we are extremely long-term focused company. We have no intention and no need to show
anything, we make sure that everything we do is towards our long-term objective, the pie that we are looking at or the price
that we are looking at ,is not month a number or quarterly number ,the price that we are looking at is becoming very strong
across the boards commercial vehicle player, becoming a global major motorcycle brand .so these two are the prices that we
are looking at in 3 to 5 year horizon. There is a lot of background work which we are doing in all of our divisions right now, so
whether it is from quality, aftermarket and becoming absolute India number-one in all the areas such as aftermarket and
quality and all that. So lot of work is going on, our customers, our dealers have extremely good responses. So we are really
setting the right foundations I believe to becoming a long-term, extremely successful player and there is a potential to
differentiate in the Indian market. The Indian market is not so mature that the game is won and lost already, there is a huge
potential for new players or emerging players to do extremely well and we want to make sure that we are one of those
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Eicher Motors Transcription
emerging players which actually captures the market. So a lot of work being done in the background and hopefully the
company will see good progress in the numbers because of that.
Chirag Shah
Great, thanks a lot Siddhartha and Mr. Malik for your time and on behalf of Emkay I would also like to thank everybody for
joining us today. Have a great day.
Moderator
Thank you. On behalf of Emkay Global Financial Services Ltd that concludes this conference call.
Note: 1.This document has been edited to improve readability.
2. Blanks in this transcript represent inaudible or incomprehensible words.
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