{LONGTERMINVESTORS} Eicher Motors Ltd. v/s Page Industries Ltd. - Which One is Investors’ Favorite?

These two stocks have been the market favorites for the last few years, and have generated returns far in excess of the market. We decided to analyze why Eicher Motors may have outperformed Page Industries, when many similarities exist between the two companies.

We are not commenting on the future financial performance or target price of the two companies.

Background

Eicher Motors Ltd. and Page Industries Ltd. operate in totally diverse industries. Eicher Motors Ltd. operates in the automobile sector and is a leading manufacturer of commercial vehicles (trucks and buses), motorcycles and personal utility vehicles. Page Industries Ltd. is an apparel manufacturer and the India master franchisee of Jockey International of the U.S.

In other words, while Eicher Motors Ltd. is primarily into B2B, Page Industries Ltd. is only into B2C.

Eicher Motors Ltd.: Royal Enfield - the Game Changer

We note that the share of Royal Enfield motorcycles in the company's sales grew aggressively over the last 5 years. The motorcycle business has proven to be the game-changer for the company's financial performance and valuations. Manufacturing capacity has been raised 9x since 2010.

Royal Enfield Sales Data	2010	2011	2012	2013	2014	2015
Gross Sales (incl. excise) RsCr	433.19	662.85	1,073.65	1,763.06	3,074.41	N.A.
Sales Volume	52,576	74,626	113,432	178,121	302,592	452,759
Volume Growth y-o-y		41.9%	52.0%	57.0%	69.9%	49.6%
Average Sales Realisation Rs	82,393	88,823	94,651	98,981	101,602	N.A.
% of Company Sales	9.2%	10.8%	15.3%	23.7%	32.9%	N.A.
Company Gross Sales RsCr	4,701.63	6,130.29	6,995.04	7,433.29	9,351.74	N.A.

Royal Enfield sales volumes grew 7.6x, at 53.8% CAGR, during FY10-15. Royal Enfield enjoyed industry best EBIT margin of 25.2% in CY15. The manufacturing capacity is to be ramped up from 0.6mn units p.a., to 0.62mn p.a. during 2016, and further to 0.9mn by 2018. 1 new product is to be launched by end-2017.

We expect the share of Royal Enfield motorcycles to move up, within the company's consolidated sales, going ahead. 

Page Industries: Riding the Consumerism Boom, on the back of Rising Share of Organized Sector

Page Industries has also been ramping capacities up over the last few years, and its Jockey brand has become a force to reckon with, in the innerwear market. It is riding on the consumption boom and fast growing market for ladies' innerwear in India. The rising share of unorganized sector in the innerwear market is a key positive for Page Industries, which is already a leading player in the segment.

What Do These Two Diverse Companies Have in Common?

We note that there are a few similarities between the two companies, such as:

·         Strong brands, backed by wide distribution network

·         Track record of aggressive revenue growth

·         Consistently growing post-tax profit

·         Strong RoE

·         High dividend payout

·         Strong balance sheets, with near-zero leverage

·         No bonus issues or stock splits

Conclusion: Royal Enfield has been the Game Changer for Eicher Motors Ltd.

Based on our analysis as contained in this report, we conclude that investors seem to have clearly favored Eicher Motors Ltd. over Page Industries Ltd, in terms of stock price returns.

The one single reason we can think of which led to outperformance of Eicher Motors, is the 7.6x volume growth in Royal Enfield motorcycles since 2010, particularly after the launch of the Royal Enfield 'Classic'.

In contrast, the innerwear segment in which Page Industries operates, remains competitive, with most leading global players already present in the Indian innerwear market.

Eicher Motors's outperformance vis-à-vis Page Industries is significant in the backdrop of higher liquidity (trading volumes) enjoyed by the former, that too, in spite of slightly lower free-float and institutional ownership, than the latter. However, a much larger number of FIIs and MFs have invested in Eicher Motors than in Page Industries. Retail ownership is also higher in case of Eicher Motors Ltd.

The Road Ahead: Businesses Remain Robust; Investors Could Benefit from a Stock Split

Eicher Motors will likely continue to ride on the success of Royal Enfield motorcycles, by raising the manufacturing capacities. While the motorcycle market in India shrunk in 2015, the share of the premium segment, in which Royal Enfield has a strong presence, is in fact growing. This bodes well for the company.

Page Industries too will continue to grow by increasing manufacturing capacities. It entered the niche swimwear segment by tying up with the Speedo brand a few years ago.

As stated above, neither company has made any issue of bonus shares or split the stock. Both stocks have become "high-priced" stocks since the last 4-5 years, materially hampering liquidity. We believe investors could benefit, if the companies were to split the stock into face value of Rs5 or Rs2 per share.

Note: Personal Views of Nitin A. Khandkar. Not meat to be investment advice or stock recommendation.

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