Eicher Motors Ltd

NSE:EICHERMOT

Earnings Call Transcript 2023-Q1

[Operator]

Welcome to Eicher Motors Q1 FY '23 [indiscernible] results con call. We're happy that the management gave us the opportunity to host the call.

We have with us Mr. Siddhartha Lal, MD and CEO of Eicher Motors; Mr. B. Govindarajan, Executive Director, Royal Enfield; Mr. Vinod Aggarwal, MD and CEO of Volvo-Eicher JV and Mr. Kaleeswaran Arunachalam, CFO of Eicher Motors Limited. So over to you, Mr. Siddhartha Lal, for your initial comments.

[Siddhartha Lal, executive]

Good afternoon, and hello to everyone. Thank you very much for joining us, and thank you to ICICI for hosting this. Welcome to the quarter 1 of FY '22, '23 earnings call for Eicher Motors Limited. I hope you're all doing well.

This quarter marks multiple new milestones for Eicher Motors Limited and for VECV, our joint venture with Volvo. Firstly, at Royal Enfield, we are continuing our path to becoming a premium global consumer brand from India. And we delivered our highest ever sales in international markets. In India, where we continue to define the middleweight segment and have greater than 85% share in the above 250cc segments, we, in motorcycle, we further strengthened our hold on the greater than 125cc segment, with a 36% segment share, which is -- now puts us in #1 position in all motorcycles above 125cc. That means 1 in 3 motorcycles sold above 125cc. So now even though we are not present in, let's say, 150 to 250, we're still counting that share, and we have 1 in 3 motorcycles. We've clearly been able to grow the market towards Royal Enfield -- in India, that is.

Additionally, we also recorded our highest ever revenue and our highest ever EBITDA at Eicher Motors Limited this quarter. And we're just getting started. We've -- all these numbers are not including, of course, our latest motorcycle in our portfolio, which we just concluded a global launch of the all new Hunter 350, which is a premium neo-retro style compact, muscular, roadster style motorcycle. We've just returned from Bangkok where we hosted global media, so media from all over the world, from Latin America; North America; Europe; India, of course; and ASEAN; Japan; Korea; Australia and New Zealand. So from everywhere.

And I believe they really, really liked the motorcycle. It was a very fresh new concept from Royal Enfield for them. And you can read the reviews -- the embargo was lifted 10 a.m. this morning. So you can read, actually, all the reviews from global motorcycle media. We've also launched it at a very accessible price point. It's an amazing motorcycle with great handling, with 17-inch wheels, with all the bells and whistles that one requires in this segment, but also extremely refined handling characteristics -- ride and handling. Very nimble, but also at an extremely accessible price point, which we are extremely confident will assure a whole lot of new motorcyclists into Royal Enfield's world.

These are customers who like the brand Royal Enfield, they have a positive leaning towards it or they love the brand Royal Enfield. But for now, our 350cc offerings, for example, some of them may not be interesting to them. So they may not subscribe to a classic look. They may not want a cruiser bike. So they like Royal Enfield, but they don't currently have anything in the portfolio that is interesting for them. And that's where the Hunter 350 comes in. And our sole objective with this motorcycle is to get new customers who were originally not buying a Royal Enfield motorcycle. So that's on Royal Enfield and EML.

But coming to VCV, which is our joint venture with Volvo Group, the company recorded its highest ever first quarter volumes in Q1. We gained market share across light, medium and heavy-duty segments. And over the last year -- and we continue to remain a profitable truck company, which is not -- which is saying a lot considering all the bad times that have passed. And so it's -- we continue our strong business model that we've always had, the resilient business model we have at VCV.

The quarter also witnessed the inauguration of the first Eicher electric city bus delivered to the city of Chandigarh. That's a great milestone for us. We believe we have really strong electric offerings in the bus segment, and this is the start of things there. And recently, Volvo Buses India has launched its next-generation Volvo 9600 platform in India. It's an all new modern platform and we'll have a factory-built sleeper -- you should see the photographs of that, it's absolutely stunning. It looks like better than business class offering in an airplane. And we will also have seater coaches in 15 meters and in 13.5 meters buses, and they represent the largest and the most modern buses in India by far.

We have also recently released our annual integrated report for FY '22. That report captures our performance from the last financial year in addition to a host of initiatives undertaken by Eicher Motors Limited towards its commitment for next stage of growth and for a much stronger ESG vision.

Now with the robust all around performance at EML and a strong product pipeline and plans in place, we are absolutely confident to push forward on our long-term strategic business plans and objectives. It's -- then we move to the financials.

For the consolidated financials for the first quarter of FY '22, '23 -- in revenue, EML clocked its new highest level quarterly revenue at INR 3,397 crores, up 6.4% quarter-on-quarter over Q4 of FY '22, and up 72% year-on-year. So -- but obviously, last year was -- there was a COVID effect, but it's still up 72% from last year.

Our EBITDA for Q1 stood at INR 831 crores, which is the highest ever quarterly profit, up 9.8% quarter-on-quarter and 129% year-on-year. Our EBITDA margin for the quarter stood at 24.5% and -- against 23.7% in the previous quarter, making a 0.8% quarter-on-quarter improvement. And it improved 6.1% in the same quarter last year -- from the same quarter last year. So it's a great improvement again.

And profit after tax was at INR 611 crores, which is similar to the same -- which on quarter-on-quarter, which was INR 610 crores previous quarter. But largely, there's -- the fact that it seems so less is because of lower other income on account of mark-to-market losses of treasury income, and partially offset by state government grants, which we received during the quarter.

But -- so that's our overall quarter, I believe an absolutely stellar quarter, a great starting point for this year and for our future plans. And there's lots of new things happening at EML and we're all super excited about those. But before I get into all of that, I'll ask Govindarajan, who is the CEO of Royal Enfield, to tell us more detail about the Royal Enfield business. Over to you, Govind.

[B. Govindarajan, executive]

Thank you, Siddhartha. Just to add more points on what Siddhartha talked about the Hunter 350, Royal Enfield, if you look at the cadence, we have a Classic 350 and we have Meteor, we have Himalayan, and we have the 650cc Twins, Continental GT and Interceptor.

When we started looking at there is a space for more vehicles, which can address the Indian audience, which has an urban fit, which is very compact, nimble, easy to maneuver and a vehicle which can actually connect with the Indian audience more and more. And that's where we actually brought in the Hunter on the same well-refined J-Series machine powertrain.

This is the Hunter 350. Myself, Siddhartha, we were there in Bangkok along with the world's best journalists across the globe. We rode the motorcycles, we actually curated what's called as a night ride and all of us rode in smaller batches. Everyone came back and then said exactly what we wanted to land in for the Indian audience, and that's where we landed this on the 6 to 8. We did all these things and we launched.

Today is the day we actually -- the embargo on the journalists are lifted. You can see the reviews which are coming up in this. This is one such motorcycle, which we wanted to offer the pure motorcycling to a larger audience across the globe. So the larger audience, we also wanted to keep it at a very accessible price point.

So we actually came up with our -- the [ factory for Series ] at INR 149,900, which is a very accessible price point, which has been very well accepted by the consumers. You can see the reviews on the social media. All the journalists who rode the motorcycle, the review started coming in. It's so well received even by them. Hunter 350, on launch, you can see we have become the top 10 trending in the Google searches. Everyone is now searching for it. You can see what exactly the organization wanted to launch and what the product positioning have to be, exactly just landing in that.

And the booking is open. It's -- there's a lot of bustle happening at our dealership format. So Hunter 350, all in all, it's a global product for the Indian audience who wants it a bit more compact, accessible motorcycle and that's what we have delivered in the Hunter 350.

Let me now share with you some of the highlights in Royal Enfield for Q1. Total sales, we sold about 186,032 motorcycles in the quarter, up by 52.3% year-on-year from last year and 2.1% higher than the Q4 FY '22. In India, we sold 157,642 motorcycles, which is 51% higher than the previous year. On a Q-o-Q basis, its volumes are more steady. Our market share above 125cc is hitting daily about 36% in this quarter as against 32.9% in the previous quarters, as Siddhartha was mentioning.

International success, for us, it has been a steady growth, which is happening month-on-month. We have recorded a new high in our international business. We dispatched 28,390 units, making an increase of 50% Q-on-Q and about 62% over last year.

New variants for Meteor we have launched in new 3 colorways in this quarter. All these have been received very well by the market. With the pandemic situations under control, we also did the Himalayan Odyssey in this year. We were very happy about connecting that. We had about 70 participants riding almost 2,700 kilometers for 18 days. It's making -- after about 2 years that's being done.

On the occasion of the World Environmental Day, Royal Enfield galvanized over 2,000 riders across this community for a pan-India cleanup ride, with a focus on creating awareness for and uniting communities to demonstrate concern towards efficient waste management system.

When we are doing this, our retail network, as last call also we have said, now we are into optimizing the retail outlets. India, our network expansion plan is as per the target. We are, as of now, almost about 2,132 retail outlets. Internationally, during this quarter, we did an expansion, especially in the markets like Kuala Lumpur, Argentina, Colombia and Mexico and 12 multi-brand outlets also which have come up. So the total count, including the multi-brand outlet, is almost about 850 numbers plus.

With the upcoming festival season, in the market, consumer sentiments -- supply chain, you all have been asking, it is steadily, it's improving. The parts availability is becoming a bit better. We are quite confident our sustained growth in Royal Enfield will continue in the coming quarters.

Now I will request Mr. Vinod Aggarwal to talk about the VECV business. Over to you, Vinod.

[Vinod Aggarwal, executive]

Thank you, Govind, and Siddhartha, and a very good evening to all the friends who have joined today.

First of all, let me give you the details about the industry. As far as the commercial vehicle industry is concerned, I think after 3 years of very, very bad recession, the industry is on the recovery path. And if you go by the trends of first quarter, I think this year, we are going to see very, very handsome numbers in the CV industry, which will be still far away from the earlier peak of 2018, '19, but still, it will cover a lot of ground -- lost ground in last 3 years.

If you look at some numbers, this year, first quarter, the CV industry has gone up to 105,000. I'm talking of excluding 3.5 tons. So 105,000 as against previous year's first quarter of only around 40,000. So therefore, even if you just consider that balance 9 months, if we take as the same number as of last year. Last year, balance 9 months was around 300,000. So 300,000 plus 105,000 of first quarter, it gives you 405,000 without considering any growth in [indiscernible].

And if you have growth of maybe 10%, 15%, which is the current trend, then you reach a figure of maybe around 430,000, 455,000. So therefore, the industry will be -- it is still away from the earlier peak, but also, it is getting closer. So therefore, industry situation is going to be good for the CV industry.

And within the industry, the buses are doing very well because schools have reopened and the situation has improved in other segments also in buses. Similarly, in light and medium duty, is almost at the earlier peak levels, if you look at the monthly figures. And heavy duty is also -- we are now getting consistently every month, 17,000 to 18,000 units every month. Now within this industry, if you look at our figures, which Siddhartha had briefly mentioned in his address, we have improved market shares in all the segments, like in light and medium duty, we are at 27.7%. And in heavy duties, we are at 7.4%. And in buses, we have, in fact, made much, much bigger progress. We are at 28.6% market share in first quarter, which earlier used to be around 17%, 18%.

So we have made improvements in the market shares in all these segments. And we have been focusing a lot on expanding our distribution reach, and we have improved our distribution network. We have added 29 more network points in last quarter, and we are almost adding every quarter, every -- 2 touchpoints every week. And we are consistently focusing on improving our uptime and improving our aftersales with our customers and through our initiatives like 100% connected trucks and the uptime center. And our product range is improving there every day with better customer value proposition in various applications.

Coming specifically to the financial figures. For the first quarter, we have total revenues of INR 3,934 crores, which is highest ever for the first quarter and it is up 140% as compared to INR 1,639 crores last year first quarter, even though last year first quarter figures are not comparable because we had the COVID-impacted quarter. These numbers are very small. Nevertheless, I think first quarter number, INR 3,934 crores, is a very, very respectable figure.

And the EBITDA margin for quarter 1 is INR 207 crores. Last year, we had only INR 18 crores in EBITDA, and we are at 5.3% EBITDA margin as against 1.1% last year. And in spite of sharp increase in the input costs as well as sustained changes in the price management, I think we are doing reasonably well as far as the profit margins are concerned.

Profit after tax for quarter 1 is INR 62 crores against a loss of INR 72 crores last year. And we sold 17,469 units in quarter 1 as against 5,806 units last year. And our exports volume was up also by 3.1%, with significant growth in some of the key export markets.

And as Siddhartha mentioned, we are very happy that we could launch first electric city bus in the city of Chandigarh in the first quarter. And this month, we are going to give the balance of the electric buses in Chandigarh. And of course, subsequently, we have also received an order of 150 electric buses from the city of Surat.

And recently, we launched Volvo Next Generation -- Volvo 9600 Intercity Sleeper and Coach, which is absolutely state of the art and which will create new standards in comfort, safety and sustainability. And of course, we are also coming out with more new models of Volvo -- of buses, both in Volvo as well as Eicher brand name from our first quarter [ fleet ] of Volvo bus.

And looking forward, as CV industry is improving, I'm sure we will continue to do well in the CV industry, and we are continuing to invest in products, services and network. And together with strong alignment with Volvo Group, we have all the elements to address upcoming market and technology needs, and we will continue to do it in a sustainable manner. Now I hand it over back to Siddhartha for closing remarks.

[Siddhartha Lal, executive]

Thank you, Vinod. Thank you so much. And as you've heard from Vinod, there's a lot going on at VECV. We're continuing to do well and have a great value proposition in light, medium duty, in buses in our, of course, Volvo truck, Volvo bus segment. But I think of particular interest is the continued growth in our market shares in heavy duty as well, which is the really big market out there.

So we have a 7.6% or somewhere in that region last quarter, and it's continuing to improve on a regular basis. So we've had -- it's really a story of focus of continuous improvement and now of enormous customer centricity, which is bringing a great uptime and aftermarket to the customer, which is super important in VECV.

And from Govind's synopsis, I would just like to say that even at Royal Enfield, we are -- I think one thing you can always take back from EML is that we're absolutely super focused. We don't do too many things. We do a few things. And I believe we do them exceptionally well. We have a great pipeline of motorcycles. This is just the beginning, but lots of amazing motorcycles coming. We are able to enter newer and newer markets. Within the markets that we are present in, we have lines of dealers waiting to get our distribution because it's a brand that is growing and doing well and they're making money from it.

So it's -- there's a very positive virtuous cycle that is coming. We're also doing super new interesting things in the entire world of pure motorcycling as we call it, pure motorcycling experiences. So it means breakthrough things on how we do events, activities, all with a sustainability focus, rides, custom motorcycles, competition, all of it, which is what brings desirability to brand Royal Enfield around the world.

So we continue to do that. We have very, very strong and engaged teams, which is the cornerstone of Royal Enfield. And we really believe that with all of these -- this extreme focus that we have on our customer and understanding consumers and bringing the right product and story out is what is the advantage that Eicher Motors brings on the table, and we continue to invest in that. And we believe we will continue to meet our long-term ambitions and targets.

As we've seen in the past, we've been growing -- grown to a true global motorcycling company and a very strong trucking company in India and that path continues. So that's it for me now. Looking forward to seeing some of you tomorrow in our investor meet here in Chennai. And over for questions and answers, please.

[Operator]

[Operator Instructions] So first question is from Pramod Kumar, UBS.

[Pramod Kumar, analyst]

Yes. And congratulations Siddhartha, and Govind for making the RE very, very accessible again. I think great pricing. So sticking with that, I just wanted to understand, given how the price point is and this is where Classic used to be like, say, 4, 5 years back in terms of the showroom price, so how do you see the volumes evolving for Hunter in the domestic space?

And on the export front, do you see this brand widening your customer base and the addressable market even in a wider way? And what could be the volume potential on the export side? Because it's a much more youthful product, much more, I would say, compact and easy to handle. So what will be your thoughts on the domestic and the export volume opportunity?

And then I have a follow-up question for Kalees on the financials.

[B. Govindarajan, executive]

Yes. Thanks, Pramod. Good. Every one of you are liking the motorcycle. It is really a lovely motorcycle.

The first question which you raised is, what does it mean to us in terms of domestic volume?

Every product Royal Enfield, which is launching -- as Siddhartha mentioned, we are a very focused company. We always look at it, what is that, the experience which we give. That adjacency has actually started giving us volume. That's how it is. You can see all of the products which we have launched so far. We launched our Continental GT and Interceptor 650, it added volumes to us.

We had Thunderbird when we changed it to Meteor on the J-series engine, then that actually doubled the volume there. Classic 350, when we upgraded to the new Classic 350, it has been holding its position as the #1 motorcycle which is selling in 125cc and above. Now we are adding Himalayan and the Scram, which we added, you already have seen. Scram has added volume to this even in that [indiscernible].

Now Hunter is a motorcycle which we really thought that if you bring in a motorcycle which is accessible for the consumers globally, everyone wanted a particular format. Here is one for an urban take.

The consumers who are having a true love for Royal Enfield, they express their love for Royal Enfield in acquiring some motorcycle from Royal Enfield, they wanted a motorcycle which is a bit more accessible, a bit more lighter, a bit more nimble. As a result of it, they could not buy anything in the Royal Enfield offering, but they loved the brand of Royal Enfield. That's where we really felt Hunter is a motorcycle which comes and addresses that. And there's huge consumers who are actually inquiring our product, and there are drop-offs, which comes up in the journey.

We feel this is the product which is going to actually address all of them, and that's how it will actually add volume to us. All the products you would have seen, it's been actually adding volume to us over a period of time.

The second question which you asked is about the international market. International market, Royal Enfield has been entering the entry segment in a way through the [indiscernible] [ VECV ] because all of our J-series are now Euro V compliant.

So it's opening up that segment for us when we are entering into the market. And all the guys, the journalists who all came and then rode with me and Siddhartha when we were there in the launch, all from U.K., Europe, Brazil, North America, Thailand, all the guys, all the journalists who rode, everyone came back, "Wow, that's a fantastic motorcycle, which fits into our country also." Not even one guy turned back and then said, "Maybe it is okay for this country, may not be okay in all." Everyone said, yes, there is a space for that. So we also see there's a good traction possible even for Hunter 350, which adds into the international markets volume.

[Pramod Kumar, analyst]

And Govind, any volume targets there? Because the media -- because they're suggesting 10,000, 15,000 being cited to the management in terms of domestic volumes. So I just wanted to clarify on that fact and also on export volume potential. You think you can share that?

[B. Govindarajan, executive]

We don't normally give any numbers. From what we look at, how many places have to be happy with our motorcycles when and -- when we give it and then enjoying the experience. And what we want is that more and more people should come into the Royal Enfield fold, enjoy the motorcycle. We are here as a company in promoting motorcycling as a culture. And if we are focused into this and create product adjacencies, we feel probably even that number can be lower, why it should not be more. But we don't look at any numbers precisely to that, Pramod.

[Pramod Kumar, analyst]

And second is on the pricing bit and what it means to the profitability for the company because the pricing is really, really accessible. I think there are wage reductions and other cost savings. But even adjusted for that, it looks like you have gone for prioritizing volumes here. So I wanted to understand from Kalees and you as to how should one read the volumes -- the pricing and the volume growth that comes from Hunter in terms of impact on gross margin and on operating leverage? And consequently, what could be the ultimate outcome on the EBITDA side? So if you can help us with that.

[Kaleeswaran Arunachalam, executive]

Sure. Just as a starting point, Pramod on this, I think there are opportunities right at the variant level. So we have an entry variant, there's a mid variant and there's a premium variant. We have all seen, over a period of time, product entry variant modeling has helped us to improve the profitability also. So while there is an attractive launch price, the variant is one opportunity available. And there will be [ VAV, ] that will be continuing as we go forward.

But more importantly, the product, as Govind was rightly addressing, is to look at a growth opportunity for India. So as we move forward, it is important for us to balance growth, profit and profitability. So from our perspective, we think the incremental capital employed for this particular product is already part of the J-series. So the incremental profit that we'll be getting in absolute value will be higher. The incremental ROCE will be higher and, usually, it will be accretive to the EPS also.

[Operator]

Next question is from Binay Singh from Morgan Stanley.

[Binay Singh, analyst]

Congratulations for good set of numbers. I just carry on from the earlier question on margins. Clearly, a good quarter. But from here on, how do you see margins playing out? Because on one side, is it fair to assume that the commodity tailwind is yet to play out? And in fact, even volumes could start to go up. So you'll see some volume leverage. But on the other side, the Hunter would be margin dilutive. So if you could comment a little bit about directionally, where do you see margins going from here? That's the first question.

[Kaleeswaran Arunachalam, executive]

Yes. Binay, we don't give any forward guidance on margin. But at the same point item, let's look at the levers available and how are we approaching it. Starts with revenue. I think a large part of pricing action that we had to do, had to do with the catch-up pricing on various accounts. That is now largely behind us. There is mix that will continue to grow positively both on the domestic side and with international catching up, that's a positive sign that will continue. We do think it's very, very early days for us in international and the potential to grow significantly high from here.

On the cost side, the commodity inflation is probably stabilizing right now. We are getting into a phase where the super commodity cycle is over. That would -- if there are no further any global political disruption that will come in to affect it. But right now, it looks like we're getting into a zone of stability. So there is no need for any further pricing action in a significant manner as we have done in the past, unless we are compelled to do that.

So therefore, on a base business, pre Hunter, we are on -- ready to move towards an operating leverage. So as you could see, the numbers for this quarter is also a visibility from that perspective. Operating leverage has started kicking in and that's where the EBITDA margin is moving towards, 25%.

Now coming to Hunter, we need to look at the holistic business model. On our base business, [ it added ] the X percentage of EBITDA. On the incremental business, whatever it is going to deliver, it is straight coming into the bottom line. And that's why we said it will be EPS accretive at the end of the day. And on a combined basis, it should further add value to both organization and all the stakeholders.

[B. Govindarajan, executive]

Just to add, Binay, in the coming quarters, I think inflation, as Kalees was mentioning, the super commodity cycle, that's -- it's slowing down a lot. We can see that. It is [ not that ] in the same cases there. We also kicked in a lot of value engineering activities because of the volatility in the subregion, which we could not get the results for the offering, that will also start flowing in for us in the coming quarters.

[Binay Singh, analyst]

Is it fair to assume that directionally the trend should be upwards only? And in terms of -- not be so lower margins that it sort of distorts the other levers, which all seem to be pointing upwards?

[Kaleeswaran Arunachalam, executive]

Yes. Binay, maybe now we will look at Q1 and Q1 results, and we will get to that as we move forward to the forward quarters.

[Binay Singh, analyst]

I'll move onto the next question, which is on the volume side. Encouraging to see the market share trends. But when I look at July volumes, they are the lowest that you've done in 8 months or so. So could you talk a little bit about both the demand side of the equation as well as the supply side of things?

[B. Govindarajan, executive]

Yes. Sure, Binay. I think in the July number, I'm sure you would have seen a shift in the market. The Hunter, which are supposed to be launched around eighth of August, 10th of August -- so the entire pipeline, which has to be worked out in such a way that the inventories are built and also working capital of the dealers have to be managed.

So we have not [ billed, in fact ] deliberately, our Hunter motorcycles to the dealers in the month of July. If I have to talk about what's happening in the demand side in India especially, we have reached above 125cc a good market share. In the middle weight also, we are continuing to grow. The market inquiries are really good. More and more inquiries are there, more and more -- the desirability of owning the motorcycles are higher.

On the conversion level, there's a bit of a pressure point, which we saw last about 30, 40 days. But with the Hunter coming in, there we see that is getting addressed finally. I think it's about time, even in the Indian market, with the Hunter coming at an accessible price point, we'll once again give an uptick on the demand which is there in India.

[Binay Singh, analyst]

And just one thing, what is the average consumer age now? Because we've been saying a lot about Hunter addressing younger audience. I always thought your average buyer age was actually below 30. Anyway, so what is it for the portfolio now?

[Siddhartha Lal, executive]

It's about 30 -- around...

[B. Govindarajan, executive]

29, 30 is the average age. Binay, I think what is more important, what you have to look at, it is not only the age which has to be looked at. Young can be even from the heart, right? One can look at it, well, I want to drive a motorcycle. Even a guy at 60 can feel it. Hunter is a motorcycle which has to be there in an accessible form: Nimble, easy to ride, and it can actually go through an urban city in a tight corners of even the traffic and that -- more and more a motorcycle which is lighter in weight compared to classic, compared to our mid-tier, that's going to address for the people who really love Royal Enfield and they also want to own a motorcycle from Royal Enfield with a particular format.

And that's what is in Hunter, which is going to give an additional volume to us. Our average age of the consumers are coming down. More and more young guys are actually coming into the fold of Royal Enfield, fundamentally because as we mentioned, as a focused company, we are looking at motorcycling as a company rather than a motorcycle company. And that's where the younger guys are enjoying the motorcycling a culture in Royal Enfield.

[Operator]

Next, Jinesh Gandhi from Motilal Oswal.

[Jinesh Gandhi, analyst]

My question pertains to the RM cost pressures that you talked about. So is it fair to say that we are largely -- I mean the entire cost pressures are now in the P&L, and second quarter onwards, there would not be a material impact going forward?

[Siddhartha Lal, executive]

That's right, Jinesh. We don't see any significant headwinds on the material cost as we stand right now.

[Jinesh Gandhi, analyst]

Okay. And can you talk about the price hikes taken in 1Q and 2Q so far?

[Siddhartha Lal, executive]

We have not taken any price increase in 2Q. In 1Q, we have taken about INR 3,000 per vehicle in our 350cc portfolio, and [ insurance, ] we have taken about INR 5,000.

[Jinesh Gandhi, analyst]

Okay. Okay. Got it. And secondly, with the supply side issues now, given that we have on boarded additional supplier on the [ EBS ] side and broader improvement, would it be fair to say that going forward, there would -- I mean, based on the current visibility, there will not be any material supply-side related bottlenecks?

[B. Govindarajan, executive]

With the visibility we have today, Jinesh, and the actions which we have taken to protect -- and it is different levers, right? You have to look at sourcing, different countries sourcing, different levels of sourcing. One more is holding inventory, trying to manage the whole situation.

I don't see it to be a major problem at this stage, supply chain volatility. It is slowly settling down. From a sheer efficiency of a supply chain perspective, should I say that everything is in order? It may take some time, but it is not disturbing us.

[Jinesh Gandhi, analyst]

Okay. Okay. And Kalees, can you talk about the state government grant which you alluded to in the opening remarks? What's the quantum?

[Kaleeswaran Arunachalam, executive]

So it's about INR 40 crores, Jinesh. I think you need to look at this together along with the mark-to-market. So for the quarter, because of the interest rate hikes that we have seen, we have had to take a mark-to-market action of about INR 120 crores. And then we have about INR 40 crores of state government incentive in the form of soft loan that has been obtained. So we have done an NPV accounting for that.

The fair value accounting has taken about INR 40 crores into the P&L. So net-net, between mark-to-market and in terms of the incentive NPV that we have accounted for, we have lost about INR 80 crores. And the mark-to-market, anyway, as you would know, is notional. It would start accruing in the forward quarters.

[Jinesh Gandhi, analyst]

Sure. And this INR 40 crore would be part of operating other income or other income?

[Kaleeswaran Arunachalam, executive]

Other income. It's part of other income.

[Operator]

Next is Kapil Singh from Nomura.

[Kapil Singh, analyst]

Firstly, Kalees, one question to you. If I look at the difference in the consolidated and standalone revenue, it's quite high this quarter. It's about INR 150 crores. Normally, it's quite small. So if you could give some color over there, please?

[Kaleeswaran Arunachalam, executive]

Yes. So typically, if you look at our international business, Kapil, the shift is slowly moving towards Americas. So what used to be led by Europe, the business is moving towards Americas, and the lead time for Americas is slightly higher. So as you look at it today, the average lead time for us from India to Americas could be anywhere between, say, 8 to 12 weeks.

So any shipments that we have done until last week for Americas gets reversed at a consolidated level because it's in transit. So that's the difference that you're seeing.

[Kapil Singh, analyst]

Sorry, I didn't get it fully. Can you explain it in more detail?

[Kaleeswaran Arunachalam, executive]

It's an inventory adjustment that has been built from the India standalone business, which is not retailed out at the subsidiary level. And, therefore, you adjust it at a consolidated level.

[Kapil Singh, analyst]

So these are bikes that are built from India, that's what you're saying. But they are not retailed in the international markets...

[Kaleeswaran Arunachalam, executive]

Correct. Because it's in transit.

[Kapil Singh, analyst]

Okay. So that difference is sitting in the revenues over there?

[Kaleeswaran Arunachalam, executive]

Yes, that gets reversed in the consol.

[Kapil Singh, analyst]

Okay, understood. But then in that case, the India revenue should be higher, right?

[Kaleeswaran Arunachalam, executive]

It is right. So if you look at from a sequential quarter perspective, India revenue is almost at the same level on a like-to-like basis.

[Kapil Singh, analyst]

Okay. So these were shipped in the previous quarter you're saying?

[Kaleeswaran Arunachalam, executive]

Both, [indiscernible] both. One would have got a positive gain, one would have got reversed last time, we record as a positive right now. And what are billed this time would have got reversed as a negative. So maybe, Kapil, I can take it offline to give you a bridge.

[Kapil Singh, analyst]

Sure, sure. And second, I just wanted to check on Hunter. Govind, you alluded to the fact that there are several customers who come, but there is nothing that is suitable for them so they have not been buying it. What is the primary reason that those customers have not found something suitable? Is it because they want a different form factor?

Or is it because they think that the product price is too high for them or not as accessible? And also in terms of capacities because, historically, we've seen that for new products, we end up having a very long waiting period. So are you -- what kind of capacities are you prepared with for Hunter? And do you think you are prepared for the kind of demand, initial trends that you're seeing?

[B. Govindarajan, executive]

It will go -- from the capacity which you have asked about, yes, we are aware that initially, when we started using the new product launches, we always used to have a supply-demand situation mismatch. But from Classic 350 onwards, you can see in the market that, that situation wasn't there because we also have built in inventory and then went into the market.

The back end, we have now sorted to deliver the Meteor also -- sorry, the Hunter also because we have test it, everything is ready. And that's why we started building the motorcycles also. So capacity was not an issue, if I have to tell you one.

Second is you're also asking about who are the customers who are looking at Hunter and what is the reason. Everyone who are there who wants to own a Royal Enfield -- there's always an expression of love towards Royal Enfield. He comes and then in his journey he finds all the motorcycles which are there, sometimes they feel that, "Well, I love this motorcycle, but maybe it has to be a bit more lighter in handling."

So Classic is nice, but some want a lighter Classic appeal. And that's why this motorcycle, which we're bringing in to [ home ] are those people who really love Royal Enfield brand and who likes motorcycling as a culture, but wanted bit more agile and a vehicle that's stylish, fun for him to ride and easy to manage.

[indiscernible] requirement. And that's why we found this set of consumers who are -- get to be addressed by Royal Enfield with our own [ search ] because Royal Enfield as a company, we always say that we make motorcycles only on listening to the consumer more and more. We go to them. The community actually tells us what they want. And this is an understanding which we got from the community that, yes, we need this motorcycle in this particular format, and we landed that motorcycle and it is getting accepted very well.

[Kapil Singh, analyst]

Okay. And wish you all the best for the launch.

[B. Govindarajan, executive]

Siddhartha, do you want to add anything on this?

[Siddhartha Lal, executive]

Sure. I mean, we do an enormous amount of work before we launch a product or before we start working on engineering. So the Hunter was late 2016, early 2017, we started actually conceiving the idea. And both to meet -- on the J-series, as you know, which is our new 350cc platform, both the Meteor and the Classic are replacing existing products. So that we call renovation. But we believe we also needed innovation, which is to get new customers into our portfolio.

And while riding and understanding and seeing customers who are not yet buying the Royal Enfield but are interested, this is the kind of insight that we get that they want something which is more agile. They don't subscribe to, let's say, classic look. I do. I love my Classic, but some people don't subscribe to that look. Fair enough. But they like Royal Enfield.

Some people don't want a Cruiser, fair enough, but they like Royal Enfield. And we're understanding, who are these customers, what do they want, what is their interest, what are they doing, why and what type of look. So with all that great insight that we build, we then come up with the concept of a new motorcycle like the Hunter. And as you can see in the past, we've been able to really get the right divisions and get the right segments and understand. So we've not had one that would, let's say, new product which has not hit the market, which has not got the right consumers that we wanted to.

So whenever we launch like -- even when we launched a sub-brand of Himalayan called Scram, we got new customers in. We got -- we did what we were trying to accomplish because we understand the consumer need super well. That's the forte of Royal Enfield, and that's what allows us to bring a product like Hunter, which is really fresh. And we know it will attract a different audience than we've been getting today because we've been told that.

[Operator]

Next, we have Gunjan Prithyani from BofA Securities.

[Gunjan Prithyani, analyst]

Congratulations on the launch. I have 2 questions. First, maybe I'll take exports given it's not covered so far. Clearly, it's been a great journey last year. I'm just trying to understand in terms of the overall opportunity, I mean how should we think about exports? How much can it grow? I mean we are at about mid-single digit or high single-digit market share in most markets.

And when you think about the overall opportunity size, is there something that you can share? You know, how big the market is in the mid-weight category? And what is the aspiration on the market share there?

[B. Govindarajan, executive]

Yes, sure. It's -- our international story, it has to be understood what is our thought. We, as a company, we don't rush things. We go to the market, understand the market and then blow the market. That's what we did. That's what is the success which we brought in India for a period of time. We wanted to go into the international market in particular product specifications, we have to come to a level. So we went to international market first with our Continental GT and Interceptor.

It actually opened up a good recognition and an acceptance of Royal Enfield as a global motorcycle brand, fundamentally because it came at a different design level, different quality level because that's where our tech centers started working in seamlessly. At that point, when we started looking at the markets, we said we'll go to 1 market, 1 city, 1 outlet. We will not go and just sign up to all the dealers and distributors. We never wanted to take that route because we are not that sort of a company, because we wanted to build a culture of the motorcycling around that.

When we are building with our world-class technology centers which are there and our manufacturing facilities is viewed very well, the J-series engine, which is now Euro V compliant, which is now opening a new set of consumers.

If I have to tell you how the acceptance is, in U.K., the rider community actually came around. Almost about 8,900 people have signed up as the -- rider community, Royal Enfield rider community. They just came around. So the community build is taking place in all the countries where we are.

Now in the last 1 year only, we are actually looking at our retail outlets going up. Today, internationally, we have almost about only 850 retail outlets in multi-brand format and in our own stores. There's a huge potential for us to actually open up the retail stores to go near to the consumers because every country is different and that country has to get suited to their retail outlet.

What is giving to us is all the products which we are launching and giving into the market, compared to last year, we have doubled. In my opinion, it's -- we are working on it is that with all the products which are coming in and the market is just getting opened up, we see there's a huge potential for us outside India. The way we hit growth in India is starting outside India.

[Gunjan Prithyani, analyst]

Okay. Got it. So fair to assume that this can comfortably double from the levels where it is in the next 2 or 3 years? That kind of potential is there for market share to reach low -teen levels?

[Kaleeswaran Arunachalam, executive]

So maybe just to add to that, Gunjan, to answer this part. I think eventually, today, we are in about 70 odd countries. And the size of this market is as big as what is there in India. And our run rate, which used to be about 10,000 a year, we are now clocking at 10,000 a month. And we do think it's pretty early days in terms of whatever inroads that we have made into international driven by people, product and the network backed up with CKD in certain markets. So we do think the journey has just started, and we still have a long way to go, and it will mimic what we saw in India a few years back.

[Gunjan Prithyani, analyst]

Okay. Got it. My second question is on the domestic again. Now going back to Hunter launch. I know you've covered it a lot in terms of how this bike is different. Maybe I'm just trying to understand, there is already a younger population, which is there buying Harley.

How do you -- you know, in your thought process, what is the risk of the existing customer down-trading to this? Because there is clearly a risk of cannibalization which can also happen. So when you are thinking about these 3 models, in particular, let's say, Classic, Meteor and Hunter, how do you market -- or said in a way differently -- that you don't see an existing customer who was looking to buy, let's say, a Classic does not downgrade -- let me not use the word downgrade -- but does not cannibalize into your existing portfolio?

[Kaleeswaran Arunachalam, executive]

Any of the product, Gunjan, when it is launched into the market, see we brought in the Hunter 350 as a new product. It's 2 days now, and the embargo has just lifted today. As Siddhartha was mentioning, our understanding by living along with the consumer, listening to the community who are not part of the Royal Enfield -- if you're not of the Royal Enfield gang, then you will be having a different view. So we went to the community. We were trying to understand what do they want and all.

Everybody were looking at a motorcycle which has to be very agile, and as I mentioned, slightly lower in weight because that's where they were looking at. This is the Hunter, which is actually addressing to those set of consumers across the globe, let alone in India. As Siddhartha was mentioning, someone likes Classic, right? We differ there. So Siddhartha likes classic motorcycle. I like mid-tier in our portfolio. Someone else will like a different form. So we were looking at -- Hunter is a form, which is actually there for that urban setup, which is there for the current level of traffic situations.

And the younger audience who want -- I want to use it for commuting and from a leisure purpose and from an enjoy purpose and for fun, but I need something which is very agile, nimble, easy to handle, lightweight. So that's where Hunter is born.

Will it come in and then take the Classic market away? It can't. But will there be a borderline to some extent here and there? Probably yes. But that's how the market will mature over a period of time. That's how it would be. We don't see, as a company, that it is the same vehicle. It is different. Because that's what consumers told us, and that's how we brought the vehicle there.

And we are seeing the last 1.5 days -- that's why I said it's just 1.5 days [indiscernible]. In 1.5 days, whatever the new inquiries bookings which are coming up, it is encouraging to us to see that there are new consumers who we've been looking at that these sort of consumers have to come in and enjoy the motorcycling in the Royal Enfield brand.

And that's what we wanted and that's what is happening as of now.

[Operator]

Next, we have in queue Hitesh Goel from CLSA.

[Hitesh Goel, analyst]

I have 2 questions. First, I wanted to get a perspective from management, right? Before COVID, I mean, in peak, we used to do 75,000 a month kind of domestic volumes, right? And we have seen the impact on volumes in the domestic market, which I believe is due to pricing because the brand has not been impacted. You have been launching a lot of products also and the product feedback is pretty good.

So this number, do you think will start coming in next 2 years when the income increases and there's no increase in prices from here on if there's stability in commodity prices? So what is the thinking on that?

And secondly, on exports front, you have talked about brand getting established. So should we assume margins will go up significantly there because of scale, you would give lower retailer margins, right? Because initially to build a brand, you've given higher retailer margins, I would guess, and the promotional expenses will come down. Just a sense on these 2 aspects.

[B. Govindarajan, executive]

In terms of domestic market, pre-COVID to post-COVID, I think let alone the motorcycles, Hitesh, all the products are being looked at, how will the market come back post-COVID situation. I think it is just coming up and it's coming to the normalcy level. Not that it has come to the pre-COVID level for everyone, any product for that matter. So when the COVID situation comes in, I think it will be bad for everyone in the same speed with which the market grows. Hunter will add us more volume into the overall. That's what we are expecting. Our growth will be there.

The next question which you are asking is about international margin.

[Kaleeswaran Arunachalam, executive]

So Hitesh, I think, again, the journey of international within the market is into 2 parts. We have developed markets and developing markets. Developed markets is already margin accretive to us. So any further growth will only further add towards. There are markets like Brazil, which has got huge potential in terms of what it can offer as volume to us.

Having said that, as you would note, there are challenges around the entire tax structure and the ForEx structure. So we are trying to see how to go about it, and one by one we are sorting that out. And over a period of time, as scale improves, these markets will also start mimicking operating leverage that we have seen in the past for Indian business.

[Hitesh Goel, analyst]

But any view -- sorry, just a clarification on any clarification on the retailer margins in developed markets? Have they come down because where you have established a brand like Argentina, Colombia, Thailand, just to get a sense on the trajectory of the margins.

[Kaleeswaran Arunachalam, executive]

Just as an example, we do take a call on that, depending upon the country's growth, margin profile, potential and what is there in the future, we have done that in the past. But I wouldn't want to give any forward guidance on that as to would that be the way forward for it. That's a lever that is available.

[Operator]

That was the last question. I'd like to hand over to the management for closing remarks.

[Siddhartha Lal, executive]

Okay. Thank you all very much for attending this. And as you've seen, we're a company on a mission and moving forward rapidly. And we have an Investor Day the day after, tomorrow. For those of you who are coming, we will welcome you tomorrow evening. And so those who can't make it, we will be broadcasting the day, and we'll have a pretty intense day of -- to explain what we're doing, our business model, our plans, all of that. So we urge you to join online in case you're not attending physically. Thank you very much, and look forward to seeing you soon. Bye-bye.

[Kaleeswaran Arunachalam, executive]

Thank you very much. Thanks.

[B. Govindarajan, executive]

Thank you very much.