Eicher Motors’ Stock Jumps On Plan To Increase Royal Enfield Capacity

Shares of Eicher Motors Ltd. jumped the most in over a month after the maker of British wartime motorcycle brand Royal Enfield announced plans to increase its output, dispelling fears that capacity constraints will hurt growth.

It announced capacity optimisation at its Oragadam facility near Chennai in the southern state of Tamil Nadu this financial year, according to its exchange filings. It will also spend Rs 800 crore in the phase-2 expansion at the nearby Vallam Vadagal facility. Apart from that, it will also set up wholly owned subsidiaries in Indonesia and Thailand.

“Our demand continues to exceed supply, and we continue to see strong growth from all our markets,” Siddhartha Lal, managing director and chief executive officer at Eicher Motors Ltd. said in the statement accompanying the filing. “Therefore, we have decided to expand our production capacity.”

Shares of the company rose as much as 4.5 percent, the most since Feb. 1. The stock has been investors' favourite, giving more than 11,000 percent returns in the last decade—the highest among India's top 100 companies—as demand for Royal Enfield motorbikes soared. Yet, there have been concerns about its growth stagnating on its inability to meet demand.

The company said the output at its Oragadam plant would increase capacity to 9.5 lakh units from 9 lakh units. If enhanced capacity is converted into sales, that would mean a 16 per cent growth for Royal Enfield volumes on a yearly basis.

Here's what brokerages said about Eicher Motors' plans:

Jefferies

• Maintains ‘Buy' with target of Rs 31,880, an upside of 14 percent.
• Higher production addresses investor concerns over capacity constraints to growth.
• Construction at Vallam phase 2 would mean annual capacity of 12,000 units.

CLSA

• Maintains ‘Buy' with a target price of Rs 39,300, an upside of 40 percent.
• Capacity expansion indicates good growth outlook.
• New capacity to come online by March 2020, full ramp-up in the following year.
• Expects 15 percent annualised growth in volumes in three years through March 2021.
• Expansion indicates strong demand growth outlook for the next two-three years.

Morgan Stanley

• Maintains ‘Overweight' with target of Rs 34,104, an upside of 22 percent.
• Guidance is 3 percent higher than the current sales estimates.