In today’s Finshots, we talk about why people are worried about Royal Enfield bikes losing their crown.

Also, if you haven't done it already, please do check out our YouTube channel. We have an amazing explainer on Indigo and why so many analysts have a buy recommendation on the stock.

The Story

Eicher Motors-owned Royal Enfield commands an 86% market share in the premium bike category. We’re talking about bikes with a power output of 250cc and above. It owns this space!

But this week, its shares have crashed by 10%. Investors are running for the exit.

Why, you ask?

It’s all thanks to Hero MotoCorp and Bajaj Auto. These legacy 2-wheeler manufacturers made some big announcements last week. Firstly, there’s Hero’s partnership with the iconic American brand Harley Davidson. The duo are launching a ‘Made in India’ Harley. And guess what? It'll be priced at around ₹2.3 lakhs. That puts it in the direct price range of Royal Enfield bikes like the Himalayan and even the Classic 350. Then there’s Bajaj’s collaboration with the legendary British brand Triumph. They’re launching a couple of bikes in the same price range too.

So yeah, the competition for Eicher Motors is going to heat up. And investors are worried that the stellar run that spanned over a decade and a half will now hit a speed bump.

Now by stellar, we are talking about the kind of work Eicher Motors did with Royal Enfield and the extraordinary results that followed.

You see, contrary to what a lot of people believe, RE isn’t really an Indian brand to begin with. It’s actually British at heart and began its biking operations in the early 1900s. It supplied bikes to soldiers during the World War. But as the years went on, the company ran into financial troubles. And in 1995, India’s Eicher Motors decided to acquire Enfield.

But it wasn’t easy to turn the company around. Enfield bikes weren’t exactly reliable. And even 10 years after the acquisition, the company was selling only about 25,000 bikes every year. By 2010, the number had slowly doubled to 50,000 bikes but it wasn’t enough.

But suddenly, things changed. By 2015 the company sold a whopping 450,000 bikes. It was crazy. And it all had to do with the introduction of the Royal Enfield Classic. There was new tech and better reliability. It was a marked change from the past. Waiting periods soared to nearly 6 months. The demand was through the roof. And the cult of Royal Enfield was well and truly on.

Investors loved the company. They piled into it. Between 2010 and June 2023, its stock rose by a whopping 5,500%. And the juggernaut snatched an 86% market share in the premium biking space.

So the question is — why are Hero and Bajaj taking on the might of Royal Enfield now?

Well, this is how Rajiv Bajaj, the CEO of Bajaj Auto put it:

“There was a famous bank robber in America called William Francis Sutton. When asked why do you rob a bank he said that’s where the money is. So if Royal Enfield is where the money is then we have no choice but to rob that bank”.

It’s all about the money!

Because even though this aspirational segment of premium motorbikes is a tiny sliver of the market — 800,000 premium bikes were sold in India in FY23 — it is a profitable venture. They could charge a premium and earn high margins. Just look at the high gross margins of Eicher Motors — it’s above 40%. And they pocket a cool margin of ₹75,000 per bike as per Nomura.

And if we consider an average selling price of ₹2 lakhs per bike, you’ll see that the market size for these premium bikes is around ₹16,000 crores a year. So it’s a market they definitely want a piece of.

It’s probably even more crucial because these two companies are going through a few hurdles of their own.

What do we mean?

Okay, there’s something you should know about the market for 2-wheelers right now. And it’s that this segment doesn’t seem to be doing that well. We’re talking about commuter bikes or the 110cc type ones that are more in demand in rural pockets. The overall demand has flatlined in the past year. As per a research report by ICICI Securities, Hero’s motorbike sales volumes are down by 12% in June when compared to last year. And Bajaj’s has dropped by 7%. This includes both domestic sales and exports.

But on the other hand, premium bikes seem to be doing quite well. Royal Enfield has managed to sell 26% more units in June compared to the previous year. It seems like the aspirational crowd still has money to shell out on their rides.

And the folks at Motilal Oswal Financial Services think that over the next 5 years, the premium segment will grow by around 15% annually. But the overall 2-wheeler market (including commuter bikes and scooters) will meander along at a 7% growth rate.

So you can see why Hero and Bajaj want to diversify their fortunes a bit. And grab a slice of the higher-income pie that seems to be more resilient to economic uncertainty.

Will they succeed, you ask?

Well, that’s the million dollar question. Harley Davidson is a cult in its own right. Even Triumph has its own fanbase. And by pricing it almost at par with the Enfields, you could argue that the battle is well and truly on.

But here’s the thing. In the past couple of years, we’ve seen Honda and the comeback kid Jawa trying to steal away Royal Enfield’s market share. But they haven’t been too successful. The going has been slow.

So what could really change the game then?

Well, here’s a thought — the game will change the moment Harley and Triumph, or even Honda and Jawa gets free advertising. See, a few years ago, a fund manager pointed out to me how Royal Enfield’s cult gave it free mileage into people’s homes. Through movies! If you pay attention, you’ll see that a lot of movies from the past decade inevitably feature the protagonists riding a Royal Enfield bike. That means while many other companies pay quite a bit to get their brands placed in movie scenes, Eicher Motors doesn’t need to do that. The cult of Enfield was getting a nice boost thanks to the massive Indian movie industry. And maybe that’s why the company only spent ₹20 crores on advertising in FY20. It doesn’t need it.

So yeah, maybe we have to wait for movie makers to shift allegiance from Enfield? Maybe we have to wait for cults to emerge elsewhere. But even if that happens, you can bet that Eicher Motors won’t roll over and cede ground easily.

Until then…let us know what you think about this biking battle that’s brewing.

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