Eicher Motors: A multi-bagger that no one foresaw

Have you been led to believe that multibaggers picked by popular investors are purely the result of skill, timing and foresight? Well, it’s often luck and patience at play.  

The case of Eicher Motors is a classic. Between April 2005 when it was at Rs 32 and now (Rs 2754), the stock’s up 86 times, a 32% CAGR.

Let’s trace the journey of an investor who did buy the stock in April 2005. 

The initial four years would have been quite frustrating because the stock didn’t budge and even made losses until 2009. Today, we receive queries from investors if stocks we recommend do not move in 4 months, so imagine yourself holding a stock without any movement for four years. 

Nor did Eicher Motors do anything very exciting with its business for you to hang on patiently. A highly cyclical commercial vehicle business and a mediocre earnings profile was not a story that would have fired anyone up. So, for about a fourth of the holding period of this winning stock, no returns came by.

A hope that did not transpire

Cut to 2008-09 when the stock began waking up from slumber. With Eicher Motors entering into a high-profile joint venture with Volvo, institutional investors began to buy into the story of the company transforming from a light commercial vehicle (LCV) play to a maker of high-end trucks.   

But did the story take off? It did, but not as per expectations. Market leaders Tata Motors and Ashok Leyland managed to retain their market share in HCVs with indigenously developed trucks, in fact meeting similar standards at much lower cost. The Volvo venture did get to a third place in the market, while it participated in the industry’s growth. 

Eicher Motors’ earnings did better with this JV than it did in the previous block of four years. The stock jumped ten-fold between December 2008 and December 2012 even as earnings jumped seven-fold in that period. Investors vexed with the stock’s inaction in the four years may well have exited then. But it was those who stuck on who experienced the next multibagger story waiting to play out.

Unexpected quarters

Eicher Motors came into its own as a business when the demand for the classic bike segment in India exploded and Royal Enfield bikes emerged as a favourite. This was not a story that large investors or fund managers bought into immediately. In fact, few even gave it a thought initially, given that 2-wheelers accounted for just 12% of Eicher’s revenue in 2008. When the sales trajectory broke out post 2009, Eicher Motors’ growth climbed, revving up post 2013. Interestingly, it’s margins (30% for Royal Enfield bikes) soared too. From selling 50,000 bikes a year in 2010, Eicher Motors now sells well over 50,000 bikes a month.

So, if we trace Eicher Motors’ 16-year journey in four-year blocks:

• 2005-2008 – Mediocre earnings growth. Single digit operating margins. Stock remained stagnant
• 2008-12 – High earnings growth on a low base. Improving operating margins. Stock jumps10 times – triggered by Volvo JV and increase in Royal Enfield bike sales.
• 2012-16 – High earnings growth. High double-digit margins. Stock jumps 8 fold triggered by increase in Royal Enfield bike sales.
• 2016-20 – Moderate growth, margins sustain, stock moves marginally. 

For those who held the stock for 15-16 years, lack of stock movement in the first quarter of this period may have led you to exit. Those who held it with patience, were rewarded well in the next 4 years but is highly unlikely that one would have built positions for this up move.  At best, the stock may have been a small portion of the portfolio of those who held it. The 2012-16 rise was an unexpected event as nobody expected Royal Enfield bikes to account for a majority of revenues. The period 2008-16 was the true multibagger period, but evident in the rear-view mirror.  Needless to say, those who saw the growth and joined the bandwagon post 2016, did not have any great story to tell. 

That leads us to the moral of this story – 

• Multibaggers can come from stocks that did not move for years. It takes a lot of conviction and patience to hold them. In other words, controlled investment behaviour is a must.
• The Volvo promise was not the trigger for stock returns. The Royal Enfield bike story was. Nobody foresaw it and those who held it, did so out of luck. 
• Entering multi-baggers of the previous decade can be a case of too little, too late or in some cases, a reversal of gains.

Also Read : 5 things they don’t tell you about finding multibaggers