Firing on all cylinders
The rise of Indian automaker Eicher echoes that of an iconic Western brand, but in a country bucking the emerging market deceleration.
David Levanson of Sands Capital has been investing in motorbikes for decades but, in recent years, that focus has taken him from the West’s most famous brand to one of India’s rising stars.
In 1993, just 11 years after its founding, Eicher Motors acquired a majority stake in Royal Enfield, a revered old motorbike brand. In 2014, Royal Enfield sold around 300,000 bikes, beating Harley-Davidson for the first time. For Levanson, the comparison is especially apt.
“We bought Harley-Davidson stock in 1993 and owned it all the way through to 2006,” says Levanson. “In the beginning they were selling around 10,000 motorbikes a year, mostly to middle-aged men, and by the end it was more like 200,000 – but still to middle-aged men. We learned a lot through that process of owning Harley, and are very familiar with the story of how it went from almost bankrupt to a global icon. That got us interested in Eicher, its prospects for growth and the power of its brand.”
Levanson points to the importance of brand in selling motorbikes – in the case of Harley-Davidson, its logo even became one of America’s most popular tattoos. Eicher has learnt from the Harley story, and is now growing its business rapidly – every year it produces around 40% more motorbikes than the previous year. Levanson believes that it could be producing a million motorbikes within a few years. A major export business is likely to follow.
“We have a long-term approach to investing, with an average holding period of about five years, but we’ve held some companies for 10 or 15 years straight through,” says Levanson. “We like high-quality companies that grow at above-average rates, so that we can capture the compounding power of that business.”
While emerging markets are currently facing major economic headwinds, some are managing better than others. India’s official growth rate has now overtaken the official growth rate in China, which has been steadily declining due in part to falling commodities prices – India is less vulnerable to commodity price falls.
“We think that India is a market that could have one of the most profound changes in growth opportunities in the world over the next ten years, if they make a few of the right decisions,” says Levanson. “That’s one of the other reasons we own Eicher. It’s a hugely popular brand in India.”
Levanson was particularly struck by the company’s scale when travelling around Mumbai and Delhi. At one point, he asked his taxi driver whether they were being followed, as it seemed that the same bike kept tailing them. Instead, it was simply the case that the bike has become a ubiquitous sight on India’s roads.
The poor state of those roads is another reason that motorbikes have sold so well. But for Levanson, the same reasoning can be applied to a number of other Asian markets, indicating Eicher has enormous export potential too.
“Countries like Indonesia have cultures where people want a $1,000 mode of transportation that works on low-quality roads – that’s a motorcycle,” says Levanson. “Five years from now, markets like Brazil and Colombia will become the next leg of growth for this company.”
Taking the highway
Eicher has other avenues to explore, too. In 2008, it formed a joint venture with Volvo Group to make trucks. As things stand, the lack of nationwide standards on road tax can make transportation across India very complicated. Potentially, every time you cross a state boundary there are further taxes to pay. Should that change, Eicher will be well-positioned.
“If they can pass some kind of pan-Indian goods and services tax, those problems would go away,” says Levanson. “All of a sudden you’ll need bigger trucks because you’re moving stuff greater distances. So a business inside Eicher that we don’t currently care for very much could become another growth driver as well.”
David Levanson is a co-manager of the St. James’s Place Global Equity fund. The opinions expressed are those of David Levanson and are subject to market or economic changes. This material is for information only and is not a recommendation or intended to be relied upon as a forecast, research or advice. The views are not necessarily shared by other investment managers or by St. James’s Place Wealth Management.
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