LETTER TO THE SHAREHOLDERS

Dear Shareholders,

I am delighted to present the Annual Report 2017-18 of Eicher Motors Limited (EML). Once again, we’ve had a spectacular year, with the Company achieving record volumes and profit, and making significant progress on the several initiatives and projects that we had set out to accomplish this year. We remain dedicated to providing pure motorcycling experience to our community globally, while consistently growing value for stakeholders.

Financial year 2017-18 was another strong year for delivering profitable growth and further strengthened the robustness of our business model. In 2017-18, Royal Enfield’s sales volume grew by 23% to 8,20,121 motorcycles. Our market share in above 125cc category of motorcycles in India increased from 24% to 27%. We have indeed come a long way from 3.8% market share in above 125cc category of motorcycles category in 2011-12.

Last year, the Indian automobile industry faced several challenges, including the changeover to BS-IV emission norms, and the implementation of GST. Neither of these events disrupted business at Eicher Motors Ltd. and we powered through as we were extremely well prepared.

EML’s consolidated net revenue from operations (reflecting the business of Royal Enfield motorcycles) for the year 2017-18 was Rs. 8,965 crores, a growth of 27% over 2016-17. In 2017-18, EML’s consolidated EBITDA grew 29% to Rs. 2,808 crores and PAT grew 18% to Rs. 1,960 crores. EML set a new industry benchmark with an EBITDA margin of 31.3% in 2017-18.

VECV - Eicher Motors Ltd's joint venture with Volvo Group - had a strong year in tough market conditions. VECV ’s consolidated net revenue from operations for the year 2017-18 was Rs. 10,049 crores, a growth of 17% over the previous year. In 2017-18, EBITDA and PAT of VECV grew 33% and 35% respectively, over 2016-17.

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Royal Enfield

Royal Enfield has emerged as the strongest premium motorcycle brand in India, and the Classic 350 was the best-selling model in the above 125cc category* in 2017-18. We recently debuted on Economic Times Brand Equity’s Top 100 Most Trusted brands list, perhaps the only brand to have done so without any major advertising spend.

Today, we enjoy the distinction of being a brand that’s both aspirational and accessible. Our reason for being is to allow commuters to upgrade to the world of leisure motorcycling, reviving the simple pleasures of motorcycling at its purest in an otherwise fast-paced, performance-crazed world where motorcycling has reached intimidating extremes or is downright boring!

A Royal Enfield motorcycle is something many riders aspire to own and our legions of fans love our motorcycles and what our brand stands for. Still, we’re accessible both in terms of price and with our sales and service network, which makes us unique. With our simple, timeless motorcycles, we stand for purposeful longevity, and shun forced obsolescence. That's why Royal Enfield motorcycles have one of the highest resale value in the country.

We continue to experiment with new retail formats and destinations to engage with our customers and those who love our brand. In November 2017, we opened the Garage Cafe in Goa. Reflecting the ‘motorcycling way of life’, the 120-seater Garage Cafe on the banks of the Baga River in Baga, Goa offers a relaxed, unhurried experience and is conceptualised to be an inclusive, engaging space. The Garage Cafe is a one-of-its-kind format that is an amalgamation of the various dimensions of Royal Enfield. The cafe houses a motorcycle museum-and-exhibition area, an exclusive gear store, a motorcycle customisation area and a service bay.

In an effort to allow easier discovery and access to pre-owned Royal Enfield motorcycles, we introduced our first pre-owned motorcycle store - Vintage - in Chennai. A pioneering initiative in the two-wheeler industry, Royal Enfield Vintage will deal exclusively in pre-owned, refurbished and restored motorcycles offering hassle-free sale and purchase experience to consumers. We will be expanding this unique retail format to 10 different locations across the country.

And we continue to strengthen our core retail network. Last year, we added 150 new dealerships in India taking our total retail outlets strength to 825 exclusive stores in the country, making us the strongest premium motorcycle distribution in the country by a large margin.

Our dealers are thrilled with us and are making solid progress too; this was reflected in our recent #1 ranking for dealer satisfaction by J.D. Power among two-wheeler manufacturers. Deeply engaged dealers are the key to our ambition of being number one in Customer Satisfaction - as an enormous part of the customer experience is in the dealership’s purview.

After a very focussed effort over the last many years, we have been ranked #2 among two-wheeler manufacturers in customer service in India by J.D. Power. This is significant progress for Royal Enfield, as we are now ahead of the largest motorcycle manufacturer in the country as well as all the Japanese brands. I firmly believe that we’re on the path to becoming number one and to set the standard for an exemplary ownership experience for our customers.

While Royal Enfield has grown from strength to strength in the last few years, we still believe that there’s enormous potential to grow further. As incomes rise and the aspiration for leisure motorcycling grows in developing markets, especially India, I believe that customers from the commuter segment will continue to upgrade to the middle-weight segment (250cc-750cc) that is dominated by Royal Enfield. More so, from our own surveys, we see that there is an increasing number of people that are directly buying a Royal Enfield as their first motorcycle purchase.

While in some of the more developed states of India, we have an overall motorcycle market share of as much as 20-33%;in the lower income states, it is as low as 2-4%. As incomes rise and distribution penetration increases in these populous states, we see a tremendous potential for growth in these regions.

While we continue to remain focussed on India, we’ve also been expanding beyond our shores, with motorcycles that stay true to our ethos of Pure Motorcycling, appealing to an increasingly higher number of riders across the world. Beyond India, Royal Enfield is now present across 50 countries through a network of over 500 multi brand outlets and 36 exclusive stores, 11 of which were opened in 2017-18.

Subsequent to opening our direct subsidiary in Brazil in 2016-17, we opened our first flagship store in the country in 2017-18. We also opened our first stores in Argentina and Vietnam, and added new exclusive stores in the UK, France, Austria, Mexico, Thailand, New Zealand, Colombia, and Indonesia. To further strengthen the brand and to accelerate market development activities, we have decided to set up wholly-owned subsidiaries in Indonesia and Thailand in 2018-19.

To cater to the continued demand, Royal Enfield began production at our plant in Vallam Vadagal near Chennai, in August 2017. Spread over 50 acres, the Vallam Vadagal plant is Royal Enfield’s third manufacturing facility. I’m extremely pleased to inform you that Vallam Phase-1 was completed in record time and is now running at full capacity, and we have commenced work on building out Vallam Phase-2, which will further augment our capacity.

With a view to enhance our design, engineering, and product development capabilities, we are also completing construction of our Technical Centre in Chennai this year. The Chennai Technical Centre will complement our new and bespoke technical centre located in Leicestershire, UK which we moved into in May 2017. Spread over 36,000 square feet, the UK facility houses more than 120 employees and state-of-the-art equipment and workshop facilities, enabling engineers to develop best-in-class motorcycles and future concepts.

We unveiled our Interceptor 650 and Continental GT 650 motorcycles in November 2017 in Milan to great acclaim at the EICMA show, and thereafter at Rider Mania in Goa. I am confident that the Interceptor 650 and the Continental GT 650 will be an important catalyst and flagship in our home market, where I expect many of our over 2.5 million riders, who have been asking for something more from Royal Enfield, to upgrade to the 650 Twins. The Continental GT and Interceptor are likely to become the mainstream volume drivers in our key international markets.

Continuing to strengthen our motorcycle offerings, we also introduced a number of new variants to our best-selling Classic range of motorcycles including the Gunmetal Grey and Stealth Black versions that added a rear disc brake. These new variants have received an excellent response, as has the new Himalayan Sleet + Explorer Kit edition and the brand new Thunderbird X, tailor-made for urban explorers.

VECV

A strict implementation of a ban on overloading of trucks, a reconfiguration of regional warehouses due to the roll out of GST, and the need for long-haul trucks are driving a transition to higher gross vehicle weight (GVW) trucks. Coupled with increased investment in infrastructure, these measures have helped revive growth in the commercial vehicle industry. Medium duty and heavy duty truck sales led this growth, while the bus segment is still to recover from the pre-buying by State Transport Undertakings and other private players prior to the implementation of BS-IV.

In the high-performance trucks segment, where Volvo Trucks India is the market leader, sluggish demand in the first quarter was attributed to pre-buying ahead of BS-IV deadline. Subsequently, the market gained some momentum in the second quarter but overall industry volumes were 36% lower than the previous financial year.

VE Commercial Vehicles had an extremely successful year with its highest ever sales of 65,932 vehicles, growing 12.5% over 2016-17 volumes. In the domestic market, VECV sold 56,931 vehicles, a growth of 12.6% on the previous year. We achieved our highest ever volumes of 13,427 in heavy duty trucks. In exports, VECV recorded its highest ever volumes of 9,001 vehicles and has been supported by 134% growth in the Middle East and 24% in Africa, along with a 9% growth in South Asia.

VECV is focussing on a few key segments like construction, mining, e-commerce, fruits & vegetables among others, and continue to invest significantly in developing the market for these segments to drive future growth. We continue to retain an 88% market share in the high performance trucks segment (400+ horsepower) and are focussed on targeting mining segments besides quarrying, road construction, and irrigation to continue to drive growth.

We are preparing to introduce the next-generation BS-VI range of trucks and buses and are confident that we will have them in the market ahead of the April 1, 2020 deadline.

With the commencement of operations of our brand new Skyline Pro Electric buses in Kolkata, VECV has reinforced its commitment to greener and cleaner mobility, and joined the league of zero-emission vehicle manufacturers. We plan to have a complete range of electric-mobility solutions for public transportation, offering world-class quality and comfort. We’re also developing an affordable air-conditioned range of buses aimed at bringing superior comfort to public transportation.

We believe there is a high growth potential in the Middle East and Africa and we are developing light and heavy-duty buses for these markets. We have entered the ASEAN market, with sales starting in the first quarter of 2018-19, and began setting up assembly operations in Bangladesh, following the Completely Knocked-Down (CKD) operations in Kenya and Nigeria.

VECV aims to create a differentiated customer experience through aftermarket excellence, and we have also been focussing on various means to improve product quality, including deploying the Volvo Production System (VPS) as a basic operating tool in our plants. We are also deploying new technology and automation to boost quality.

To meet the market demand, we have increased our plant capacity to 84,000 vehicles per annum, and we will continue working on improving productivity in line with utilisation to further increase capacity.

Eicher Polaris Private Limited

In March 2018, the Board of Eicher Polaris Private Ltd. (EPPL), our equal joint venture with Polaris Industries, decided to close the operations of the venture with immediate effect, after multiple attempts at turning around the business were unsuccessful.

EPPL, which was incorporated in October 2012, introduced Multix, India’s first personal utility vehicle in June 2015. Given its unique positioning and differentiated product features, Multix initially generated significant interest from customers. However, the initial interest could not be sustained and the subsequent sales performance was significantly slower than our expectations.

Despite several initiatives, the Company's performance could not be revived. Hence, the Board of EPPL concluded that it was in the best interest of all stakeholders to close the operations of the Company. EPPL is deep in the process of engaging with all its stakeholders including customers, suppliers, employees and channel partners to implement the closure, and will continue to provide spares and service support for the fleet of Multix vehicles on the road.

Consequent to closing down the operations of EPPL, your Company has recorded a loss of Rs. 220 crores of exceptional nature representing the Company's share.

Looking ahead

At EML, we have created a business model that has enabled us to achieve a strong and sustained growth over the years. While we have been on a solid growth trajectory, we are not taking things for granted. We have been focussed on ensuring that all our motorcycles and commercial vehicles will keep our customers delighted.

As we move into the new financial year, we are faced with a number of challenges including meeting the BS-VI emission norms by March 2020, four years ahead of the originally planned deadline, and introducing ABS on all our motorcycles before the regulation deadline of March 2019.

Royal Enfield has earmarked an investment of Rs. 800 crores in 2018-19 in all areas of its business. The investment would be towards setting up additional production capacity at Vallam Phase-2, completing construction of the Technology Centre in Chennai this year, investing towards the development of new motorcycles to meet the upcoming regulations and to expand Royal Enfield’s portfolio for its global markets.

We are committed to being a Company that provides amazing Pure Motorcycling experiences to riders and travellers, and we are looking for new ways to engage with people outside of just selling them a motorcycle. We are going to step up our efforts in rides, events, and community building - so that these act as catalysts for more people to enter the amazing world of motorcycle adventures and journeys, in India and around the world.

In 2018-19, we plan to invest Rs. 500 crores in VECV towards new product development and capacity enhancement. We are continuing our journey to become a world-class CV manufacturer in India and continue to invest in new products and technologies to truly lead the segment.

I would like to thank all our stakeholders for their resolute faith in us. I would like to assure you that we are working tirelessly to make the most of the opportunities coming our way, and to create new ones, to take EML to a new orbit of growth and success.

Siddhartha Lal

Managing Director & CEO
Eicher Motors Limited

* Based on Society of Indian Automobile Manufacturers’ data for B4 category and above