Eicher Motors’ Royal Enfield invokes force majeure clause to select vendors

MUMBAI: Eicher Motors, the maker of Royal Enfield brand motorcycles, has suspended payments to a few of its suppliers, invoking what is known as the ‘force majeure’ clause.

The move reflects the acute distress the industry is going through after a nationwide lockdown forced by the Covid-19 virus outbreak resulted in shuttering of manufacturing facilities and dealerships for automobile companies.

“While we are all together in this, we have no choice but to declare this as ‘Force Majeure’ and suspend any/all our contractual obligations,” the company said in a circular to select suppliers late last week.

Given the extraordinary circumstances that have disrupted its business operations (Eicher Motors Ltd’s Royal Enfield unit), the company said it had been forced to take appropriate measures in accordance with mandatory government instructions, protection of health and safety of employees and the pandemic-induced disruption of third parties.

The company clarified that it was unable to determine whether this force majeure – an unforeseen event or circumstance that prevents a company from fulfilling its contractual obligation — would continue beyond the 21-day lockdown.

The company is evaluating all forward-looking contractual commitments given the unprecedented situation – that also with select business partners only – said people in the know.

In an official response, Royal Enfield spokesperson said, the company has not postponed or suspended any payment for material and goods already supplied, and/or services already rendered. The engagement with stakeholders is done in a manner that is contractually provisioned for.

“We have prioritized salary payments to all our employees, and our temporary and permanent workforce. We have not retrenched any workers – temporary, contractual or otherwise. We have honoured all our current contracts and also taken steps to help those vendors / suppliers who might be vulnerable,” added the spokesperson.

To be sure, the company’s liquid cash position has been quite healthy, thanks to its growing volume.

In fact, its investment in mutual funds and fixed deposits grew annually by 47% to Rs 5,896 crore between financial years 2016 and 2019, according to its financial year 2019 annual report.

The company also has trade receivables of just Rs 90 crore on sales of Rs 9,794 crore in the previous fiscal year.

This also shows that pending receivables from debtors has been historically low.

Sales volumes at its most profitable two-wheeler unit have not been encouraging in the current fiscal year, although it had not reached alarming levels to prompt it from holding back payments to vendors.

Royal Enfield sold 14% fewer motorcycles in the first eleven months of the ongoing fiscal year.

The force majeure announcement came as a surprise to some industry observers, as Royal Enfield had already cleared its BS-IV stock and the amount due to vendors was not a sizeable sum.

Eicher Motors enjoys one of the highest profit margins in the industry.

“It seems like a game of who blinks first. With Hero MotoCorp taking the first step of Force Majeure, given the environment, Eicher Motors has joined the bandwagon,” said an executive at a vendor company.

Hero MotoCorp, which is sitting on sizable BS-IV stock, informed its vendors last week that it was invoking force majeure to suspend full payments to vendors, since it had “no visibility of receivables,” with sales coming to a standstill because of the lockdown.

The company told vendors that bill discounting facilities have been withdrawn effective immediately.

It said it would release payments to micro, small and medium enterprises (MSMEs) and suppliers it owes up to Rs 2.5 crore as of March 23 — they will be paid in full as per standard payment terms.

Hero MotoCorp said it made payments up to March 22, adding it would not be able to maintain its track record of timely payments.

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