Is Eicher Motors Ltd Stock Halal to Invest? Facts You Should Know

Report Published as on 2nd August 2024

We have conducted a comprehensive review on Eicher Motors Limited from a Shariah point of view and analyzed its sources of income to know whether they are complying with Shariah principles.

Eicher Motors Limited is a prominent Indian automotive manufacturer known for its diverse range of products, primarily in the commercial vehicle and motorcycle segments. Established in 1982 and headquartered in Gurugram, India, the company is renowned for its flagship brands, including Royal Enfield and Eicher Trucks & Buses. Royal Enfield, a globally recognized motorcycle brand, is celebrated for its classic and retro-styled bikes that cater to a niche market of motorcycle enthusiasts. Eicher Trucks & Buses, on the other hand, focuses on producing a wide array of commercial vehicles designed for both urban and long-haul transportation, with an emphasis on durability, efficiency, and technological advancement.

Eicher Motors operates through a vertically integrated model, encompassing various aspects of design, manufacturing, and distribution. The company’s operations span multiple facilities, including state-of-the-art manufacturing plants and research and development centers, which contribute to its innovation and product development efforts. Eicher’s commitment to sustainability and efficiency is reflected in its ongoing initiatives to enhance vehicle performance and reduce environmental impact. By continuously investing in technological advancements and expanding its global presence, Eicher Motors aims to maintain its leadership position in the automotive industry while addressing evolving consumer needs and regulatory requirements.

Let’s have a look at the operating segments from which the company derives its revenue and apply the Shariah screens to them:

Segment Breakup: (In millions of USD)

  For the year ended 31^ST December 2023

Segment Breakup

1. Commercial Vehicles & Motorcycles: Revenue from commercial vehicles and motorcycles generally aligns with Shariah principles as long as the products and their use do not contravene Islamic ethics. Eicher Motors’ primary business in manufacturing and selling vehicles falls into permissible activities, provided that the vehicles are not used for activities prohibited in Islam, such as transporting alcohol or engaging in gambling.
2. Profit on Sale of Property, Plant, and Equipment: Profit from the sale of property, plant, and equipment is typically Shariah-compliant as long as the sale does not involve items or assets associated with prohibited activities. In Eicher Motors’ case, the focus on industrial and commercial equipment and property, used primarily for production and business operations, aligns with Shariah principles.
3. Other Income: This category includes various miscellaneous sources of revenue. The compliance of “Other Income” with Shariah depends on its nature. If this income comes from permissible activities, such as investments in Shariah-compliant ventures or rental income from permissible assets, it would be Shariah-compliant. Careful evaluation is required to ensure none of this income is derived from prohibited sources.
4. Grant Income on Soft Loan from SIPCOT: Grants or soft loans provided by government entities like SIPCOT are typically Shariah-compliant, provided the funds are used for purposes that do not involve prohibited activities. This segment should be reviewed to ensure that the usage of the grant aligns with Shariah principles and does not involve interest-bearing loans or financing for non-permissible activities.
5. Change in Inventories of Finished Goods, Work-in-Progress, and Traded Goods: This segment reflects adjustments in inventory valuation. It is Shariah-compliant as long as the inventory itself consists of permissible goods and is used in a manner consistent with Islamic ethics. The primary concern would be to ensure that the inventory items and their utilization do not involve prohibited activities or products.

Tricky Areas in Shariah Compliance For Eicher Motors

Commercial Vehicles & Motorcycles: While the sale of commercial vehicles and motorcycles itself is generally permissible, potential Shariah concerns arise based on their usage. If these vehicles are employed for activities contrary to Islamic principles—such as transporting prohibited items like alcohol or engaging in gambling operations—the revenue from their sale could be problematic. Ensuring that end-use does not violate Shariah principles is crucial.

Profit on Sale of Property, Plant, and Equipment: This revenue segment is typically permissible, but scrutiny is needed regarding the nature of the assets sold. If the property or equipment was previously involved in non-Shariah-compliant activities or if the sale proceeds are used for impermissible purposes, it may raise compliance issues. For instance, selling assets related to prohibited sectors or using the proceeds for non-permissible investments could pose challenges.

Other Income: This category requires careful examination as it may include various sources of revenue. Key concerns include whether any of this income derives from interest-bearing activities or investments in non-Shariah-compliant sectors. Income from financial instruments or ventures that involve interest or unethical practices would be problematic.

Grant Income on Soft Loan from SIPCOT: Grants and soft loans are generally acceptable; however, the conditions and usage of these funds need to be reviewed. The compliance issue arises if the grant or soft loan is used to finance activities or investments that are not Shariah-compliant. Additionally, if the loan involves any form of interest or financial arrangement that does not adhere to Islamic finance principles, it would be a concern.

Change in Inventories of Finished Goods, Work-in-Progress, and Traded Goods: Adjustments in inventory valuation are usually acceptable, but the nature of the inventory must be considered. If the inventory includes items related to prohibited activities or if the inventory adjustments are linked to non-compliant goods, this could raise compliance issues. Ensuring that inventory handling and valuation align with Shariah principles is essential.

Let’s have a look at the non-operating revenue of the company.

Non-operating revenue: 

(All figures in Lakhs of INR for the Year ended 31st March 2023)

It is clear from the table above that the non-operating income of the company include gains on financial instruments and finance income on lease  which is Shariah not compliant. This amount is included for the calculation of the Sector Compliance and Dividend Purification.

Sector Compliance Calculation:

Dividend Purification Calculation:

Financial Ratio Screen:

 (All figures in Lakhs of INR for the Year ended 31^st March 2023)

Source: All the above information is based on the website of the company and the latest Annual Report for the period ended 31^th March 2023.

Conclusion:

Given the above information, we at Islamicly believe that Eicher Motors Limited is Shariah Compliant company as per the Shariah screening criteria.