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Published on 26/11/2019 11:32:58 AM | Source: ICICI Securities Ltd

Buy Eicher Motors Ltd For Target Rs.25,748 - ICICI Securities

Strong play on discretionary demand revival

Eicher Motors’ Q2FY20 standalone result was ahead of consensus estimates as ASP came in higher at Rs~131k/vehicle (2.2% QoQ), while EBITDA margin was softer (gross margins slipped 43 bps) at 25.0%. PAT grew ~15% aided by corporate tax reduction and higher other income. We continue to like Eicher Motors primarily due to its Royal Enfield (RE) franchise as an Indian premium motorcycle manufacturer with capabilities to make global markets’ meaningful share of revenue (“650-twins” success a case in point). We believe the current demand slowdown has affected discretionary demand in autos, could probably need a few quarters more to normalise. However, we like RE’s enhanced customer focus is reflecting in product initiatives (650 twins, Bullet-X) and focused marketing (linguistic approach, small format stores). We maintain our BUY rating.

* Key highlights of the quarter: Eicher Motors reported only ~9% revenue decline even as volumes dropped drop ~21% as ASP continued to rise (14.5% YoY/2.2% QoQ). ASP rise has been driven by a) price changes due to regulatory compliance, b) favourable mix with rising revenue contribution of 650cc twins. RE has kept production lower than wholesales to limit inventory and smoothen BS-VI transition.

* Key concall takeaways:

a) Management indicated that demand in the quarter had been affected by slower recovery but demand for new launches of Bullet X has been strong from key states e.g. Kerala, Punjab;

b) RE has worked extensively to expand its reach with the new studio store format setting up 500 stores in H1FY20 (delivering 8-10 units per month);

c) “650 twins” demand remains very strong in domestic market and the category has expanded 4X since its launch;

d) exports grew 161% YoY at 12.6k units driven by strong demand from 650cc twins and Himalayan;

e) RE is expanding reach with 57 exclusive stores across 20 countries (added three stores each in France, Thailand and one store in Italy, Brazil and Argentina in Q2FY20); will start exports of Twins and Himalayan to Latin America and APAC region and

f) festive demand was stronger than expected, dealers in many regions are facing stock outs as inventory levels remain low

* Maintain BUY: We believe recent trends (strong orderbook for “650cc twins” / healthy festive season/low inventory) do provide some signs of optimism for RE. Over medium- to- long term, we believe, the trend of premiumisation will increase in 2Ws albeit at a slower pace vis-a-vis PVs. We believe rising financing penetration is likely to aid affordability for consumers and RE’s strong brand positioning across premium price points positions it as one of the likely winners. We raise our EPS estimates for RE by ~6.7%/5.7% for FY20E/21E (model ~15% EPS CAGR FY18- 22E), while maintaining our multiple at 22x Sep’21E EPS. We maintain our BUY rating on the stock with a revised target price of Rs25,748 (earlier: Rs22,033)

 

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