Volume recovery expected ahead; retain Buy
* Q1FY21 revenue declined 66% yoy to Rs8.2bn (estimate: Rs8.6bn). Net loss stood at Rs552mn, better than the estimate of –Rs1.3bn due to lower-than-expected losses in the CV division.
* We expect 2W volume recovery ahead, supported by a healthy order-book, new products and focus on network expansion. We expect a volume CAGR of 10% over FY20-23E. The market share in domestic 2Ws is likely to improve from 3.8% in FY20 to 4.4% in FY23E.
* New products remain a focus area, with expectation of one new model or major refresh every quarter for the next three years to support the widening of addressable customer base in domestic and overseas markets.
* We estimate revenue/earnings CAGR of 14%/17% over FY20-23, with average ROCE of 29%. We retain Buy with a TP of Rs26,727 (Rs19,954 earlier), based on 25x P/E for motorcycle business (20x earlier) on Sep’22E (20x Mar’22E earlier).
What we like? 1) Order-bookings at almost pre-Covid-19 levels. 2) Order backlog at ~45,000 units, and low system inventory of 10,000 units. Wholesales to improve notably over the next few months, supported by a ramp-up in production. 3) Network expansion continues with the addition of 38 studio stores, and target addition remains at least 600 stores in FY21. 4) New product launch is expected around the festive season.
What we did not like? Margin performance was weak in Q1FY21, owing to low scale. Margins are likely to improve ahead, supported by the increase in volumes.
Focus continues on new products: The launch of a new model or major refresh is expected every quarter, in 250-750cc categories over the next three years. Led by introduction of new platforms, there would be opportunity to launch new models, variants and limited editions ahead. A wide bouquet of options have been planned, including cruisers, adventure tourers, bobbers and sporty looking retro bikes, etc.
Increasing domestic reach: Network stands at 1,559 outlets, split between 921 regular stores and 638 studio stores. In the past quarter, 38 new outlets have been added. Expect at least 600 stores to be added in FY21. Presence in rural areas is expected to support brand awareness and sales volumes. Most studio stores are situated 30-60kms from city. Breakeven point stands at 6-8 units per month for these stores.
Maintain Buy: We estimate volume/revenue/earnings CAGR of 10%/14%/17% over FY20- 23E, with average ROCE of 29% and FCF/year of Rs19bn. We retain Buy with a TP of Rs26,727 (Rs19,954 earlier), based on 25x P/E for motorcycle business on Sep’22E (20x Mar’22E earlier). We apply a higher valuation multiple, factoring in volume upcycle and market share gains. We have OW stance in sector EAP. Key downside risks include weak macroeconomic environment, higher competitive intensity and adverse commodity/currency rates.
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