Published on 7/12/2019 10:48:19 AM | Source: Motilal Oswal Ltd

Buy Eicher Motors Ltd For The Target Rs.25,000 - Motilal Oswal

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Preparing for next leg of growth

Eicher Motors (EIM) owns one of the oldest motorcycle brands in the world – the Royal Enfield (RE) – a brand that is also the market leader in the Indian super premium motorcycle (>250cc) category. It also has a JV with Volvo for the commercial vehicle business in India.


Worst seems behind, expect recovery from 2HFY20:

RE is witnessing demand weakness for the first time since its renaissance in 2008, as it is in perfect storm with weak industry environment, substantial cost inflation and a new competitor. After witnessing severe headwinds over last 12 months, we expect volumes to recovery gradually from hereon. The company is now focusing on expanding its addressable market size by

(a) improving its product quality,

(b) launching new products,

(c) expanding dealerships (in sync with capacity expansion), and

(d) driving a paradigm change in its retail identity, which in turn should improve growth sustainability.


Strategy execution underway…

 Post Mr. Dasari coming on board as the CEO, the company has renewed its strategy to expand RE sales by

(a) expanding its distribution network (through smaller format stores),

b) price laddering (offering multiple 'trim' levels), and

(c) mass customization. We are seeing credible progress in all the three areas.


…To reflect in volumes/performance in due course:

The initiatives are expected to gradually reflect in volume recovery over the next 3-6 months, as industry-wide headwinds recede. Unlike other 2W players, RE is better placed in terms of

(a) inventory, which is at 2.5-3 weeks v/s 5-7 weeks for other players, and

(b) impact of BS6, which is at 5-7% for RE v/s 10-12% for other players.


650cc Twins ramping up well for India/exports:

Recently, the company launched 650cc Twins, which ramped up to 4,570 units in Oct’19 (~1.7k in India and ~2.8k in exports). In India, the waiting period for the 650cc Twins is 3-4 months.


BS6 transition – second inflection point for Classic/Thunderbird?:

The BS6 transition is expected to address questions surrounding product fatigue, as the current Classic platform is 11 years old. We believe that the BS6 transition would be an inflection point for the Classic/Thunderbird; with a completely new and improved platform, it should significantly raise the quality of the Classic/Thunderbird.


Volumes & valuations nearing bottom:

We are estimating ~13% decline in FY20 volumes to ~719k (implying residual run-rate of ~60k/month) and ~15.6% growth in FY21 to ~832k (v/s 826k in FY19). FY21 volumes should be driven by the upgraded Classic/Thunderbird and the success of the 650cc Twins in India and the export market. The stock is now trading at 30.1x/23.7x FY20/FY21 consol. EPS, which is at ~22% discount to its 5-year average P/E and is factoring in the moderate volume recovery (and 450bp decline in margins from peak). Buy with TP of INR25,000 (Sep’21 SOTP-based – 22.5x S/A EPS + VECV @ 10x EV/EBITDA).

Risks: Prolonged weakness due to BS6 related cost inflation coupled with increase in competitive intensity could lower EIM’s growth potential.


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