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Below are Views On RE aims to become a USD5b global company By Mr. Vinod K. Dasari, CEO, Royal Enfield, Motilal Oswal Financial Services Ltd 

RE aims to become a USD5b global company

Strong product pipeline over the next 5-7 years and exports to drive growth

RE banks on strong brand equity, new product launches, and exports for growth

* RE aims to become a USD5b global company. The management has a clear focus on cruiser biking in both the domestic and export markets. It has a strong pipeline for the next 5-7 years, with a new launch every quarter. The Meteor was the first product launched in Nov’20 and the new Himalayan was launched in Feb’21.

* With the new Meteor seeing a healthy response, all of RE’s recent product launches have been a success (Himalayan, 650cc twins, and Meteor). The upcoming new product launch of the new Classic (soon) on a brand-new platform would expand its product portfolio and narrow the gap in product quality vis-à-vis the 650cc twins, but substantially expand the addressable market in India and globally.

* Debottlenecking of production: The Meteor launch has added one more platform to the existing UCE of Himalayan and the twins. (Earlier, Thunderbird was produced on the UCE platform only). With increased number of operations, the company is working on debottlenecking its production. It has acquired land near its Vallam Plant, Tamil Nadu to shift some operations like machining etc. to increase capacity utilization.

* Digitization: RE’s digitization program got its biggest push during COVID-19. Online enquiries now constitute over 50% of total enquiries (v/s 10% during pre-COVID) and over 90% of Meteor bookings are through its MIY platform.

* Increasing share from customers’ wallet: Currently, RE share is just 30% in the accessories market, leaving ample opportunity for growth. The launch of Meteor on its MIY platform has boosted accessories sales. With all upcoming launches on its MIY platform, RE expects a significant increase in market share in accessories.

* Eyes huge opportunity in the export market, to fully play out in the next few years - The management sees great opportunity in the international mid-size Bike market. The success of the 650 twins reflects and reinforces confidence in RE’s export strategy. It is expected to grow further with new launches such as Meteor, international product quality, and plans to launch its complete portfolio globally in due time.

* RE is targeting 10% market share in mid-size Bikes in the export market and has already crossed the landmark in Korea and Australia.

* Currently, export margin is well above domestic and the management wants to keep that way. It has started its first offshore CKD plant in Argentina during Sep’20 and plans to set up three new plants in Thailand, Brazil, and Columbia

Valuation and view

* Demand is back to pre-COVID levels at RE and is expected to improve going forward on the back of new launches and ongoing expansion in international markets. After witnessing severe headwinds over the last 18 months, we expect volumes to grow from here on. The beginning of new launches could be an inflection point for RE as a completely new and improved platform could usher in a revival. VECV will see a cyclical recovery in volumes and profits, in turn boosting consolidated PAT CAGR to 22%. The stock trades at 26.5x/21.1x FY22E/FY23E consolidated EPS (v/s 10-year average P/E of 26.6x). Maintain Buy with a TP of ~INR3,275 per share (Mar’23E based SoTP).

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