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In line operational performance

Eicher Motors’ (EIM) Q2FY23 EBITDA margin at 23.3% was down 112bps QoQ due to 154bps QoQ gross margin (GM) contraction on account of rise in Hunter mix. Launch of Hunter-350 has served as a lighter and cheaper model to attract new customers to RE brand (26% first-time buyers). With Hunter-350 creating marginal cannibalisation to the rest of portfolio, we are estimating RE to clock average volume of 80k units/month in the rest of FY23. Declining input commodity prices, strong orderbook and securing of chip supply to help RE scale up ahead, and in turn improve profitability in coming quarters. We are building in 877k/980k units in FY23/FY24E with EBITDAM of 25%/27% to arrive at a revised DCF-based target price of Rs3,938 (earlier: Rs3,795), implying 27x FY24E EPS. We maintain ADD on the stock.

Key highlights of the quarter:

* Brand Hunter, the latest addition to RE portfolio, has already retailed more than 50k units so far with marginal cannibalisation to the existing portfolio. Though Hunter-350 volumes have impacted the blended ASP for the quarter by 6%, incremental price hike of Rs3k from Nov’22 and launch of new Meteor-650 in CY23 is expected to help RE resume the ASP uptrend Q4 onwards.

* Introduction of Hunter-350 has helped improve the share of first-time buyers for RE from 13% to 18% in Q2 (with 26% Hunter sales from first-time buyers). RE also improved its share in the 125cc+ segment to >30% during the festive season. In terms of demographic, 40% of Hunter sales came from the age group of 18-25 years while 43% came from 26-30 year age group.

* RE is yet to benefit from declining RM prices and thus, was unable to protect gross margin from declining due to rising sales of Hunter. However, the same should be visible from Q3 and gross margin should start improving Q3 onwards with price hikes and commodity price decline benefit seeping through.

* RE’s EBITDA margin of 23.3% in Q2FY23 was after absorbing peak raw material costs. With improving mix (even within Hunter sales) and price hike taken of Rs3k along with stable commodity prices and outlook on chip supply, management is looking forward to margin expansion with operating leverage improvement set to cushion a slight margin dilution due to Hunter pricing.

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