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Eicher Motors’ (EIM) Q3FY23 EBITDA margin at 23.9% was up 20bps QoQ, with gross margin (GM) expanding 20bps QoQ despite this being the first full quarter witnessing sales of the newly-launched, lower-priced, model Hunter. 7% QoQ
higher volumes with 1% contraction in ASP helped RE deliver 6% QoQ revenue growth and support EBITDAM in terms of operating leverage. With benefits of raw material contraction and price hikes yet to trickle into the GM fully, we believe,
with stable mix of Hunter in volumes and launch of Meteor 650 in Q4, both ASP and GM would be on an upward trajectory from Q3 levels. With new launches planned in FY24, across 350cc / 450cc / 650cc platforms, along with improving chip supply, we are building-in average monthly volumes at 79k units for FY24E, implying growth of 12% YoY. Export markets are going through a tough phase forall 2W players including RE. Thus, instead of 10k+ units a month a year back, RE is currently exporting ~7k-8k units per month. Exports are expected to revive circa mid-FY24, in sync with commentary of other key 2W exporters. We are building-in EBITDAM of ~25% for FY24E. Maintain BUY on EIM with a revised DCF-based target price of Rs3,743 (earlier: Rs3,938), implying 25x FY25E EPS.

Key highlights of the quarterly conference call and our views:

*With brand Hunter retailing ~15k-18k units per month, RE is able to expand its target audience to the 125-150cc market users looking for an upgrade. With gradual price hikes over its initial pricing, RE is strategically building up the brand scale while bringing it closer toward the portfolio-level margin, without requiring to invest toward capacity addition. On the other side, with Meteor 650cc and other refreshes set to come, including Himalayan refresh, we believe the ASP decline in past couple of quarters from ~Rs172k/unit levels to ~Rs162/unit would start reversing from coming quarter itself. Additionally, weaker exports are built into the volume mix currently, which post revival would also add to the blended ASP and subsequently GM.

* RE delivered ~31% market share in the 125cc+ domestic motorcycle segment in the first three quarters of FY23 combined vs ~29% in FY22, thus signifying its being the prime beneficiary of 2W premiumisation in India. With TCO inflationary pressures easing off from the highs of FY22-end, 2W market is expected to revive from FY24, with rural demand set to reverse. Thus, with rural market dominated states with decent contribution for RE (e.g. UP, Rajasthan, West Bengal, Madhya Pradesh) potentially reviving, RE can benefit from demand growth in FY24E we believe, over and above its stronghold in key urban markets like Karnataka, Maharashtra, Kerala, Delhi, etc.

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