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Steady Qtr; New Launches and growth focus to drive performance

In 3QFY23, EIM reported standalone EBITDA margin of 23.9% (+340bps, +20bps QoQ), 20bps below JMFe. Domestic volume increased 10% QoQ on easing supply constraints and strong demand for recently launched Hunter 350. Exports declined 22% QoQ owing to macro challenges. Overall demand momentum is expected to continue with expanding distribution network and rising market share in international markets. Management expects the demand build up to remain strong led by the affordable Hunter 350 model. Supply constraints have largely receded. EIM took price increases during 3Q to offset inflationary pressure. With recent softening in RM inflation, margin pressure is expected to be largely behind. With the improvement in underlying demand sentiment and product interventions, we believe the company is back on the growth trajectory (FY22- 25E volume CAGR: 20%). Cost control initiatives and positive operating leverage is expected to support margin performance. We ascribe 25x 1-yr forward PE for RE and 12x 1-yr forward EV/EBITDA for VECV to arrive at TP of INR 4,100. Maintain BUY.

* 3QFY23 – margin broadly in-line: EIM reported standalone revenues of INR 35.9bn (+27%YoY, +6% QoQ), broadly in-line with JMFe. Realisation declined 3% YoY (-1% QoQ) due to unfavourable model mix. Motorcycle volumes stood at c.221k units (+31% YoY, +7% QoQ). EBITDA for the quarter stood at INR 8.6bn (+47% YoY, +6% QoQ), inline with JMFe. EBITDA margin stood at 23.9% (+340bps YoY, +20bps QoQ), 20bps below JMFe. PAT stood at INR 6.8bn (+61% YoY, +11%QoQ). 7% above JMFe

* Demand environment: : Management highlighted Hunter 350 continues to receive healthy customer traction led by young buyers. Management indicated cannibalization had limited impact on sales. Supply constraints have largely receded and wholesale momentum is expected to continue as the order book remains healthy. RE’s market share in >125cc stand at c.33% during 9MFY23 (vs. 28.7% in FY22). EIM reiterated that its product launch pipeline remains strong. The company has recently entered in partnership with Stark Future to collaborate on R&D for electric motorcycles. Recent launched ‘Super Meteor 650’ has been received well by auto experts and media.

* International demand: Export volumes remained steady during 3Q (+2% YoY) and RE’s retail market share continues to grow. Export of Hunter 350 commenced during 3Q and company expects volume run-rate to increase in the coming months owing to new launches and expansion of retail network globally (187 exclusive stores & 760 MBOs). The company recently inaugurated CKD assembly unit in Brazil and also plans to set up similar facilities in Nepal and Bangladesh to expand its global footprint. RE’s market share in middle-weight motorcycle market (currently mid-to-high single digit) has been gradually rising in EMEA, America and APAC.

* Margin outlook: : RE has taken consistent price hikes to offset RM inflation (INR 3k in 3Q). In addition, higher sales of accessories/spares is also supporting margin. BS6 phase-2 transition is expected to increase cost by 3-5%. However, softening RM costs and better operational efficiencies is expected to support margins going ahead.

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