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Buy Eicher Motors Ltd For Target Rs.2,948 - HDFC Securities

Our Take:

Eicher Motors Ltd. (EML) with a strong established brand ‘Royal Enfield’ has a strong product portfolio and a long operational track record. It has a loyal base of customers and is the market leader in the addressable segment (more than 95% market share in the over 250-cc subsegment) of the Indian two-wheeler industry. The company had invested significantly in its motorcycle business over the past five years for setting up new manufacturing facilities and new product developments; the same were entirely funded through internal accruals. Its debt free and cash rich balance sheet provides adequate liquidity to meet its future capex requirement through internal accruals and available cash balances.

Although the company has had limited presence in the export market for its motorcycles business, the latest addition of 650cc ‘Twins’ to its portfolio (launched in H2FY19) has received a favourable response and has already started aiding in growing the export volumes as reflected in the 96% YoY growth in FY20, albeit on a low base. However, the increasing competition in the mid-size motorcycles segment as evident from recent launches as well as their partnerships with their Indian counterparts, could pose a threat to its sustained dominance over the medium to long term.

The commercial vehicle business has been able to largely maintain its market position in the industry amid industry headwinds on the back of continuous product launches/refreshes, expanding dealer network and targeted marketing efforts over the past few years. The Government’s thrust on infrastructure projects, coupled with the potential implementation of fleet modernisation or scrappage programme, will support demand.

Valuations and Recommendations:

Eicher Motor is a structural story on premiumisation theme in motorcycles. In the M&HCV space, it is well poised to break the duopoly of Tata Motors and Ashok Leyland. Strong execution track record coupled with superior balance sheet provides additional comfort. We expect 4.6% CAGR in revenues over FY20-FY22 driven by 6.2% CAGR growth in realisations. Volumes are expected to decline by 1.1% CAGR as the Covid pandemic would delay discretionary spending by consumers. PAT is expected to grow by 8.4% CAGR on back of demand revival in the CV business. New product launches, network expansion, strong orderbook and possibility of a pick-up in CV cycle all bode well for EML. Investors can buy the stock at the LTP (31.0xFY22E EPS) and add further on declines to Rs 2155-2169 band (27.5x FY22E EPS) for a base fair value of Rs 2751 (35.0x FY22E EPS) and bull case fair value is Rs 2948 (37.5x FY22E EPS) over the next two quarters.

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