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Easing supply chain, ramp-up in exports to drive growth

Exports are ramping-up very well in both RE and VECV

* The performance miss in EIM was led by lower realization and launch/event related marketing spends. With supply chain issues showing some signs of improvement, the management expects volume performance to be better in FY23. A focus on exports and revenue from accessories is helping RE improve its realization.

* We lower our FY22E/FY23E consolidated EPS by 3%/11% to reflect launch/event related costs and lowering of volume assumptions. We maintain our Buy rating with a TP of INR3,050/share (Mar’24E SoTP).

Lower exports hit realization, launch/event cost hurt margin

* Consolidated revenue/EBITDA/PAT grew 2%/-13%/-14% YoY to ~INR28.8b/ INR5.8b/INR4.2b. The same grew 23%/23%/30% YoY in 9MFY22.

* Realizations for RE grew 19% YoY to INR167.4k (est. INR175k) in 3QFY22. The QoQ decline is due to an adverse mix (lower export contribution).

* Standalone revenue grew 1% YoY to INR28.4b (est. INR29.75b), while gross margin declined by 110bp YoY to 39.8% (est. 39.5%). Standalone EBITDA fell 12% YoY to INR5.8b and EBIDTA margin declined by 300bp YoY to 20.5% (est. 20.6%). Despite a 37% QoQ volume growth, EBITDA margin improved by just 20bp. It incurred ~INR600m (~210bp) for the launch of the new Classic and cost related to its 12th anniversary event. Lower other income further restricted standalone PAT to ~INR4.2b (est. INR4.6b), a decline of 14% YoY.

* VECV: Realizations declined by 8% YoY to INR2.3m (est. INR2.1m). EBITDA margin stood at 6.7% (est. 5.6%), driven by operating leverage. Net profit stood at INR657m (est. INR310m).

Highlights from the management commentary

* Demand update: Demand remains good, with a healthy order book. Supported by the New Classic, booking rates are improving on a MoM basis.

* Semiconductor shortage: It has added two more suppliers to address the semiconductor shortage, which is helping ease supplies. It expects a gradual improvement in production from hereon.

* RE exports have seen strong traction, with 57% growth and strong demand across geographies, driven by product launches (650cc twins, Meteor, and the new Classic), network expansion (156 exclusive stores from nil in six years), and a brand building exercise. It has started a CKD assembly facility in Thailand. It now has three such facilities outside India in Argentina, Columbia, and Thailand.

* VECV commands over 50% market share in the LMD CNG segment. Its market share in the HD segment stands at 8% (v/s 6.9% in FY21). Exports are seeing strong growth (+72% YoY in 3QFY22), driven by the addition of markets in South Africa, LatAm, and the Middle East.

Valuation and view

Near term uncertainties due to supply chain issues notwithstanding, the recently launched Classic 350 and upcoming products will help expand its addressable markets and drive the next phase of growth for RE.

The stock trades at 24.2x/19.3x FY23E/FY24E consolidated EPS. We maintain our Buy rating with TP of INR3,050 (Mar’24E SoTP).

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