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Expect swift volume recovery from Q2FY22; retain Buy

* Q4 adjusted EBITDA margin stood at 23.3%, marginally above the estimate of 22.8%. The impact of commodity inflation has been passed on to customers and Gross profit per unit has largely sustained at similar levels of ~Rs59,000 for both FY20 and FY21.

* Management expects a swift volume recovery from Q2FY22, led by a healthy order book and new products. Production is expected to increase to 80,000 units per month in coming months as supply challenges ease.

* We reduce FY22/23 EPS estimates by 8%/4% to Rs99.1/Rs129.4 due to lower volume and margin assumptions. We introduce FY24E EPS of Rs155.3, factoring in volume growth of 10% and EBITDA margin of 27.6%. Following the revision, we expect revenue/EBITDA CAGRs of 25%/38% over FY21-24E.

* New products remain a focus area, with expectation of one new model or major refresh every quarter. Retain Buy with a revised TP of Rs3,180 (Rs3,300 earlier), based on 25x P/E for the motorcycle business and 20x P/E of the CV business on FY23 estimates.

What we like?

1) Led by a healthy order book, monthly production capacity for Meteor has increased from 8,000 units to 15,000 units. 2) Several new models are in the pipeline, and one new model or major refresh will be launched every quarter. FY22 is expected to see the highest number of launches. 3) In FY21, EIM added 104 large stores and 430 studio stores, taking the total store count to 2,056. Both large and studio stores are in excess of 1,000 each. 4) Focus is on customization and accessories. Penetration of the MIY (Make-it-yourself) option stands at ~80% and accessories penetration has increased to ~70%.

What we did not like?

Lockdowns and supply chain challenges relating to electronic components are impacting production in the near term. Production levels should improve to 80,000 units per month in subsequent months as supply challenges ease.

EBITDA margin slightly above estimates:

Considering a low base in Q4FY20, results have been compared with Q4FY19 (2-year CAGR). Revenue grew at an 8% CAGR to Rs29.4bn (est.: Rs29.7bn). 2W volume grew at a 1% CAGR and realization increased at a 7% CAGR. Adjusted EBITDA margin contracted to 23.3% from 27.4% in Q4FY19 (est.: 22.8%). Adjusted margin has been calculated after removing one-offs relating to forex losses on loans at the Brazilian subsidiary (loan is being repaid in Q1FY22) and provision relating to advances given to a vendor (who has filed for NCLT). These items are not expected to continue next quarter. Overall, adjusted PAT grew at a 2% CAGR to Rs5.6bn (est.: Rs5.7bn). The share of profit from associates declined by 4% CAGR to Rs690mn.

Maintain Buy:

We build in revenue/EBITDA CAGRs of 25%/38% over FY21-24E, with average FCFs of Rs26bn/year. Retain Buy with a revised SOTP-based TP of Rs3,180 (Rs3,300 earlier), based on 25x P/E for the motorcycle business and 20x P/E of the CV business on FY23 estimates. Key downside risks include weak macro-economic environment, failure of new products, higher competitive intensity and further increase commodity rates.

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