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Product launches continue to be impacted due to external factors

Mr. Dasari (CEO of RE) quits, Mr. B Govindarajan (COO) to take over

* EIM’s performance beat was driven by VECV, while RE was in line with our estimates. Delayed product launches (first due to the second COVID wave and now due to the semiconductor shortage) have shifted the recovery timelines to 2HFY22.

* Mr. Dasari resigns after a stint of over two-years: Mr. Dasari, who joined as CEO of Royal Enfield in Apr’19, has resigned to pursue his passion in affordable Healthcare. Mr. B Govindrajan will now lead RE. He has been associated with RE for over 23 years. He has handled various roles, with the latest being COO.

* We cut our FY22E consolidated EPS by 6% to account for the delayed launch of the new Classic, while maintaining our FY23E earnings estimates. We maintain our Buy rating with a TP of INR3,250 (Mar’23E SoTP).

Higher export contribution drives standalone realization

* Consolidated revenue/EBITDA/PAT declined by 33%/47%/60% QoQ to ~INR19.7b/INR3.6b/INR2.4b.

* Realization for RE grew 15% YoY (+8% QoQ) to INR154.3k (est. INR144.2k) in 1QFY22, driven by favorable mix (high exports) and pricing actions.

* Standalone revenue declined by 35% QoQ to INR19.1b (est. INR17.8b) and gross margin fell by just 30bp YoY to 40.6% (est. 39.7%). Gross profit per unit of ~INR63k was the highest ever.

* Standalone adjusted EBITDA declined by 50% QoQ to INR3.35b (in line). Adjusted EBITDA margin fell 535bp QoQ to 17.5% (est. 18.8%) due to operating deleverage. EBITDA per unit stood at INR27k (v/s INR32.7k in 4QFY21).

* VECV: Realizations declined by 4.3% YoY (+42% QoQ) to INR2.83m (est. INR2.15m). EBITDA margin stood at 1.1% (-780bp QoQ, est. -1%). Net loss stood at INR720m (v/s a PAT of INR1.3b in 4QFY21 and our loss estimate of INR1.1b).

Highlights from the management interaction

* While demand remains good, supply-side issues have impacted ramp-up in production and new product launches. Though it is seeing a step-bystep improvement in supply-chain issues, it expects the semi-conductor shortage to continue to impact over the next few months.

* 1QFY22 saw the best ever exports (+28% QoQ, 83% growth over 1QFY20). International network expansion continues with the addition of eight exclusive stores (to 140) and 19 new multi-brand outlets (to 650) in 1QFY22. It targets to take the exclusive store count to 175 by FY22-end.

* The Retail network spans over 2,000 stores, covering 1,750 cities (~1,033 main stores and 1,038 Studio stores), with the addition of eight/seven main/Studio stores in 1QFY22.

* Cost inflation: After the price hike in Jul’21, it has largely covered the entire cost inflation till Jun’21. Going forward, it expects relatively lower cost inflation.

Valuation and view

Near term uncertainties due to supply-chain issues notwithstanding, the recently launched Meteor and upcoming products would help expand the addressable markets and drive the next phase of growth for RE. The stock trades at 33.5x/21.6x FY22E/FY23E consolidated EPS. We maintain our Buy rating.

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