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In-line; RE in-line; strong operating performance in VECV

Good demand recovery for RE, led by Meteor; VECV gaining share

* Eicher Motors (EIM)’s 3QFY21 performance was in-line, supported by good volume recovery in both RE and VECV. Despite cost inflation (BS6 & precious metals), EBITDA margins per unit were stable YoY. a) Good response to Meteor, b) the upcoming launch of the new Classic, and c) normalized production would support RE volume recovery going forward. VECV is also firmly on the recovery path.

* We upgrade FY22 consol. EPS by 17% as we upgrade volumes and margins for both RE and VECV. Maintain Buy, with TP of INR3,275 (Mar’23 SOTP).

RE – EBITDA/unit stable despite cost pressures

* Consol. revenues/EBITDA/PAT grew 19%/13%/7% YoY to ~INR28.3b/INR6.7b/INR5.3b. 9MFY21 consol. revenues/EBITDA/PAT declined 16.8%/34.4%/46% YoY.

* RE 3QFY21 realizations grew 8.6% YoY (-0.4% QoQ) to INR140.4k, driven by price hikes taken for BS6 and in Sep’20 (1–1.5%).

* S/A gross margins declined 440bp YoY to 40.9% (est. 42%) on higher commodity cost (impact of 80–100bp) as well as the BS6 cost impact. EBITDA grew 11% YoY to INR6.6b (v/s est. INR6.76b). Although EBITDA margins declined 170bp YoY (+70bp QoQ) to 23.5% (v/s est. 23.9%), per unit EBITDA was stable YoY at INR33k (v/s INR32.6k in 3QFY20).

* VECV EBITDA margins were at 8.6% (+220bps YoY, v/s est. 8.1%). PAT grew 94% YoY to INR580m (v/s est. INR707m).

Highlights from management commentary

* RE is seeing good demand recovery across the country, driven by Meteor. Overall bookings are stronger than last year. Even matured markets such as Tamil Nadu and Maharashtra are reviving. The share of the Top-20 markets is now back at 25% (v/s 20% during COVID and 27–30% pre-COVID).

* Distribution expansion continued with the addition of 43 large stores and 129 studio stores in 3Q, taking the total number of outlets to 1,889 (spanning 1,550 cities). It plans to add 600 stores in FY21 (368 adds in 9MFY21).

* The Meteor booking trend has been 1.5–1.7x higher than Thunderbird, and it has not cannibalized any other model.

* With improved production, the waiting period has reduced (~1 month). While there are some niggles on the supply side, it is not facing any material constraints (not even related to semi-conductor availability).

* RM cost saw an impact of 80–100bp in 3Q due to commodity cost inflation. The 2–3% price increase taken in Jan'21 and Feb'21 would partly take care of the cost inflation expected in 4Q.

Valuation and view

* We believe the recently launched Meteor and upcoming products would help expand addressable markets and drive the next phase of growth for RE. The stock trades at 29.7x/23.7x FY22E/FY23E consol. EPS. Maintain Buy.

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