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Back on the growth trajectory

The core of our SELL thesis on Eicher Motors Ltd (EIM) was pertaining to its ability to expand its customer base (Our report: RE - Bumpy ride to growth). Also, multiple external headwinds including steep vehicle price inflation, supply chain constraints and weak customer sentiment limited volume growth visibility. This led to CAGR 13% volume contraction during FY19-22. Most of these challenges are now starting to recede with correction in commodity prices, strong pickup in export sales, improving customer sentiment in urban and rural markets and the launch of new products. The company has rebooted its focus on volume growth and indicated of multiple new product introductions during the recent investor meet. Our interaction with 15+ RE dealers reflects strong customer response for the Hunter 350. Footfall and enquiries were up by 15-20% during Aug’22, with c.50% of enquiries from new (young) customers. Dealers expect demand momentum to rise further during the upcoming festive season. With the improvement in underlying demand sentiment and product interventions, we believe the company is back on the growth trajectory (FY22-25E volume CAGR: 21%). Softening commodity prices and positive operating leverage is expected to provide margin support (+540bps over FY22-25). We reinstate PE multiple for RE to 25x (from 18x) and upgrade our rating to BUY with the revised TP of INR 3,900.

* Sharp rise in initial acquisition price led to sub-par sales: During the Covid period, different segment of the auto industry behaved differently. Rise in the initial cost of acquisition (due to emission and safety related regulations) (Exhibit 2 & 3) coupled with sales slowdown affected the two-wheeler segment (Motorcycle CAGR: -13% for FY19- 22). During the same period, RE took 13 product actions, including both new models and variants. However, the 350cc+ segment still contracted in-line with the overall motorcycle segment (CAGR: -13%). While Himalayan and Meteor launches improved monthly sales by 4,000 units for the relevant product families but they were unable to offset the volume contraction in the mainstream Bullet/Classic (Exhibit 5). Additionally, supply constraints restricted RE’s ability and led to sub-optimal c.50-60% capacity utilization.

* New launches (including affordable products) to address growth concerns: To address the growth challenge and to increase customer accessibility for the RE brand, the company recently introduced Hunter 350, its most affordable product to date to recapture the price point of INR 150,000 (Exhibit 6 & 7). During the recent investor meet, the company shared its vision to enhance growth and to ‘ReBalance’ growth and profitability. Moreover, RE is expected to launch multiple new products going forward positioned at aspirational, first-time RE buyers to drive volumes going ahead.

* Strong response to Hunter 350: Over the past few days, we interacted with c.15+ RE dealers at a pan-India level to gauge the customer response towards the recently launched Hunter 350 (Exhibit 1). Both, dealer and customer feedback, for the new product has been positive. Most dealer healthy double-digit growth during Aug’22 led by strong enquiries and demand for the product, despite likely cannibalization of c.20% in Classic 350 volumes owing to attractive price point. Waiting period for Hunter 350 stands between 4-6 weeks. Dealers indicated increase in walk-in by new set of younger customers and expect demand momentum to continue on the back of strong enquiries.

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