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Above est; price hike led cost recovery drives margin

Expects Hunter 350 to usher in new customers globally

* EIM’s 1QFY23 performance was above our estimates, led by lower than expected cost inflation. Easing supply chain issues and continued expansion of the product portfolio will aid the domestic recovery and support a ramp-up in exports.

* We increase our FY23/FY24 consolidated EPS estimate by 3%/5% to reflect easing commodity prices and operating leverage. We maintain our Buy rating with a TP of INR3,600/share (Sep’24E SoTP).

EBITDA margin expands due to stable RM cost and lower other cost

* Consolidated revenue/EBITDA/PAT grew 72%/129%/157% YoY to ~INR34b/INR8.3b/INR6.1b.

* RE volumes grew 51% YoY (flat QoQ). RE realizations improved by 12% YoY (~1% QoQ) to INR173.5k/unit (est. INR174.2k).

* Standalone gross margin improved by 210bp YoY (flat QoQ) to 42.7% (est. 41.7%), benefitting from stable RM cost and price hikes. EBIDTA margin improved by 680bp YoY and 70bp QoQ to 24.3% (est. 23%), further benefitting from lower other expenses (down 110bp QoQ and 60bp YoY).

* VECV: Realizations fell 20% YoY, but grew 1% QoQ to INR2.25m (inline). EBITDA margin fell 140bp QoQ to 5.3% (est. 5.6%), likely impacted by higher steel cost. Net profit fell 38% QoQ to INR620m (est. INR570m)

Highlights from the management commentary

* Hunter 350, launched at a very accessible price, is expected to usher in customers who weren't buying RE. It is a light and easy to manage Motorcycle, targeting younger customers in urban India.

* Inquiries are very good, but conversion was a tad weaker in the last 30- 40 days. The launch of Hunter will aid conversion. With the easing of supply-chain issues and no major challenges foreseen, it expects sustained growth in coming quarters.

* RM cost is expected to remain stable. It has largely passed on the entire cost inflation after the 1QFY23 price hike of ~INR3k/INR5k per unit for 350cc/650cc Motorcycles.

* Improving mix (exports and non-Motorcycle sales) and stable commodity prices should drive margin improvement, diluting the impact of potentially lower margin on Hunter.

Valuation and view

* An improving supply-side, product launches, and ramp-up in exports will drive the next phase of growth for RE. This, coupled with stable commodity prices, will support margin and drive earnings growth.

* The stock trades at 28.9x/20.9x FY23E/FY24E consolidated EPS. We maintain our Buy rating with TP of INR3,600 (Sep’24E SoTP).

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