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In 2QFY23, EIM reported standalone EBITDA margin of 23.7% (+520bps, -60bps QoQ), 100bps below JMFe. Domestic volume increased 11% QoQ on easing supply constraints and strong demand for recently launched Hunter 350. Exports declined 16% QoQ owing to seasonality and macro challenges. Overall demand momentum is expected to continue with expanding distribution network and rising market share in international markets. Management expects the demand build up to remain strong led by more affordable Hunter 350 owing to positive launch reception. Supply constraints are gradually easing. EIM has passed on the current RM inflation through price hikes and with recent softening in RM inflation, margin pressure is expected to be largely behind. 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 ascribe 25x 1-yr forward PE for RE and 12x 1-yr forward EV/EBITDA for VECV to arrive at TP of INR 4,100. Maintain BUY

* 2QFY23 – margin misses estimates: In 2QFY23, EIM reported standalone revenues of INR 34bn (+56%YoY, +5% QoQ), 2% below JMFe, due to lower realisation. Realisation declined 7.5% YoY (-6% QoQ) due to unfavourable model mix. Motorcycle volumes stood at c.208k units (+68% YoY, +11% QoQ). EBITDA for the quarter stood at INR 8bn (+2x YoY, +2% QoQ), 6% below JMFe. EBITDA margin stood at 23.7% (+520bps YoY, - 60bps QoQ), 100bps below JMFe due to higher than expected RM costs and weak model mix. Adj. PAT stood at INR 6.1bn (+2x YoY, +6%QoQ), 3% below JMFe.

* Demand environment: Management highlighted that recently launched Hunter 350 has received strong customer response led by young and first time buyers. The age group 18- 35 contributed c.83% to Hunter 350 sales. Share of first time buyers also increased from 13% to 18% post Hunter 350 launch. Management indicated that cannibalization had limited impact on sales. The company also indicated that supply constraints have receded and it expects the momentum to continue as the demand remains healthy. Overall, RE continues to maintain ~90% market share in +250cc motorcycle segment. EIM reiterated that its product launch pipeline remains strong. It recently unveiled ‘Super Meteor 650’ and expects to start production in 4Q

* International demand: The management indicated that RE’s retail market share in export markets continues to grow. Demand remained strong in North America and LATAM while inflationary challenge has impacted demand in EU. Overall, RE continued healthy quarterly exports (volume +14% YoY) and expects volume run-rate to increase further in the coming months owing to new launches and expansion of retail network globally (175 exclusive stores & 710 MBOs) RE’s market share in middle-weight motorcycle market (currently mid-to-high single digit) has been gradually rising in EMEA, America and APAC driven by network expansion. Management highlighted that RE is currently present in 70+ countries and has large opportunity to grow in these markets.

* Margin outlook: The Company has been consistently taking price hikes to offset RM inflation (INR 3k in 3Q). In addition, higher sales of accessories/spares is also supporting margin. Management indicated that with recent softening in RM cost inflation (benefit from 3Q), gross margin pressure is largely behind.

* VECV performance: VECV reported revenue of INR 42bn (+34% YoY), EBITDA of INR 2.5bn (EBITDAM of c.6%). Management highlighted that CV business is recovering after 3 years and is expected to scale to new peak over next 2 years. VECV continues to outperform domestic industry gaining market share across light & medium duty trucks, heavy duty trucks and bus segment. Focus on expanding distribution network, customer up-time and after-sales service is aiding the market share gains for VECV. In international markets, import restrictions in Bangladesh, Nepal and Sri Lanka have impacted truck sales.

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