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Below est; Hunter-led mix hurts ASPs, margins

Hunter bringing in new customers without much cannibalization

* EIM’s 2QFY23 operating performance was adversely impacted by a weaker mix (first quarter of Hunter sales and lower exports). The benefits of softening RM costs should start reflecting from 3QFY23 onwards. This, coupled with easing supply chain pressures and continued product expansion, will aid domestic recovery and support ramp up in exports.

* We tweak our EPS estimates for FY23E/FY24 (down 2%/up 4%), as we wait to see Hunter’s impact on volumes, ASPs, and margins. We reiterate our Buy rating on the stock.

Weaker mix, high commodity cost hurt REs performance

* Consolidated revenue/EBITDA/PAT in 2QFY23 grew 56%/75%/76%, respectively, to INR35.2b/INR8.2b/INR6.6b, and 1HFY23 grew 64%/98%/108%, respectively.

* 2QFY23 RE volumes grew 68% YoY on a low base, while ASPs declined 7.5% YoY to INR163.5k/unit (vs est INR173.9k) due to a weaker mix.

* Gross margins were flat YoY (down 160bp QoQ) to 42.4% (vs est 43.1%). However, operating leverage benefits led to EBITDA margin expansion of 240bp YoY (down 120bp QoQ) to 23.3% (vs est 24.1%).

* VECV Share of PAT was above estimate at INR441m (vs est INR417m) in the quarter. Higher ‘other income’ boosted adj. PAT to INR6.6b (vs est INR6.9b).

* VECV: Volume/realizations growth of 16%/15% YoY led to 34% YoY revenue growth at INR42.2b (est INR39.8b). EBITDA margin expanded 50bp YoY (up 60bp QoQ) to 5.9% (est. 6.3%) in 2QFY23. Net profit stood at INR811m (v/s est. INR766m, 2QFY22 at INR177m) in the quarter.

Highlights from the management commentary

* Hunter has lived up to expectations of attracting new customers and generating incremental volumes. There is negligible cannibalization, with only 6% of Hunter buyers being existing RE customers. Hunter has brought in younger customers, with 40% in the 18-25 years age group and 43% in the 26-30 year age group. Post Hunter launch, the share of first-time buyers in RE has expanded to 18% (from 13% pre-Hunter). Since the launch in Apr22, the company has sold 55k units of Hunter and it is yet to offer a test ride in 30% of the domestic market.

* Domestic demand in core 350cc segment (ex of Hunter) witnessed growth during the recently concluded festive season. It has plans to launch refreshes for several existing products.

* Profitability assumption for Hunter was based on a) near-peak commodity prices, and b) a certain mix of Retro vs Metro (premium) variant, which is so far in favor of the Metro variant. Further, the company has increased prices by ~INR3k/unit for Hunter. Also, margins in exports will be higher and Hunter is expected to be gradually launched in the export market from Nov’22 onwards.

Valuation and view

* Improving supply side pressures, new product launches, and ramp up in exports are expected to drive the next phase of growth for RE. This, coupled with stable commodity prices, will support margins and drive earnings growth.

* The stock trades at ~34.1x/23.1x FY23E/FY24E consolidated EPS. We reiterate our Buy rating on the stock with a TP of INR4,150 (Dec’24E SoTP).

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