IGI Logo

Steady outlook, gradual margin recovery under way

About the stock: Eicher Motors (EML) is the market leader in the >250 cc premium motorcycle segment (market share ~85%+) through its aspirational models under the Royal Enfield (RE) brand, such as Bullet, Classic, Interceptor among others.

* Via its JV with Volvo i.e. VECV (EML has 54.4% stake), the company has a presence in the CV space as well (6.6% FY22 market share)

* Strong net cash positive b/s with healthy return ratios metrics

Q3FY23 Results: Eicher posted a mixed performance in Q3FY23.

* ASPs at RE, profitability at VECV arm surprised positively while operating margins disappoint at 23%, down 30 bps QoQ (gross margin down 60 bps)

* Consolidated revenues were at | 3,721 crore, up 5.7% QoQ ? Consequent consolidated PAT was at | 741 crore, up 12.8% QoQ

What should investors do? EML’s price has grown at ~4% CAGR over the last five years (from | 2,732 levels in February 2018), in line with the broader Nifty Auto index.

* We retain BUY rating on the stock amid RE driving premiumisation play in 2-W space with healthy double digit volume growth on anvil driven by new launches including affordable Hunter 350 & ongoing CV cyclical upswing

Target Price and Valuation: Introducing FY25E, we value EML at | 4,065 on SOTP basis (i.e. 30x PE to RE business & 30x PE to VECV business on FY24-25E average)

Key triggers for future price performance:

* With dominant position in >250 cc segment, healthy response to Hunter 350, exploration of EV opportunity in premium motorcycle space & global ambitions, we expect RE volumes to grow at 21% CAGR over FY22-25E

* Capabilities showcased in alternate fuel technologies domain like BEV, fuel cells, CNG, etc, for entire range of CVs (trucks, buses) during recently concluded Auto Expo 2023. With CV cyclical upswing domestically, CV volumes at VECV are expected to grow at 18% CAGR over FY22-25E

* Strengthening its presence in overseas markets in mid-weight category with new product launched in >350 cc segment like “Super Meteor 650”

* With levers in place margins, RoCE are seen at 25.4%, 27.3%, respectively, by FY25E

Alternate Stock Idea: In our auto OEM coverage, we also like M&M.

* Focused on prudent capital allocation, UV differentiation & EV proactiveness

* BUY with target price of | 1,665

Key takeaways of recent quarter & conference call highlights

Q3FY23 Results:

* Consolidated revenues for Q3FY23 were at | 3,721 crore up 5.7% QoQ. ASPs at Royal Enfield (RE), were flat QoQ at ~| 1.6 lakh/unit. RE sales volumes were at ~2.21 lakh units, up 6.6% QoQ

* EBITDA for the quarter was at | 857 crore with margins at 23%, down 30 bps QoQ. The company reported ~64 bps gross margin decline (amid adverse product mix) and limited operating leverage gains (other expense as percentage of sales, down just ~40 bps)

* Consolidated PAT was at | 741 crore, up 12.8% QoQ. The company’s share of profit from VECV JV was at | 63.9 crore

Q3FY23 Earnings Conference Call highlights

* The company achieved highest ever revenue & EBITDA for a quarter for both VECV & RE operations amid positive demand sentiments domestically and continued on its path to become a global, affordable brand in the mid-range segment

* Eicher continues to dominate >350 cc space with >85% market share and within >125 cc (even though it is not present in 125 cc or 150 cc segments) it increased market share to ~30.7% in 9MFY23 vs. ~27% till 9MFY22. Also, the company has ~8.1% market share in motorcycle space, as a whole

* The management informed about a healthy uptick in international volumes and has grown ~4x from FY18 leading to 8%, 9% & 10% market share in America, APAC & EMEA regions, respectively. Further, to strengthen its export the company is setting up CKD facilities in Nepal and Bangladesh

* During the quarter, it invested ~US$50 million in Stark Mobility for ~11% equity and will be exploring EV opportunities through the same

* The management remains upbeat about demand from domestic markets amid positive macroeconomics like (i) young population with ~60% population at 20-59 years of age, (ii) rising disposable income, (iii) favourable disposition towards premium bikes

* The management informed about its recent launch Super Meteor 650 is getting brilliant response from journalists all around the globe post its launch event in Rajasthan, whereas Hunter 350 continued to perform well and has crossed ~80,000+ units mark till 9MFY23. Further, the company has started export of Hunter 350 in foreign markets

* Eicher’s bus market share improved to ~22.5% in 9MFY23 vs. ~5.3% in FY09. Same for light & medium trucks improved to 30% from 25% in FY09

* The management informed about some commodity decline benefits to accrue in coming quarters as old order book ramp down protecting the interest of customers who booked at old prices

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://secure.icicidirect.com/Content/StaticData/Disclaimer.html
SEBI Registration number INZ000183631

Above views are of the author and not of the website kindly read disclaimer