Eicher Motors Ltd : Supply issues to hit near-term sales; retain Buy on a 12-month view - Emkay Global
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Supply issues to hit near-term sales; retain Buy on a 12-month view
* Q1FY22 EBITDA margin stood at 18.4%, beating our estimate of 17.9%, owing to inventory gains. Revenue came in at Rs19.7bn, slightly above our estimate of Rs19.3bn, thanks to higher-than-expected realizations.
* Management expects supply disruptions due to the shortage of semiconductors. Factoring in supply issues and slower ramp-up, we reduce FY22/23/24 EPS estimates by 28%/12%/7% to Rs71.2/Rs114/Rs144.1.
* Despite the cut in estimates, we expect a robust earnings CAGR of 42% over FY22-24E, supported by a sales upcycle, increasing share of premium motorcycles and margin expansion. New products remain a focus area, with the expectation of one new model or major refresh every quarter.
* While we do not see any fundamental change in the company's strategy and direction, the sudden resignation of professional CEO may lead to heightened perception about key person risk. Any correction in the stock price could provide an opportunity to accumulate. We retain Buy with TP of Rs3,040 (Rs3,180 earlier), based on 24x P/E for the 2W business on Sep’23E EPS (25x Mar’23E earlier).
Results beat estimates: Considering the low base in Q1FY21, results have been compared with Q1FY20 (2-year CAGR). Revenue came in at Rs19.7bn (-9% CAGR), above our estimate of Rs19.3bn, owing to better-than-expected realizations. 2W volume saw an 18% CAGR, while realization increased at a 9% CAGR. EBITDA margin contracted to 18.4% from 25.8% in Q1FY20 but was above our estimate of 17.9% due to inventory gains. Overall, adjusted PAT saw a negative 28% CAGR to Rs2.4bn, above our estimate of Rs2bn, owing to the EBITDA beat and lower-than-expected losses in the CV subsidiary (VECV). The share of loss from VECV stood at Rs394mn vs. a profit of Rs209mn in Q1FY20.
Reducing revenue estimates on supply issues: Management expects production to be hit by a global shortage of semiconductors in Q2FY22 and possibly through FY22. Management expects a recovery in H2FY22 with an improvement in the supply chain. Factoring in supply issues and slower ramp-up, we reduce FY22/23/24 revenue estimates by 15%/4%/3%.
Change in professional management: Mr. Vinod Dasari, CEO of Royal Enfield, has stepped down to pursue his personal endeavors. Since his appointment in Apr’19, he has been credited with efforts for growing non-vehicle revenues, creation of digital properties, network expansion, etc. Mr. B Govindarajan will take on the responsibility of leading Royal Enfield as Executive Director. He has been the COO since 2013. He has spent more than 23 years with the company and has a deep understanding of the industry and strong technical know-how. He has been instrumental in expanding manufacturing facilities, improving product quality, delivery/development process, and setting up Technology Centers in India/UK.
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