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Growth Outlook Improving

Global Leader in mid-segment motorcycles: Eicher Motors (Eicher) is a globally recognized automobile company engaged in the manufacturing of motorcycles and commercial vehicles. Its motorcycle brand ‘Royal Enfield (RE)’ is the global leader in the 250cc – 750cc, mid-segment motorcycles. In the domestic market, RE has a market share of 28.7% in motorcycles above 125cc and nearly 90% in the 250cc plus segment.

Strong player in the commercial vehicle industry: Eicher Motors CV business is led by VE Commercial Vehicles (VECV) which is a JV between Eicher Motors (54.4%) and AB Volvo (45.6%). It enjoys a market share of 16.6% in the CV industry.

Premiumization trend in motorcycles bodes well for Eicher: Given the maturing nature of the two-wheeler industry, we believe the next leg of growth would be driven by premiumization and increased thrust on exports. Eicher would be the biggest beneficiary of the premiumization in motorcycles given its strong presence in the 125cc+ segment. Its constant focus on increasing distribution reach and new launches would help the company to outperform the industry.

Exports to provide additional levers to growth: Eicher’s international business has witnessed tremendous growth over FY17-22 with volume CAGR of 39%. We expect the growth momentum to continue led by promising industry growth prospects (for mid -segment motorcycles) coupled with Eicher’s plans to expand product portfolio, increase in penetration in existing markets and tap newer geographies.

VECV performance set to improve: VECV performance in the last decade has been impressive as efforts towards modernization have helped the company to gain market share both in buses and trucks segment. However, the financial performance has been impacted in the last three years due to increased cost pressure and higher competitive intensity. Going forward, we expect profitability to improve for VECV led by pick-up in volumes, cost-saving initiatives and higher operating leverage.

Improved financial performance: We expect Eicher (RE) to register volumes CAGR of 19% over FY22-24E on the back of a low base, industry-led demand recovery and continued growth in the exports. On the operational front, higher operating leverage and cost rationalization efforts would aid margin improvement of 381bps over FY22-24E to 24.9%.

Valuations: We estimate Eicher’s Revenue/EBITDA/PAT to grow at 24.3%/35.1%/40.5% CAGR over FY22-24E led by volume recovery in the domestic market and continued strength in exports. Hence, we initiate coverage with a Buy rating on the stock with a target price of Rs. 3,149 valuing the company at 26x as against 10-Year Average of 32x.

Key Risks:

i) Prolonged slowdown in the motorcycle industry, ii) Sharp increase in key raw material prices.

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