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All eyes on upcoming product launches

Eicher Motors’ Q4FY21 standalone performance missed consensus estimates as EBITDA margin came in at 22% primarily due to gross margin compression (down ~322bps YoY), one-time provisions (70 bps). RE has undertaken price increases in Jan-Mar’21 (3-8%) to mitigate input cost impact on margins. We continue to like the RE’s customer-centricity/market expansion strategy via: a) New product launches (highest new launches (we expect 4) in its history) to expand addressable market following the footsteps of Meteor-350; and b) improving consumer experience with initiatives like MiY vehicle customisation app, service on wheels. We believe, in the near term covid is likely to dampen demand, however, new product success coupled with improved customer life-cycle experience are likely drivers for potentially a strong rebound in H2. Valuations remain fair. Maintain HOLD.

Key highlights of the quarter:

Eicher Motors reported 34% YoY jump in revenues as volumes rose 25.6% YoY. ASP continued to rise (~Rs143k/vehicle / 6.7% YoY higher) driven mainly by: a) Price increase (Rs12k/vehicle in FY21) to pass on RM cost inflation and mandatory regulatory changes (BS-VI), and b) favourable mix with rising revenue contribution from Himalayan/650cc twins/Meteor-350. Tight cost control was led by other expenses (down 236bps) and lower manpower costs (down 208bps). Other expenses include one-time expense of Rs0.5bn from FX impact due to a Brazil loan MTM and provision for vendor advances (vendor is in NCLT).

Key concall takeaways:

Management indicated: a) Production continues to be impacted due to supply-side bottlenecks from i) local lockdowns in Pune/Delhi and Tamil Nadu; ii) global semi-conductor shortage; b) high demand of Meteor has led to capacity ramp-up from 8-10k units to 15k units; c) company has undertaken value engineering to reduce the usage of rhodium by 66% for its new line; d) Make-ItYours (MiY) feature is witnessing ~80% penetration and has led to improved accessory levels to 70% (FY20: 30-40%); e) RE has expanded its reach to >2k touch points across India with 1,031 studio stores; f) in international markets, it added 32 exclusive stores (FY21: 132, FY22 target:~175) with entry in Japan, Cambodia, Costa Rica etc.; and g) VECV delivered strong operating margins of 8.9%

Maintain HOLD:

Eicher Motors is likely to witness a growth tailwind in FY22/FY23 as both underlying market rebound and new product launches stimulate demand. However, higher input costs and new platform costs stabilization could hinder pace of margin recovery. We trim our EPS estimates for RE by 8.2%/6% for FY22E/FY23E, respectively, and maintain our RE valuation multiple at 25x FY23E EPS. We maintain our HOLD rating on the stock with a revised target price of Rs2,709 (earlier: Rs2,820).

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