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Supply side snags to hinder growth rebound

Eicher Motors’ Q3FY21 standalone performance missed consensus estimates as EBITDA margin came in at 23.5%, primarily impacted due to lower gross margin (down ~139bps QoQ). RE has undertaken price increases in Jan/Feb’21 (2-3%) to partially mitigate input cost inflation. We continue to like the RE’s customercentricity/market expansion strategy via: a) new product launches (expect 2 new launches each year) to follow the footsteps of Meteor-350, b) superior consumer experience through initiatives like Make-it-Yours (MIY) customization app. We believe, these are long-term positives for brand popularity amongst Gen-Z and, in turn, could aid product mix enrichment. In our view, accelerating the latent premiumisation potential in 2-Ws via new products (e.g. SUV analogy: Impact of Hyundai Creta) has to be long term Priority No.1 for RE. Post the sharp rally (~130%) since Mar’20 stock lacks near-term triggers. Downgrade to HOLD.

* Key highlights of the quarter: Eicher Motors reported 18.6% YoY jump in revenues as volumes rose 9.2% YoY. ASP continued to rise (~Rs140k/vehicle / 8.6% YoY higher) driven mainly by: a) price increase 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 on other expenses was driven by both value engineering activities coupled with structural fixed costs (down 311bps). Manpower costs remained sticky (up 44bps); as company normalized increments and reversed earlier wage cuts.

* Key concall takeaways: Management indicated: a) Production in Dec’20/Jan’21 reached ~70k-75k units respectively; however; supply side bottlenecks continue to hamper further production ramp. b) Make-It-Yours (MIY) feature is to be extended to all models and accessories deriving from the massive success in Meteor350. c) RE has expanded its reach with the addition of 43 regular and 129 studio stores in Q3 to take the total to 1,900 touch points across India. d) In international markets, it added 13 exclusive stores (total: 100) with entry in Japan and Dominican Republic. e) Due to its digital initiatives, share of digital in inquiries has increased 3x and that in bookings has grown 5x compared to pre-Covid levels, and website visits reached 8mn during the quarter; f) overall waiting period for models on a blended basis is >1 month while for a few models (e.g. Meteor-350) it remains in >3-4 months.

* Downgrade to HOLD: Royal Enfield is poised to witness growth tailwinds in FY22/FY23 as both underlying market rebound and new product launches stimulate further demand. However, underlying production challenges could hamper achievable growth. We trim our EPS estimates for RE by 1.6%/1.5% for FY22E/FY23E respectively, and maintain our RE valuation multiple at 25x FY23E (roll forward) EPS. Post a ~130% rally in the stock (since Mar’20) we downgrade our rating to HOLD from Add with a revised target price of Rs2,820 (earlier: Rs2,624).

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