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Steady quarter, volume growth to be back-ended…

About the stock: Eicher Motors (EML) is the market leader in the >250 cc premium motorcycle segment (FY21 market share at 93.5%) 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 (6.4% FY21 market share)

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

Q1FY22 Results: The company posted relatively steady Q1FY22 results

* Consolidated net sales declined 32.9% QoQ to | 1,974 crore

* EBITDA margins at 18.4% were down 319 bps QoQ

* Consequent consolidated PAT was down ~55% QoQ to | 237 crore

What should investors do?

EML’s stock price has grown at ~5% CAGR from ~| 2,200 levels in August 2016, thereby outperforming the Nifty Auto index.

* We retain HOLD rating on EML amid delayed volume ramp up, especially at Royal Enfield, due to near term supply constraints (global chip shortage)

Target Price and Valuation: We value EML at | 2920 on SOTP basis; assigning 30x PE to RE business and 25x PE to VECV business on FY23E (earlier TP | 2,970).

Key triggers for future price performance:

* We expect 15% FY21-23E RE volume CAGR aided by low base, abating of supply constraints, pent up demand, undiminished brand pull, network expansion benefits and higher exports

* Continued VECV outperformance in CVs to lead to market share gains; we build 27% FY21-23E volume CAGR as cyclical recovery gathers pace

* Overall FY21-23E consolidated net sales CAGR expected at 23.4%, with margins seen rising to 24.2% by FY23E riding on operating leverage gains

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

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

* BUY with a target price of | 1,000

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