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Strong sequential recovery in performance

Eicher Motors Limited (EML) manufactures motorcycles and accessories. The company owns the iconic Royal Enfield brand and has a joint venture with AB Volvo – Volvo Eicher Commercial Vehicles (VECV).

* Q3FY22 consolidated revenue grew 27.6% QoQ (+0.6% YoY) on strong international performance and success of the all-new Classic 350.

* EBITDA rose 23.9% QoQ (-13.3% YoY), although EBITDA margin contracted 60bps to 20.6% (-330bps YoY), owing to global semiconductor shortages and higher operating expenses.

* Pick-up in economic activities, supreme performance of Royal Enfield in international market, wide distribution network, new product launches, improvement in availability of semiconductors and strategic cost management actions will drive company’s performance in future. We hereby upgrade our rating on the stock to BUY with a rolled forward target price of Rs. 3,122 based on SOTP valuation.

Strong export performance aids topline growth sequentially

Consolidated revenue grew 27.6% QoQ to Rs. 2,828cr (flat YoY) in Q3FY22, mainly due to strong international performance and high traction seen for the all-new Classic 350. Royal Enfield sales volumes stood at 167,664 units (-15.6% YoY), as performance was impacted due to shortage of semiconductor chips and onset of 3rd wave of COVID-19 pandemic. However, company continued its strong growth momentum in international markets with total exports at 17,036 units (+57.3% YoY). VECV business grew 35.3% YoY to Rs.3,626cr, with overall sales of 16,044 units (+25.3% YoY), driven by pent-up replacement demand and strong focus on infrastructure investments.

Global semiconductor shortage impacts margins

Gross profit grew 20.4% QoQ to Rs. 1,108cr (-4.4% YoY) while gross margin fell 130bps QoQ to 39.2% (-210bps YoY) due to increased manufacturing costs. EBITDA rose 23.9% QoQ to Rs. 582cr, although margin contracted 60bps QoQ to 20.6% owing to global semiconductor shortages and higher operating expenses. PAT went up 22.2% QoQ to Rs. 456cr, partially offset by lower other income (-15.2% QoQ) and higher taxes (+33.4% QoQ).

Key concall highlights

* Eicher commenced operations of Royal Enfield (RE) motorcycles at its completely knocked down (CKD) facility and local assembly unit in Thailand. With this, RE now has 3 CKD units outside India, in Argentina, Columbia and Thailand.

* In the domestic market, the company expanded its network with 12 large format stores, taking its total store count to 2,118 across 1,750 cities, incl. 1,065 large stores and 1,053 studio stores. Abroad, 7 exclusive stores and 11 multi brand outlets were added, taking the total to 156 exclusive and 660 multi-brand outlets.

* Company launched its state-of-the-art heavy-duty coach and Sleeper bus range, developed at the Volvo Bus Hoskote plant.

Valuation

We expect volumes to pick up with receding Omicron effect and recovery in economic activities. Persistent good performance of RE in international market, extensive distribution network, new product launches, high traction in all-new Classic 350, proactive engagement with suppliers to address supply chain bottlenecks and multiple management actions taken to optimize cost base augur well for the company’s performance in future. With positive outlook, we upgrade our rating on the stock to BUY with a rolled forward TP of Rs. 3,122 based on SOTP valuation.

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