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Focus on volumes over margins accelerate

Valuation and View – Volume trajectory to likely improve for near term    

Eicher Motors (EIM) 2QFY25 consolidated results were operational weak with EBITA/margins miss of 4-6%/~70bp to our/street. This was led by lower-thanexpected margins in both standalone (led by lower ASP and inflated other expense) and VECV (weak margins). RE's margins expansion ahead will be guided by stable RM, higher share of non-motorcycle revenues, platform related VAVE and exports. The demand outlook is positive for domestic volumes are expected to see full benefits of new launches, undergoing market activation projects, conversion of pent-up demand in few states and upcoming marriage season. Exports on the other hand to see gradual volume improvement.

The management sounded confident to improve RE’s volume trajectory backed by healthy response to new launches. Further, it has re-iterated slew of launches and wider branding/market activation projects, which should help expand overall midsize market. We expect RE’s overall volumes to grow at ~7% CAGR over FY24-27E, despite competitive launches. Recent launches could be an inflection point for RE as a completely new and improved platform should drive efficiencies. However, we remain watchful of domestic average monthly run-rate as exports recovery to be only gradual. On the other hand, VECV is approaching a cyclical decline in volumes, in turn restricting consolidated revenue/EBITDA/Adj.PAT CAGR to 9.2%/9.9%/11.4% over FY24-27E. We upgrade FY26/FY27 EPS by 4-6% to reflect upon likely better RE exports and higher other income, partly offset by cut for VECV margins. Stock trades at 24.2x/22.7x FY26E/FY27E consol EPS. Maintain BUY with SoTP based TP of Rs5,526 (vs Rs5,307 earlier). We value S/A at 27x P/E and VECV at 12x EV/EBITDA.  

Result Highlights – Weak ASP, higher other expenses dent margins    

* Consol reveunes grew 3.6% YoY (-3% QoQ) at Rs42.6b (est Rs43.3b). RE’s volume de-grew 0.6% YoY+0.4% QoQ at ~228k while RE ASPs came lower at Rs185.6k/unit (est Rs190.2k/units, +7.7% YoY/-1% QoQ), led by product mix.

* Consol gross margins expanded 40bp YoY (+10bp QoQ) at 46.5% (est 46.5%) while RE’s gross margins contracted 110bp YoY/QoQ each at 45.7% (est 46.5%). Consol EBITDA were flat YoY (-6.7% QoQ) at Rs10.9b (est ~Rs11.4b) with margins at 25.5% (-90bp YoY/-100bp QoQ, est 26.3%). S/A margins contracted 170bp YoY (-160bp QoQ) at 26.3% (est 27.6%), leading to EBITDA/vehicle at Rs48.5k/unit which grew by ~1.3% YoY (-6.7% QoQ). Adj.PAT came in better at ~Rs11b (+8% YoY/flat QoQ, est ~Rs10.6b).

* VECV performance weak - Revenues grew 8% YoY at Rs55.4b (est ~Rs54b), EBITDA declined 2.2% to ~Rs3.9b (est ~Rs4.6b) with margins at 7.1% (est 8.5%). PAT grew 12.4% YoY at ~Rs2.1b (est ~Rs2.5b). 

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