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Margins surprise led by price hikes, cost savings

Valuation and View

Eicher Motors (EIM) 2QFY24 consolidated results were better with ~13%/6% beat to our/street EBITDA leading to margins expanding by 3110bp YoY/+80bp QoQ at 26.4% (FY19 levels). This was largely due to positive impact of RM declined (~100bp) and balance due to price hike, cost savings, higher spares sales offsetting lower exports which declined 20.8% YoY (-4.5% QoQ). However, margins expansion ahead will be gradual ahead as stable RM and price hike (+1.5% in 2Q in domestic) would be partially offset by launch expense related to new launches. While demand outlook is mixed/weak for domestic/exports, the management sounded confident to navigate increased competitive intensity by playing on RE’s strength developed over period of past decade. Further, it has hinted slew of disruptive launches (rather will be spaced out), which should help expand overall mid-size market.

We expect RE’s overall volumes to grow at ~11% CAGR over FY22-25E (vs -7% CAGR over FY20-22), despite competitive launches. Recent launches could be an inflection point for RE as a completely new and improved platform should drive efficiencies. VECV would continue to see a cyclical recovery in volume and profit, in turn boosting consolidated PAT CAGR to 24.7% over FY23-25E. We have raised FY24/FY25 EPS by 12.6%/2.4% to factor in for better gross margins wh. Stock trades at 22.6x/21.4x FY24E/FY25E consol EPS. We maintain BUY with SoTP based revised TP of Rs4,116 (v/s Rs4,008). We value S/A business at 25x (~15% discount to 10yr LPA).

Result Highlights – S/A better than estimates while VECV in-line

* Consol reveunes grew 16.9% YoY (+3.2% QoQ) at Rs41.1b (est Rs38.9b). RE’s volume grew 10.4% YoY/ +0.7% QoQ while RE ASPs grew 4.8% YoY (flat QoQ) at Rs171.4k/unit (est Rs170k/unit) largely led by price hikes. The management indicated price hike of ~1.5% in domestic as well as for few SKUs/markets in exports too in 2QFY24. 

* Consol gross margins expanded 360bp YoY (+190bp QoQ) at 46% (est 43.1%). This was led by soft RM (~1% impact) and balance due to price hikes and product mix impact. Consol EBITDA grew 32.3% YoY (+6.5% QoQ) at Rs10.9b (est Rs9.5b) with margins at 26.4% (+310bp YoY/ +80bp QoQ, est 24.6%). S/A margins expanded 420bp YoY (+190bp QoQ) at 27.9% (est 26%, at 4QFY19 levels). Led by healthy op performance and higher other income at Rs2.7b (+13% QoQ, est Rs2.5b), Adj.PAT came in at Rs10.1b (+54.7% YoY/ +10.77% QoQ, est Rs9b). 

* VECV 2QFY24 performance in-line - Revenues grew ~21.6% YoY (+2.7% QoQ) at Rs51.3b (in-line), EBITDA at Rs4b (in-line) with margins at 7.9% (in-line, +200bp YoY/ +10bp QoQ), Adj.PAT at Rs1.86b (est Rs2b, +1.3x YoY/ +3% QoQ).

KEY CON-CALL HIGHLIGHTS

Royal Enfield Domestic 

* Demand – Seeing good demand during festive (+13-13.5% festive to festive) and momentum is continuing. ? RE’s market share in >125cc segment at 32% in 2QFY24 (v/s 32.9% in 1QFY24) and domestic motorcycle market at 7.4% in 2QFY24 (v/s 8.2% in 1QFY24 and 7.8% in FY23).

* Domestic network expansion is steady and gradual – have added ~4 dealership main stores taking total dealership large size count to 1094 stores (v/s 1090 in 1QFY24). Where as studio stores count have come down to 923 stores (v/s 969 stores in 1QFY24).

* Himalayan 450 – Power 50%, Torque 25-30%.

Exports 

* The demand in few markets is challenging led by macro challenges impacting dispatches...however retails are holding up. Have launched Super Meteor couple of months back in US.

* Market share in key global markets is stable such as Americas 8%, APAC 9% and EMEA 9%. 

* Distribution reach in key markets exclusive stores/ MBO – Americas 98/214, UK,MEA, Europe – 69/512, APAC – 50/110. Added ~27 stores during 2QFY24 (v/s 20 stores during 1QFY24). Overall 1,050+ global touchpoints with 217 Exclusive stores and 836 MBOs.

VECV

* Highest ever quarterly parts business (combined both Eicher and Volvo) at Rs5.21b registering more than 29% growth YoY. 

* Highest even powertrain volumes at 14,834 units (+12% YoY). ? Financials performance - Revenue Rs51.26b, Rs4.04b, EBITDA margins at 7.8%, PAT at Rs1.86b. 

* Have gained market share across categories.

Financials 

* Gross margins expansion - 1% benefit due to RM and balance due to mix and price impact which taken in May’23.

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