Hold Eicher Motors Ltd For Target Rs.6,840 by Prabhudas Liladhar Capital Ltd
Margin contracts on higher RM & marketing costs
Quick Pointers:
* Enquiry to booking ratio improved to 29-30% (+900bps) post GST 2.0
* Inflationary pressure from commodities to continue
EIM reported its highest-ever quarterly consolidated revenue in Q2FY26 at Rs61.7bn (+44.8% YoY), slightly above street estimates. The management is optimistic about sustained growth in H2 driven by strong demand, new product launches and GST 2.0 reforms. It affirmed its focus on long-term value creation, absolute profitability and maintaining leadership in the mid-size motorcycle segment. We tweak volume, realization and margin estimates translating to revenue/EBITDA/PAT CAGR of 15.4%/15.7%/13.3% over FY25-27E and retain ‘HOLD’ rating with TP of Rs6,840 (previous Rs6,729). We value the core business at 30x P/E Sep’27E and VECV business at 10x EV/EBITDA Sep’27E.
Consolidated gross margin at 43.7% (-280bps YoY, -50bps QoQ): Due to higher RM and marketing costs, EBITDA margin of 24.5% (-100bps YoY) missed BBGe/PLe by 60bps/45bps. EBITDA was Rs15.1bn (+39.0% YoY), while PAT (incl. share of JV and associates) was Rs13.7bn (+24.5% YoY), deviating -3.7%/+2.0% from BBGe/PLe. For H1FY26, consolidated revenue was Rs112.1bn (+29.5% YoY); EBITDA Rs27.1bn (+20.5% YoY); EBITDA margin, 24.2% (-180bps YoY); and PAT, Rs25.7bn (+16.9% YoY).
VECV posts revenue of Rs61.1bn (+10.3% YoY): In Q2FY26, EBITDA margin was 8% (+70bps YoY) and PAT margin was 4.2% (+40bps YoY). In H1FY26, revenue was Rs117.8bn (+11.0% YoY) and EBITDA margin was 8.6% (+110bps YoY). HDT and Bus volumes in Q2 grew by 3.5% and 1.9% YoY, respectively. HDT was impacted by extended monsoons, increasing productivity level/usage of existing trucks, and migration to rail freight corridors, despite which it grew by 3.5%/1.2% YoY in Q2FY26/ H1FY26. As per the management, H2FY26 is not likely to see significant growth, but it will be better than H1. Seasonally, H2 sees ~55% of annual volume.
40bps impact on margins due to higher commodity prices: The impact was offset by a positive 50bps impact from price hikes by the company. EIM plans to further mitigate the impact through mix improvement, price increases, value engineering, evaluating make vs. buy decisions, etc. Prices of a few motorcycle models have been increased in Apr’25 and Jul’25. The management will decide on further hikes quarterly based on market conditions.
Inventory built-up for festive demand: Pre-buying was seen for 450cc/650cc bikes before the GST slab was moved up to 40% from 31% (28% GST + 3% Cess). Royal Enfield (RE) follows the replenishment model for inventory management and aims to maintain appropriate inventory levels. As retail sales grew faster than wholesales during festivities, inventories are lower than usual and further build-up should be seen, especially in 350cc bikes, which are being most sought after. Since RE is working on peak capacity utilization, it would enhance annual capacity from current 1.2mn units to 1.35mn+ units by further debottlenecking and adding a new module from Q1FY27.
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