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Focus on Volume Growth & Overall EBITDA Improvement

Est. Vs. Actual for Q1FY26: Revenue – INLINE; EBITDA – BEAT; PAT – BEAT

Change in Estimates post Q1FY26

FY26E/FY27E: Revenue: 2.5%/2.4%; EBITDA: 0.9%/0.2%; PAT: 2.3%/2.5%

Recommendation Rationale

• Focus On Volume Over Margins: Management is focused on growing overall EBITDA rather than preserving margins as a strategy to weed out new competition. Standalone EBITDA grew by just 4.5% YoY despite strong 17% volume growth, reflecting higher promotional spend, product shift towards lower ASP variants and competitive pricing. We estimate EBITDA CAGR of 8–9% over FY25–28E, which trails historical performance and consensus expectations.

• New Product Variants: Royal Enfield delivered 17% YoY volume growth in Q1FY26, driven by new variant introductions of Classic, Bullet, and Hunter models, along with Effective brand activation campaigns. Battalion Black, Classic 650, Classic350 and Hunter 350 refreshes have received a positive initial response. The upcoming Flying Flea electric motorcycles (C6 and S6) are expected to be launched in early CY26, reflecting a cautious yet deliberate entry into the EV space.

• International Business: Brazil continues to see strong demand with a second CKD unit now operational. SAARC markets, especially Nepal and Bangladesh, reported healthy traction and positive customer sentiment. The management reiterated its intent to deepen penetration in existing export markets rather than pursue rapid new market entry.

Sector Outlook: Positive

Company Outlook & Guidance: The management's focus is on driving volume growth in the domestic market through new product launches/refreshes and gaining market share, while the company is cautiously optimistic on exports.

Current Valuation: We value RE’s standalone business at 26x FY28E EPS (earlier 28x on FY27E EPS) and VECV at 10x EV/EBITDA on FY28E EBITDA (earlier on FY27E).

Current TP: Rs 5,635/share (Unchanged)

Recommendation: We recommend a HOLD rating on the stock.

Financial Performance: Q1FY26 standalone revenue (in line) was up ~16% YoY, but down 4% QoQ, led by a 17% YoY (6% QoQ decline) volume growth, while ASP declined by 1% YoY on account of poor product mix. EBITDA (6% Beat) grew by 4.5% YoY but declined 2.3% QoQ. EBITDA margins were at 25.1%, beating out estimates by 148 bps, which were down 277 bps YoY but up 39 bps QoQ. This YoY decline was primarily due to a poor product mix, higher commodity prices, provisions for old inventory, and increased other expenses by the company. PAT (25% beat) was up 40% YoY and 41% QoQ, driven by higher other income (Rs 218 Cr dividend from VECV) and lower effective tax rates.

Outlook: We expect RE volumes to grow at 7% CAGR over FY25-28E, with standalone revenue and EBITDA projected to grow at an 8-9% CAGR over FY25-28E. The long-term growth potential for VECV remains strong, supported by its robust execution capabilities and entry into the EV/ SCV category

Valuation & Recommendation: The current prices have largely factored in the positives, and hence, we maintain our HOLD rating, with a target price of Rs 5,635/share (unchanged). We value the RE standalone business at a sustainable PE of 26x on FY28 EPS (earlier 28x on FY27E) and VECV at 10x EV/EBITDA on FY28E EBITDA (earlier FY27E), implying a ~2% upside from the CMP. (We recommend a ‘Buy On Dips’ strategy for the stock.)

Key Concall Highlights

• VECV: Revenue from operations in Q1FY26 stood at Rs 5,671 Cr, up 11.9% from Rs 5,070 Cr in the same quarter last year. EBITDA rose 32.6% to Rs 511 Cr, from Rs 385 Cr YoY. VECV sold 21,610 vehicles in Q1FY26, up from 19,702 vehicles YoY. Overall market share improved to 18.7% (vs 17.3% last year), led by continued leadership in LMD trucks (34.5% share) and a strong showing in Buses, where total Bus volumes grew 14.8% and market share rose to 21.5%. Exports grew by 20.5% YoY.

• Investments: The full-year Capex target is Rs 1,200 Cr. Investments are being directed toward expanding production facilities, including the new CKD plants, enhancing electric mobility infrastructure, and product development for both Royal Enfield and VECV.

• Production Facilities: The company’s two state-of-the-art production facilities are located at Oragadam and Vallam Vadagal, near Chennai, with an annual capacity to produce 1.2 Mn units. Across the world, Royal Enfield has six modern CKD assembly facilities in Bangladesh, Nepal, Brazil, Thailand, Argentina, and Colombia.

• Dealership Network: Royal Enfield operates through over 2,000 stores across all major cities and towns in India, as well as nearly 850 stores in more than 60 countries worldwide. Royal Enfield has expanded its pre-owned motorcycle business, RE Own, to over 230 cities across India.

• Others:

? Non-motorcycle revenue (including domestic and exports) contributed Rs 2,750 Cr in FY25.

? Increased financing availability with 575 dealers, the majority in rural areas.

? The commodity cost impact in Q1 was limited to 30 bps; however, we expect slight headwinds going into Q2.

? Management indicated that a shortage of rare earth magnets has impacted the sale of performance platform motorcycles in Q1; however, alternate materials have helped reduce the dependence.

Key Risks to Our Estimates and TP

• Increasing competitive intensity poses a risk to the company in the >250cc segment, where it holds the highest market share.

• Macro-economic headwinds, driving lower exports for longer (than our estimates), could pose a downside risk.

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