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In-line quarter; growth concerns remain

EIM’s results were in line with estimates; revenues/EBITDA/PAT were up 12%/21%/18% YoY with margins up 43bps QoQ to 26.5% on lower RM. For EIM’s Royal Enfield (RE) brand, we believe growth remains a challenge with: i) recent launches like Himalayan 450 yet to take off meaningfully, ii) concerns around incremental growth potential from upcoming 450cc launches, given the segment’s limited size, and iii) replacement/upgrade demand for RE remaining elusive. We raise FY26E EPS by ~5% on ongoing 2W recovery and consequent margin improvement (build-in 9% PAT CAGR over FY24-26E). We retain SELL with revised TP of Rs3,400 (Rs3,250 earlier) at an unchanged 20x FY26E PER + the stake in VECV. HMCL is our preferred pick in 2Ws given its stronger growth visibility (on new launch success of Xtreme 125R) and much better risk-reward.

In-line Q4 performance

Consolidated revenues rose by 12% YoY to Rs42.5bn (in line), backed by 4% growth in Royal Enfield (RE) volumes; ASPs were up 2.6% QoQ on the back of better mix (higher share of exports and larger cc motorcycles). Consolidated EBITDA was in line (up 21% YoY to Rs11.3bn), with EBITDA margins at 26.5% (up 43bps QoQ) amid lower RM. Consolidated PAT rose by 18% YoY to Rs10.7bn.

Earnings Call KTAs

1) Management highlighted that the domestic 2W industry is poised for growth, with the middleweight category (RE’s addressable market) seen growing in double-digits amid the continuing premiumization trend; RE is expected to outperform the market growth on recent new launches, as well as upcoming product actions planned across platforms (J series, 450cc Sherpa platform, and 650cc platform). 2) Replacement cycle for RE is yet to kick-in and would eventually pan out; in the meantime, the company is focused on attracting natural upgrades from existing buyers with new product actions addressing all categories and customer sets (RE has a 6mn vehicle parc). 3) In international markets, while macros vary by region, Company is focusing on continuing retail performance with market shares intact and visible green shoots. 4) The new Himalayan 450 is registering strong response; current production is at 200units/day; Company is working on increasing supplies to meet demand. 5) In CVs, long-term fundamental drivers (expected economic growth, infra/capex push, replacement demand due to more modern/efficient trucks, transporter profitability) for growth on CAGR basis remain intact, though there could be some disturbances along the way. 7) Margins are seen being supported by operating leverage and mix improvement (with exports, >350cc category, and faster growing non-motorcycles revenues); EIM is watchful of RM but does not see it as a headwind for now. 8) There have been no price hikes in RE recently; it has reduced discounts in VECV to improve realizations. 9) RE finance penetration is at 61%.

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