Sell Eicher Motors Ltd. For Target Rs. 3650 By Elara Capital
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Volume growth drags on waning demand
Average selling price increases on improved mix
Eicher Motors (EIM IN) Q3 consolidated EBITDA rose 27% YoY but was flat QoQ at INR 10.9bn, with 3% YoY and flat QoQ volume growth in Royal Enfield (RE). EBITDA margin dipped 30bp QoQ to 26.1% vs our estimates of 25.6%, led by a rise in employee expenses. Standalone ASP rose 3.7% QoQ and 9.7% YoY, led by improved product mix. VECV revenue surged 19% YoY and 7% QoQ to INR 54.8bn, with an EBITDA margin at 8.0%, up 10bp QoQ, and a PAT of INR 2.1bn. VECV’s average selling price (ASP) improved 1.4% QoQ.
RM cost remains range-bound; no major price hikes undertaken
Steel and precious metals prices have declined while aluminum prices remain range-bound, resulting in a 90bp YoY benefit on gross margin. The company did not undertake any major price hikes in Q3. Management has observed an uptick in enquiries and bookings for RE brand of products. New product launch in the high-end segment, led to a richer mix, which has led to better realization. The Red Sea issue has led to a surge in shipping cost by 25-30% for routes with shipment duration increase by 30 days. Exports was muted due to weak global sentiments in the UK and Australia markets, dragged by the high inflationary scenario. Thailand showcased a revival.
Valuation: reiterate Sell with a higher TP of INR 3,650
While margin trajectory improved on softening RM cost, we expect underperformance in the premium segment for RE as the Hunter 350cc base catches up. Exports disappointed in the past few quarters, due to muted sentiments in key markets. In Q3, RE lost 30bp YoY retail market share at 4.2%. We expect RE to lose premium and overall MC market share during FY24-26E due to aggressive launches by rivals, such as the Harley, the Triumph and Hero MotoCorp despite market expansion. The proportion of current RE customers upgrading to a new model may not increase significantly. Aggressive pricing from competitors would constrain RE’s pricing power in the medium term. We expect a single digit volume CAGR for RE over FY25-26E with margins largely peaking out. We reiterate Sell with a higher TP of INR 3,650 (from INR 3,250) on 22x (unchanged) FY26E P/E for the RE business and 10x (unchanged) FY26E EV/EBITDA for VECV.
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SEBI Registration number is INZ000185632
