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Margins under pressure despite improved mix

Focus on growth over profitability clearly visible

* Eicher Motors’ (EIM) 2QFY25 operating performance was below our est. as margins contracted 90bp YoY to 25.5% mainly due to higher other expenses (higher promotional spend and warehousing). While VECV outperformed industry growth, it seems to have come at the expense of margins (down 70bp YoY to 7.1%). Management has indicated that they would continue to focus on demand generation activities going ahead and are not fixated on margins.

* We have slightly tweaked our estimates. Reiterate Sell with a TP of INR4,000 (premised on Sep’26E SOTP) as slower earnings growth should no longer attract premium valuations.

Margins hurt despite improved mix as focus shifts to growth

* EIM’s 2Q consol. revenue/adj. PAT grew 4%/8% YoY to INR42.6b/INR10.9b (est. INR44.3b/INR11.9b), while EBITDA was flat YoY at INR11b (est. INR10.8b). 1HFY25 revenue/EBITDA/adj. PAT grew 7%/7%/14% YoY. 2HFY25 revenue/EBITDA/PAT may grow 8%/7%/4% YoY.

* RE volumes declined 1% YoY, while realizations grew 8% YoY to INR184.6k per unit (est. INR189.1k).

* Gross margin expanded 50bp YoY (+10bp QoQ) to 46.5% (est. 46.7%).

* Higher other expenses impacted EBITDA margins, which contracted 90bp YoY/100bp QoQ to 25.5% (est. 26.8%). Other expenses were high due to higher marketing spends (launch-related costs) and warehousing costs ahead of the festive season. EBITDA was flat YoY at INR10.9b (est. INR11.9b).

* VECV: Volumes/realizations grew 6%/2% YoY, leading to 8% YoY growth in revenue to INR55.4 (est. INR52.4b). EBITDA margin contracted 70bp YoY to 7.1% (est. 7.6%). PAT stood at INR2.1b vs. INR1.8b YoY.

* Consol. operating cash flow/FCF declined 26%/41% YoY.

Highlights from the management commentary

* RE demand update: After strong growth of 26% YoY during the festival season (vs. industry growth of 6-7% YoY), RE is now seeing better demand compared to the pre-festive period.

* Focus on growth over profitability: Management has reiterated that they would continue to focus on demand generation (growth) over profitability. They have indicated that they are not fixated on margins but would work on absolute profitability.

* Other expenses are likely to remain elevated going forward, as 1) the management would continue to focus on demand generation activities, 2) EICMA and Motoverse events are scheduled in 3Q, and 3) incentive payout to dealers would happen in 3Q.

* Retail exports grew 12% YoY in 2Q (20% YoY in 1HFY25), ahead of wholesales growth. Management expects export market recovery to be gradual over the coming quarters.

* At the EICMA, the company recently unveiled its first EV motorcycle, the flying flea, which is likely to go into production in FY26.

Valuation and view

We factor in a 7% volume CAGR for RE over FY25-27E. We expect margins to largely remain stable from hereon as any benefit from improving mix (higher spares and apparel sales) is likely to be invested by RE in demand generation activities. Overall, we expect RE to deliver an 11% earnings CAGR over FY25-27E. Given the expected slower earnings growth, we see no reason for the stock to trade at premium valuations. Maintain Sell with a TP of INR4,000 (Sep’26E SoTP).

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