Sell Eicher Motors Ltd for the Target Rs.4,698 by Motilal Oswal Financial Services Ltd
Exports has been the key growth driver
Focus on growth to continue
* Eicher Motors' (EIM) 1QFY26 consolidated PAT at INR12.1b was ahead of estimates of INR10.6b, supported by strong other income (INR 4.5bn, +58% YoY) and better-than-expected performance at VECV, even as standalone margins were in line with our estimates.
* We factor in a 10% volume CAGR for RE over FY25-27E, with management now prioritizing growth over margins. Hence, we expect margins to remain under pressure from here on, as any benefit from an improving mix (higher spares and apparel sales) is likely to be invested by RE in demandgeneration activities. We expect RE to deliver a much slower 6% earnings CAGR over FY25-27E. Reiterate Sell with a TP of INR4,698. We value RE at 24x June-27E EPS and VECV at 10x EV EBITDA.
PAT beat driven largely by higher other income
* EIM’s 1QFY26 consolidated PAT at INR12.1b was ahead of estimates of INR10.6b, aided by higher-than-expected other income and improved VECV performance.
* On a standalone basis, revenue grew 16% YoY to INR48.2b, in line with our estimates. Revenue growth was driven by a 17% YoY growth in volumes
* EBITDA margin contracted 280bp YoY (+40bp QoQ) to 25.1%, marginally ahead of our estimate of 24.8%.
* Other income increased sharply to INR6.6b, largely due to MTM gains.
* As a result, standalone PAT came in at INR13b, ahead of our estimate of INR10.8b.
* EBITDA margin at VECV improved to 9%, expanding 140bp YoY on the back of a better product mix, lower discounts, and operating leverage benefits.
* PAT share of VECV has declined 10% YoY to INR1.6b, but was ahead of our estimate of INR1.2b.
Highlights from the management commentary
* Royal Enfield reported a strong 14.7% YoY growth in volumes, supported by a 41% surge in exports. Domestic sales rose 11.8%, led by a broader portfolio appeal and distribution push into non-urban geographies. Rural sales’ contribution has increased to 50% from 32% over last few years, underlining the success of deeper market penetration and tailored financing.
* In exports, RE continues to entrench itself in the mid-size segment. With Brazil and Argentina seeing rapid volume traction post CKD localization and channel ramp-up, RE is now among the top three players in key Latin American markets. The Himalayan 450 launch in Brazil has received an overwhelming response, supporting brand momentum overseas.
* Despite cost inflation, RE has taken limited price hikes (only a modest ~1.15% increase in Apr’25), preferring to absorb margin impact in favor of volume growth.
* VECV’s EBITDA margin expanded to 9%, marking a 140bp YoY increase on the back of a better product mix, lower discounts, and improving operating leverage.
Valuation and view
We factor in a 10% volume CAGR for RE over FY25-27E, with management now prioritizing growth over margins. Hence, we expect margins to remain under pressure from here on, as any benefit from an improving mix (higher spares and apparel sales) is likely to be invested by RE in demand-generation activities. This is clearly visible in the past few quarters, where volume has seen a healthy pick-up, albeit at the expense of margins. Hence, we expect RE to deliver a much slower 6% earnings CAGR over FY25-27E. Given the expected slower earnings growth, we see no reason for the stock to trade at premium valuations. Reiterate Sell with a TP of INR4,698. We value RE at 24x June-27E EPS and VECV at 10x EV EBITDA.
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