EQUITIES

Eicher Motors rating: Buy — A weak performance by the company

Eicher’s Q4 consolidated Ebitda and net profit fell 37-44% y-o-y and were a 10-20% miss, led by lower margin and higher taxes. Demand commentary was strong though and Eicher said its bookings have recovered to almost pre-Covid levels. Product catalysts are nearing too with the first launch in Sep-Q. We find Eicher well-placed to benefit from the potential demand recovery with its strong franchise, aggressive product pipeline and big network expansion. We retain Buy.

A weak quarter
Royal Enfield’s (RE’s) Q4 volumes fell 17% y-o-y while Ebitda declined
35% y-o-y (7% miss). RE Ebitda margin at 20.8% was down 440bp q-o-q. Gross-profit-per-vehicle was flattish q-o-q despite the higher-cost BS6 vehicles constituting more than two-thirds of Q4 volumes. Ebitda-per-vehicle still fell 15% q-o-q due to a sharp jump in staff cost and high other expense despite lower volumes. Q4 results included a one-time vehicle recall cost and impact of high FX volatility; adjusted for these, Ebitda would be broadly in line with estimates, but we would consider the latter as operational.

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Commercial vehicle business (VECV) also had a tough Q4 with volumes down 45% y-o-y, Ebitda margin of just 1.8% and a small net loss. Q4 consolidated net profit was down 44% y/y. In FY20, RE’s volumes fell 16% y/y while consolidated Ebitda and net profit declined 18-25% y/y .

Demand picking up fast
Eicher is witnessing a sharp rebound in retail demand and said that RE’s new bookings have reached close to pre-Covid levels. About 90% of its dealer network has also opened up. There would be an element of pent-up demand and Eicher acknowledged that sustainability needs to be seen, but we find the initial trend encouraging. RE has also taken about 1-2% price hike in April to pass on the balance BS6 cost increase, which should aid margins. RE also demonstrated a smooth BS6 transition and cleared up channel inventories despite the lockdown.

Product catalysts nearing
RE is turning more aggressive on product launches and plans to introduce 2-3 new platforms in coming years, along with product upgrades, variants, facelifts and limited edition vehicles. The first launch is scheduled in Sep-Q and RE is planning to hold a product introduction almost every quarter subsequently. A big dealer network expansion is also underway, which should fuel the next leg of growth. RE added ~600 studio stores in FY20 and plans to add a similar number in FY21, more than doubling its dealer network over FY19-21.

Retain Buy
We believe RE offers a strong long-term growth outlook given its differentiated products, strong franchise, and industry premiumisation tailwind. We expect EPS to decline 15% in FY21, but then rise at 31% CAGR in FY22-23. We cut FY21 EPS by 4% led by changes to below-Ebitda-line items at RE and lower CV estimates; our FY22-23 estimates are largely unchanged. We retain Buy with

Rs 20,000 TP, valuing RE at 25x FY22e PE and CV business at 2.0x FY22e PB. Key risk is an elongated slowdown and demand shifting away from cruiser bikes.

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