In terms of profitability, after witnessing a 60 percent CAGR in profits over CY10-FY18, HDFC Securities expects standalone profit growth to moderate to 10 percent over FY19-21E.
Multiple factors impacted Eicher Motors stock in the last one year which has lost 23 percent since Mach 20, 2018 when it was trading at 28,360. The stock has been in a downtrend since then. It closed at Rs 21,759 on Tuesday, March 19.
HDFC Securities, which re-initiated its coverage on Eicher Motors, maintains its sell rating on the stock with a target price of Rs 21,000.
The main factor which led to a sharp correction in the stock is the slowing growth.
“After witnessing robust growth over CY12-FY18, when earnings grew 46 percent CAGR, we believe earnings growth will moderate to 10 percent CAGR over FY19-21E as lifestyle segment growth normalizes in India, competition steps up and export initiatives take time to pay off,” said the HDFC Securities note.
The domestic brokerage firm assigns PE of 22x to the Royal Enfield business – at 25 percent premium to the mass market OEM’s. The lower multiple reflects the moderating growth outlook.
There are three possible near-term headwinds for the company as highlighted by HDFC Securities. Customers are yet to absorb the price hikes in its entirely (Rs.25,000, ~15% of the ASP), secondly, high volume markets such as Kerala (where RE has a 30% market share of overall bike sales) are sluggish, and finally, competition in commercial vehicles remains intense, with the industry continuing to witness aggressive discounting.
Combination of the above factors is also impacting profitability at VECV or Volvo Eicher Commercial Vehicles Limited.
The incumbents, Tata Motors and Ashok Leyland, have adopted an aggressive discounting policy to protect their respective market share.
Our channel checks suggest that discounts continue to remain elevated, particularly for large fleet orders. Thus, VECV’s market share has been restricted to 11 percent.
How do financials stack up?
After witnessing a 46 percent CAGR in volumes over CY10-FY18, revenues for Royal Enfield will moderate to 11 percent over FY18-21E.
EBITDA margins have expanded sharply from 18 percent in CY13 to 31 percent in FY19 as the benefits of operating leverage kicked in. The domestic brokerage firm believes that the margins will stabilise in the 28-30% range.
In terms of profitability, after witnessing a 60 percent CAGR in profits over CY10-FY18, HDFC Securities expects standalone profit growth to moderate to 10 percent over FY19-21E.
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