Retain ‘buy’ on Eicher Motors with target price of Rs 25,000

Eicher said that RE demand remains healthy, with inquiries at pre-Covid levels and bookings close to the prior period.

Eicher reported 1Q Ebitda of just Rs 38 million as the Covid-related lockdown took a toll on operations. Demand commentary was strong, though, with Royal Enfield (RE) bookings close to pre-Covid level, and the build-up of a waitlist amid supply constraints. RE also plans to launch a new product in 2QFY21. We find Eicher well-placed to benefit from a potential demand revival given its strong franchise, aggressive product pipeline and big dealer expansion. Retain ‘buy.

Royal Enfield’s 1Q volumes fell 69% y-o-y while Ebitda came in at just Rs 12 million as the Covid-related lockdown took a big toll on operations. RE gross margin was down by a sharp 540 bps q-o-q; the company attributed this mainly to higher incentives in the quarter and expects these to normalise. We believe the adverse accounting effect of inventory drawdown would also have affected gross margin in 1Q.

Ebitda margin fell to near zero, pulled down by adverse operating leverage impact of lower volumes. The commercial vehicle business (VECV) also had a tough 1Q, with volumes down 84% y-o-y. VECV reported an Ebitda loss of `0.7 billion. At the consolidated level, Eicher reported a net loss of Rs 0.6 billion.

Eicher said that RE demand remains healthy, with inquiries at pre-Covid levels and bookings close to the prior period. Production ramp-up has lagged, though, due to lockdowns and supply-chain constraints, resulting in a build-up of 40-45K units of waitlist. Inventories are also down to just ~10K units, less than a week of sales versus the desired level of about three weeks. About 90% of its dealer network had opened up at the peak but this has come down to 75-80% again due to renewed lockdowns in certain areas. Financing penetration has declined from 50-55% pre-Covid to ~45% now but is driven by regional mix and finance availability is not a concern.

RE is turning more aggressive on product launches and plans to introduce 2-3 new platforms in the coming years, along with product upgrades, variants, facelifts, and limited-edition vehicles. The first launch is scheduled for September and RE is planning to hold a product introduction almost every quarter subsequently. A big dealer network expansion is also under way, mainly targeting semi-urban and rural markets, which should fuel the next leg of growth. RE also intends to increase the share of exports from 6% in FY20 to 20% in the long term.

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 28% in FY21, but then rise at 44% CAGR in FY22-23.