Maintain ‘hold’ on Eicher Motors with unchanged TP of Rs 2,600

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Eicher’s story is in line with this overarching thesis.Eicher’s story is in line with this overarching thesis.

Perfect-storm is an understatement for Indian auto industry: BS VI transition, Covid-19, semiconductor shortages and, on top of everything, commodity price increases have significantly impacted sales and earnings. Royal Enfield (RE) has seen c20% EPS downgrades since early 2020. On the flip side, it also means over the medium term the sector is likely to perform strongly as some of these headwinds recede or normalize. Eicher’s story is in line with this overarching thesis. Strong traction in exports in recent quarters by most companies, including for RE, is a medium-term positive as well. For RE, in particular, the risk of an EV pick-up is low as well.

However, patience is in order to play the positive theme: Semiconductor shortages don’t look like they will normalise over the next few months. Also, from a demand perspective, while we see strong pent-up 2W demand (especially in the 125c-150cc segment), RE’s growth outlook remains in uncharted territory. Quality has significantly improved in the new products, however the price of RE bikes has risen by 20-30% over the past three years. This has been the biggest set-back to the penetration story. In the long term, sustaining margins will remain a challenge as well, while valuations leave little scope for further downside. Separately, on the CEO exit, while the timing is a bit disconcerting, we don’t see the transition to the current COO as a negative, although we look for Eicher to further expand/ strengthen the board.

1Q22 Highlights: RE business revenue of Rs 19bn was slightly ahead of our expectation (of cRs 18.4bn), while EBITDA margins (17.5%) were in line. Led by semiconductor shortages, management expects production to ramp up only gradually through the rest of FY22. Supply constraints are a concern, especially for the success of its imminent launches (the New Classic 350 is due to be launched later this month). An inability to fulfil festive demand could be a setback as well. We cut our volume estimates for RE by 11% and now factor in sales of c700K units for FY22. However, we expect the product mix to remain strong for the rest of the year and partially offset the current headwinds.

Maintain ‘Hold’ rating with unchanged TP of Rs 2,600. We remain positive on the long-term story, however, consensus earnings downgrades may continue in the near term and impact valuations, in our view. The success of new launches or better than expected production ramp-ups are the key upside risks.

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