We initiate coverage of Eicher Motors with an Ďaddí rating and assign a sum-of-the-parts based target price of R5,500 per share. We value the Royal Enfield business at 20x March15e EPS and the Volvo Eicher Commercial Vehicle (VECV) business at 17x March 15e EPS.
We expect Eicher Motorsí consolidated earnings to increase 2.3x over CY13-15, driven by strong growth in the Royal Enfield business, addition of engine outsourcing revenues in the VECV business and recovery of the commercial vehicle cycle in CY15. The stock trades at ~7.7x CY15e EV/ebitda and 15.1x CY15e EPS, which we belieev is cheap, given the company's strong growth prospects.
The Royal Enfield business is in a sweet spot with a waiting period of 4-6 months across its product range. We believe volume trajectory will remain strong driven by ó expansion of distribution network (the company has presence is restricted to top-60 cities), scale-up of the export business with the launch of Continental GT and uptrading customers to the premium motorcycle segment. We expect Royal Enfield volume to grow at 29% CAGR over CY13-15, driven by rising demand for leisure motorcycles, attractive price points, muted competition and an expanded distribution network.
Eicher and Volvo have formed a joint venture called VECV in the ratio of 54:46, which will manufacture commercial vehicles for the Indian market and become a hub for manufacturing Euro 3-6 engines for Volvo's global operations.
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