'Buy' rating on Eicher Motors shares, a new speedster in town: BofAML

Dec 02 2013, 13:47 IST
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Company to scale up motorcycle operations with new facility and models Company to scale up motorcycle operations with new facility and models
SummaryEicher Motors to scale up motorcycle ops with new facility and models (Continental GT).

Upgrade on higher forecasts, valuation multiples. Despite extended outperformance, we upgrade Eicher Motors Ltd to 'Buy' from 'Underperform'. Key reasons: (i) sharp revision to forecasts, mainly due to motorcycles which contributes over 75% of profit, and (ii) higher valuation multiples, also aided by reversion to FCFs (free cash flows). Our revised EPS (earnings per share) forecasts are 6%-15% ahead of street over CY14, CY15e, and our PO (price objective) of Rs 6,000 (earlier Rs 2,845) offers 43% potential upside.

Eicher Motors

Motorcycles: structural demand drives sharp revision: Our demand model suggests

Indiaís leisure motorcycle market could register 38% CAGR (compound annual growth rate) over the next five years, nearly 2x (times) earlier expectations. Eicher Motors will be key beneficiary as it readies to scale its operations with an expanded facility (end-Q1CY14), portfolio (Continental GT end-Nov) and network (five-six distributors per month). We therefore revise our volume-led profit forecasts by 36%-65% over CY14-15e (estimates).

Commercial vehicles: new products to drive advantage: Although early revival seems unlikely, Eicher Motorsí operating subsidiary is well positioned to gain market share, aided by new launches starting Dec í13. We also expect the company to be advantaged with leaner cost structure and pricing discipline into the next economic cycle, and thereby register healthier profits. Cut forecasts to reflect the slowdown, but contribution is less significant at 24% of Eicher Motorsí consolidated profit.

Engines: larger potential, better profitability: VECVís (VE Commercial Vehicles Limited) outsourcing initiative to Volvo is larger and also includes engine supplies towards (i) select off-road applications in Europe, and (ii) specific 9L products for emerging markets. Also, we expect profits to be higher due to upfront recognition of product development expenses. Our estimates are raised by 30% in CY15e.

Polaris JV: Not in our forecasts: Eicher Motors and Polaris Industries (PI) operate a 50:50 joint venture, which is setting up a green field project aimed at design and manufacturing of passenger vehicles for India and other emerging markets. The joint investment is estimated at R2.5 bn.

First product in CY15: The JV is expected to roll out its first customised product in CY15. Although our cash flows build in EMLís share of the investment, we have not factored in contribution from the new launch due to lack of visibility at this stage. Given PIís historic track record and strong execution capabilities across markets, we expect this JV to also

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