We interacted with the management of Eicher Motors (EIM). Though production growth seems restricted to 15% YoY, there continues to be levers for demand to outpace supply – namely, dealer expansion from 825 to 925 (new dealers volume has historically been incremental), higher growth in relatively underpenetrated states, new products (650cc twins) and sharp growth in exports (albeit on a low base). It’s positive to note that ~33% of sales are from those upgrading from a typical 125cc bike and not 150-200 cc earlier. With rising scale, efficiency and share of spares/accessories, margin can continue expanding.
We still believe EIM is a quality franchise with growth story well intact, but maintain HOLD due to limited upside in the stock. Our unchanged TP values the stock at 25x FY20E PE.Management continues to believe that the key selling point of Royal Enfield (RE) is the strong brand heritage at an affordable cost. RE continues to have strong top of the mind recall with buyers (online search market share is 2x its retail market share) and a robust test-ride conversion ratio of 55%. The growth in mature stores remains strong at 12%.
With new Vallam Vadagal facility ramping up, it can do a production of 950k units in FY19 . RE has started work towards phase 2 of its new plant and will have exit capacity of 1.2 mn per annum eventually, post which it will have to consider a new greenfield plant. First-time buyers account for 8% of sales (vs. nil few years back). Further, the management highlighted that 33% of sales are direct upgrades from 125 cc. This bodes very well for long-term demand. The export strategy is twofold – (1) 350 cc and 500 cc product portfolio in high volume developing markets; (2) newly launched twin cylinder 650 cc engine for developed markets (where single cylinder is unable to compete on power).