Analyst Corner: Upgrade Eicher Motors to ‘add’, FV revised to Rs 19,500

By: |
March 7, 2020 3:30 AM

The company has smoothly transitioned to the BS-VI regime.

Eicher Motors, chinaEicher Motors imports certain electronic components (indirect impact) and alloy wheels from China.

Eicher Motors share price has corrected by 19% over the past three months due to a weak demand environment in the domestic market and concerns around supplies of some parts because of coronavirus. We upgrade the stock to ‘add’ (from ‘sell’ earlier) thanks to reasonable valuations, limited competition in >350 cc segment, further penetration into hinterlands and aggressive product launches. Fair value revised to `19,500 (from `18,700 earlier) due to rollover to March 2022E EPS.

Eicher Motors imports certain electronic components (indirect impact) and alloy wheels from China. Currently, the company has sufficient inventories of alloy wheels for at least a month. Factories in certain parts of China have restarted and the company expects supplies to normalise soon. The company has also identified alternative sourcing partners for electronic components and is readying alternate vendors for alloy wheels. Hence, we believe the risk of production disruption for the company remains limited currently.

The company has smoothly transitioned to the BS-VI regime. It will be selling 100% BS-VI vehicles from March onwards and its inventory levels remain very low. The company has highlighted that the feedback of customers on BS-VI products is quite encouraging. We would like to highlight that the company has taken an absolute price increase of `9,000 to `11,000 on BS-VI vehicles; however, price increase as a % of selling price is in the range of 3-7% only versus 10-15% price increase for competition.

Given low inventory levels and reasonable price increase, we expect RE to clock in average monthly volumes of 60,000-65,000 units, implying 4% y-o-y growth in volumes in FY2021E and 15% y-o-y growth in FY2022E, led by launches and recovery in industry volumes.

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