Downgrade Eicher Motors to ‘reduce’

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Published: March 16, 2016 12:12:22 AM

Our dealer checks across states reveal that average waiting period for Royal Enfield (RE) motorcycles is at 2.2 months vs. 5 months at 2014-end.

Our dealer checks across states reveal that average waiting period for Royal Enfield (RE) motorcycles is at 2.2 months vs. 5 months at 2014-end. Part of this is due to increase in production capacity; it is also due to new order generation falling below deliveries. We expect RE’s order book to deplete in FY17 and result in lower volume growth in FY18.

Eicher may not be able to keep driving volume growth through network expansion as metros and Tier I/II cities are largely saturated; sales per dealer in smaller Tier III/IV towns is much lower than the country average. The stock is trading at 33x FY17 EPS, at 100% premium to peers. We expect the stock to de-rate as: volume/earnings growth will fall, and depletion of order book will lead to volatility as monthly volumes will reflect concurrent underlying demand. Downgrade to reduce.

Average waiting period has fallen to 2.2 months vs. 5 months at 2014-end. This reflects: increase in capacity; and new order generation not keeping pace with deliveries. We expect the outstanding order book to fall sharply in FY17, resulting in lower growth in FY18 as Eicher would enter the year without cushion of a big order book. We note that management guidance of 620k units in CY16 and 900k capacity in CY18 implies 28% y-o-y growth in 2HCY16 and 20% CAGR over CY16-18, much lower than the current 50%+ growth.

RE’s dealer network has grown at 25% CAGR over 2011-2015; it has been a key driver of RE’s volume growth. The RE network has largely saturated in metros and Tier I/II cities. We expect network growth rate to come off as the low-hanging fruits have been exhausted.

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