Our recent meeting with Lalit Malik, CFO, Eicher Motors (EIM), reinforces our confidence in the company’s long-term prospects. Key takeaways for 2 wheelers (2W) are: demand outlook remains robust; EIM has sharpened focus on front end, customer experience, service, new catchment areas, etc. In the past five years, spotlight was on scaling up manufacturing; EIM has chalked out a focused and strategic exports approach based on learnings from past three years; in our view, chrome plating and pace of vendor scalability are key capacity bottlenecks; and management envisages adequate margin levers. Maintain ‘Buy’.
Management is confident of strong domestic demand. It believes, more number of players will expand the market. EIM’s target is to expand its dealer network from ~700 to ~800 by FY18 end. Also, management has been sharpening focus on states where its presence is low. This is likely to add new catchment areas. Management reiterated production target of 825K in FY18. In our view, chrome plating and vendor ramp up remain key bottlenecks with respect to capacity. There is no specific cap on margin. However, management focuses on long-term margin rather than quarterly variations. EIM perceives adequate margin levers from vendor scale up. Operating leverage from higher scale is yet to reflect as EIM is in investment mode in export markets.
EIM has chalked out a focused and strategic approach. It has identified key markets to focus on based on learnings from past 3 years. Our ~44% EPS CAGR over FY17-19E is driven by strong demand for RE and margin improvement, led by scale and vendor consolidation benefits. VECV is also focusing on profitable growth and has enhanced market share riding new launches. At CMP, the stock trades at FY19E PER of 24.6x. We maintain ‘Buy/SO’ with TP of Rs 34,891, 30x core EPS, preferred band 25-35x, 17x VECV core EPS and Rs 2,576 cash per share.