Q1 Ebitda was 5% below estimate. Ebitda margin at 26% – down 600 bps y-o-y (a 100 bps miss) – was impacted by higher staff cost (lumpy hiring/ increment provisions; expected to taper) and operating deleverage.
RE’s net ASP remains strong owing to premium models an price hikes. Management expects volume and margin to recover from here. It is also expanding its present ~930 dealer reach with additional 500 rural-focussed studio stores (vs. 350 initially planned) by Q2. Volume outlook is grim at the moment, but we continue to believe that RE’s volume headwinds are not structural.
When 2W industry recovers, RE’s growth will outperform industry (albeit at a slower pace than historically). We have moderated our volume/margin estimates further (leading to 7%/6% cut in FY20/21 earnings), but still foresee 10% FY19-21 earnings CAGR. Maintain ‘Buy’ with revised TP of Rs 19,300, 20x FY21E PE (20% below historical average), vs. Rs 23,721 earlier.
Management expects volumes to pick up going ahead on the back of recovery in sentiment. RE volumes have declined more than the industry given the aspirational nature of its products. Management expects RE volumes to also recover faster than the industry when the sentiment turns positive. Demand has been impacted more in states where RE has a higher market share than its country average.
Top 20 cities now account for 25% of RE volumes. Channel inventory is less than 1 month and dealer inventory is much less than that. Footfalls and conversions continued to remain weak in Q1 akin to Q4. However, online search and field enquiries have improved.
Management is focusing on improving walk-ins through various activities (including expanding distribution network) over the next 2 months. These stores are typically smaller (225 sq. ft in size with workshop area of 275 sq. ft.) vs. larger stores in cities (3-5x the size). Identity across stores will be unified and they will typically sell 12-20 bikes a month (vs. 80-120 for larger stores) and will break-even even if they sell 10 bikes a month.