Maintain ‘hold’ on Eicher Motors with Rs 2,804 TP

By: |
November 10, 2021 1:24 AM

Management attributed 70% of the movement to price hike and mix, and the balance to higher accessories/spares. Over H1FY22, realisation jumped ~23% (mix of pricing, model mix and spares).

The stock is trading at FY23E PER of 26.3x.

Sharp realisation outperformance: Eicher Motors (EIM) posted Q2FY22 standalone EBITDA of Rs 4bn 12% above estimate. A sudden QoQ jump of 15% or Rs 22k in realisation drove the surprise. Management attributed 70% of the movement to price hike and mix, and the balance to higher accessories/spares. Over H1FY22, realisation jumped ~23% (mix of pricing, model mix and spares).

This makes us wary of price elasticity of demand once supply normalises, especially given a general slowdown in the 2W industry. For EIM, chip shortages are restricting price-demand elasticity assessment. Taking cognisance of the general slowdown in demand, we are lowering FY23E EPS by 12% (could have been higher, but for strong realisation). Maintain ‘HOLD’.

Q2FY22: Historical-high realisation and gross profit per unit: EIM’s standalone EBITDA of ~Rs 4bn is 12% ahead of our estimate. Realisation continued its upward march (15% QoQ in Q2 after a 7% jump in Q1). As a result, gross margin continued to improve QoQ by 30bps to 41.4%. Realisation at Rs 174K and gross profit at Rs 73K (up 16% QoQ) are at historical highs. Surprisingly, the QoQ jump has happened despite a stable export mix.

The only change in mix is lower volumes of Bullet (entry bike) and higher volumes of Classic 350; exports made up 15% of volumes. The only plausible reason for the sharp jump could be a surge in the share of spares/accessories under MIY.

Keeping faith in launches: RE remains a strong franchise. With the launch of Meteor/Classic 350 and the expected one-model-launch-per-quarter, RE is striving to address product fatigue. More importantly, with analytics capability in place and MIY, RE should gain critical insight into consumer behaviour, which in turn should help in brand differentiation. We believe success of new products remains critical to revival of demand for RE’s products. Besides, launches should enable RE to exploit international markets.

Outlook and valuation: Priced in; maintain ‘HOLD’ EIM has tailwinds of volume ramp-up as well as launches. However, the current valuation leaves little room for disappointment. We retain ‘HOLD/SN’ with a TP of Rs 2,804 (earlier Rs 2,866) while rolling over to Mar-23E (RE at 33x core EPS, VECV at 25x EPS and cash per share of Rs 418). The stock is trading at FY23E PER of 26.3x.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Global markets: Asian shares catch global equities rally, but oil slips
2Reliance Industries, Spicejet, Vedanta, Hindustan Zinc, SBI among stocks in focus today
3NBFCs raise over Rs 42,000 crore via ultra-short-term CPs in one week to finance IPOs