Motilal Oswal: ‘Buy’ with target price of Rs 25,000 on Eicher Motors

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Published: November 23, 2019 12:30:52 AM

RE is witnessing demand weakness for the first time since its renaissance in 2008, as it is in a perfect storm with weak industry environment, substantial cost inflation and a new competitor.

The initiatives are expected to gradually reflect in volume recovery over the next 3-6 months, as industry-wide headwinds recede. The initiatives are expected to gradually reflect in volume recovery over the next 3-6 months, as industry-wide headwinds recede.

Eicher Motors (EIM) owns one of the oldest motorcycle brands in the world — Royal Enfield (RE) — a brand that is also the market leader in the Indian super premium motorcycle (>250cc) category. It also has a JV with Volvo for the commercial vehicle business in India.

Worst seems behind, expect recovery from 2HFY20: RE is witnessing demand weakness for the first time since its renaissance in 2008, as it is in a perfect storm with weak industry environment, substantial cost inflation and a new competitor. After witnessing severe headwinds over last 12 months, we expect volumes to recovery gradually from hereon. The company is now focusing on expanding its addressable market size by, improving its product quality, launching new products, expanding dealerships (in sync with capacity expansion), and driving a paradigm change in its retail identity, which in turn should improve growth sustainability.

Post Mr. Dasari coming on board as the CEO, the company has renewed its strategy to expand RE sales by expanding its distribution network (through smaller format stores), price laddering (offering multiple ‘trim’ levels), and mass customisation. We are seeing credible progress in all the three areas.

The initiatives are expected to gradually reflect in volume recovery over the next 3-6 months, as industry-wide headwinds recede. Unlike other 2W players, RE is better placed in terms of inventory, which is at 2.5-3 weeks v/s 5-7 weeks for other players, and impact of BS6, which is at 5-7% for RE v/s 10-12% for other players.

The BS6 transition is expected to address questions surrounding product fatigue, as the current Classic platform is 11 years old.

Buy with TP of INR25,000 (Sep’21 SOTP-based – 22.5x S/A EPS + VECV @ 10x EV/EBITDA).

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