Royal Enfield revenues were in line with estimates.Royal Enfield revenues were in line with estimates.

Royal Enfield revenues were in line with estimates.
Royal Enfield revenues were in line with estimates.

Royal Enfield revenues were in line with estimates. A slight dip in gross margins was offset by lower SG&A, resulting in Ebitda at R5.8 bn (+61% y-o-y, +6% q-o-q), in line with estimates. PAT at ~R4.15bn was also in line. VECV performance was slightly better than our modest expectations with Ebitda at R1.3 bn (6.9% margin) higher than our estimates of R1.1 bn (6.5% margin).

Also Watch:

Royal Enfield outlook positive: RE’s volumes have been strong and with management noting that order book is still ~3 months (high selling models) on a higher production base, we are more sanguine on volume growth. We increase our FY18-19 volume estimates by 1%. Our FY17 volume estimate increases by 5% as RE has been more resilient to demonetisation than we expected. We are slightly more cautious on margins due to high raw material costs. While there could be a price increase in Q4 (BS4), we have slightly trimmed our margins over FY17-19 by 0-30 bps.

VECV: Ahead of our modest expectations — Demonetisation has impacted CV industry significantly with declining volumes and elevated discounts. That said, VECV’s 9MFY17 performance is ahead of our relatively muted expectations, which prompts us to increase our FY17 Ebitda estimates by ~9% while FY18/19 estimates are broadly unchanged.

Other con call takeaways — (i) RE order book remains strong with bookings more than production, (ii) ~100 RE dealers are being added every year — 640 by Dec’16 end, (iii) No price hike taken in Q3, though there could be BS4 related price hikes in Q4, (iv) third plant at Vallam Vadagal is expected to get commissioned in Q3FY18.

Implications: We maintain Buy on Eicher Motors, primarily due to the strong positioning of Royal Enfield and its healthy margins trajectory. Our SOTP-based target price increases slightly to R28,000 from R27,300 earlier reflecting a slight increase in RE’s earnings (~8% for FY17; 2-3% over FY18-19) as well as VECV’s estimates.

Valuation: Our target price for Eicher Motors of R28,000 is based on a sum-of-the parts methodology. We value the Royal Enfield business (parent) at

R26,140/share based on 33x Sep’18E core EPS (ex-dividend from VECV). It is difficult to compare Royal Enfield with other Indian 2W OEMs, given RE’s unique product positioning and significantly higher growth rates vs. other 2W companies. Our target multiple is at a ~18% premium to Harley Davidson’s trading multiple of ~28x over its peak earnings growth phase (CY99-2002).

We value Eicher’s 54.4% stake in VE Commercial Vehicles (VECV) at R1,460/share, based on 9x Sep’18E EV/Ebitda—a ~10% discount to our 10.5x target multiple for Ashok Leyland. We add net cash of R43/sh on VECV’s books. Eicher’s 50% stake in the Polaris JV (EPPL), is valued at R324/sh, based on 4x Sep’18e BVPS. The 4x multiple is set at a ~20% discount to Polaris’s trading multiple given the JV launched its first vehicle, Multix, in June’15 and is still in expansion phase.