We maintain ‘sell’ on Eicher Motors as valuations are extremely expensive. The stock trades at 34x CY16 EPS, which we find expensive and difficult to fathom given Royal Enfield (RE) volume growth will likely slow down as it achieves scale of 500,000 units. The long-term growth rate of RE business is questionable as competition heightens with segment volumes rising. We have cut our consolidated earnings estimates by 4-10% over CY14/15 driven by cut in VE Commerical Vehicles (VECV) volumes. We have raised our target price to R9,000 from R8,300 as we roll-over to September 2016 from March 2016.
VECV business beats estimates. Eicher Motors reported consolidated net profit of R165 crore (up 54% y-o-y) which exceeded our estimates with higher-than-expected revenues in the VECV business. Strong volume growth in RE business continues to drive consolidated earnings growth. The RE business reported a stellar quarter with a 128% y-o-y growth in net profit while volumes grew by 70% y-o-y.
VECV business reported net sales of R1450 crore (up 17% y-o-y), 14% higher than our expectations. Volumes grew by 3% y-o-y led by light commercial vehicle volumes while heavy-duty truck volumes remained subdued. Gross margin improved by 110 bps y-o-y driven by higher share of 7.5-12 MT trucks in the mix which is Eicher’s key volume segment.
By Kotak Institutional Equities