Product upgrade cycle is key; host of positives behind 5% rise in FY20e EPS; TP up to Rs. 25,019; ‘Buy’ retained.
Eicher Motors’ (EIM’s) Q2FY20 consolidated EBITDA of Rs. 5.4 bn (down 25% YoY) came in line with our estimate. Despite a tough quarter, we are enthused by: 1) double-digit festive retails & a good start to November; 2) tight leash on inventory (<3 weeks) prior to upcoming BS VI transition; and 3) margin levers due to operating leverage & commodity benefits. Hence, we revise up FY20E EPS 5% and multiple to 26x (from 24x). We factor in a strong product cycle for EIM’s core models (drawing from 650cc twins and Himalyan Sleet) post BS VI transition. Maintain Buy with revised TP of Rs. 25,019 (Rs. 20,456 earlier).
In-line quarter: Standalone revenue of Rs. 21.6 bn (down 9.5% YoY) beat our estimate by 2.0%. The beat was driven by sustained improvement in realisation, up 2.1% QoQ (up 1.5% QoQ in Q1FY20) due to increase in share of 650cc twins. However, 100bps QoQ spike in other expenses, coupled with lower-than-expected raw material benefits weighed on EBITDA margin, which slid 90bps QoQ to 25%. Consolidated PAT of Rs. 5.7 bn was 14% ahead of estimate due to lower tax rate.
Product cycle: Key to watch out for – In the near term, margin lever exists due to recent commodity price correction. Also, with investment phase in employees and export markets behind, staff and other expenses can also provide margin levers as volume ramps up. However, we expect RE to have a strong product upgrade cycle along with BS VI transition. We expect the strong capability upgrade seen in 650cc twins and Himalayan Sleet to flow through its core models as well as create new segments.
Outlook: Structural story intact – Our FY19–21E EPS CAGR of 15% factors in ~11% volume decline in RE in FY20, followed by pick-up in FY21 as the premiumisation trend sustains. We maintain ‘BUY/SO’, valuing RE at 26x FY21E core EPS, VECV at 16x EPS and cash per share of Rs. 3,751. The stock is trading at FY20/21E PER of 25.3x/20.1x.