Maintain “hold” on Eicher Motors with Rs 2 804 TP
Strong performance outperformance: Eicher Motors (EIM) posted autonomous EBITDA of Rs 4bn 12% above estimate at Q2FY22. A sudden QoQ jump of 15% or Rs 22k in realization led to surprise. Management attributed 70% of the move to rising prices and mix, and the rest to rising accessories / spares. During S1FY22, achievement jumped by around 23% (price mix, model mix and spare parts).
This makes us wary of the price elasticity of demand once supply normalizes, especially given the general downturn in the 2W industry. For EIM, chip shortages constrain the assessment of price-demand elasticity. Considering the general slowdown in demand, we are reducing FY23E EPS by 12% (could have been higher, but for solid delivery). Hold “WAIT”.
Q2FY22: Historically high realization and gross profit per unit: EIM’s stand-alone EBITDA of approximately Rs 4 billion is 12% higher than our estimate. Realization continued its bullish march (15% QoQ in Q2 after a jump of 7% in Q1). As a result, the gross margin continued to improve QoQ by 30 basis points to 41.4%. Achievement at Rs 174K and gross profit at Rs 73K (up 16% QoQ) are at all time highs. Surprisingly, the QoQ jump occurred despite a stable export mix.
The only change in the mix is the lower volumes of Bullet (entry bike) and higher volumes of Classic 350; exports accounted for 15% of volumes. The only plausible reason for the sharp increase could be an increase in the share of spare parts / accessories under MIY.
Maintain confidence in launches: RE remains a strong franchise. With the launch of Meteor / Classic 350 and the expected launch of one model per quarter, RE is working to address product fatigue. More importantly, with the analytics capacity in place and MIY, RE should gain critical insight into consumer behavior, which in turn should help differentiate the brand. We believe that the success of new products remains essential to revive demand for RE’s products. In addition, the launches should allow RE to exploit international markets.
Outlook and valuation: Taken into account; keep “HOLD” The EIM is on the rise for increased volume as well as launches. However, the current valuation leaves little room for disappointment. We keep ‘HOLD / SN’ with a TP of Rs 2,804 (previously Rs 2,866) while moving to Mar-23E (RE at 33x base EPS, VECV at 25x EPS and cash per share of Rs 418) . The stock is trading at FY23E PER of 26.3x.