Rating: sell; Eicher Motors in the fast lane

Eicher Motors has announced a standalone Ebitda of Rs 9.5 bn, which is 7% higher than our expectations. This is primarily due to higher-than-anticipated average selling prices (ASPs) resulting from a favourable product mix in both domestic and export markets. However, despite the launch of the Hunter 350, demand for Royal Enfield’s domestic portfolio (excluding the Hunter) remained weak due to high upfront costs, and certain states continued to weigh on demand recovery.

In the coming period, the competitive landscape is expected to intensify with the launch of new models in the >250 cc motorcycle segment by Bajaj-Triumph and Hero-Harley, which may pose a challenge to Eicher Motors’ growth prospects. Therefore, we recommend retaining the SELL position.

Q4FY23 standalone Ebitda came in 7%

Eicher Motors reported Q4FY23 standalone Ebitda of Rs 9.5 bn, which was 7% above our expectations due to (i) higher-than-expected ASPs, (ii) RM tailwinds and (iii) higher spares mix. Revenues increased 6% q-o-q, which was led by (i) an 8% q-o-q increase in ASPs and (ii) 1% q-o-q decline in volumes owing to a 5% q-o-q decline in domestic sales. Improvement in ASPs can be attributed to (i) a higher mix of export sales (300 bps q-o-q), (ii) higher mix of the >500 cc motorcycle segment, especially in the export segment, (iii) price hikes, (iv) lower mix of Hunter 350 and (v) higher spares mix. Ebitda margin was at 24.7% (80 bps q-o-q)—30 bps above our expectations. Gross margin improved 120 bps q-o-q due to a richer product mix and raw materials (RM) tailwinds. Standalone net profit of `7.5 bn, which is 7% above our expectations due to a beat at the Ebitda level.

Per vehicle profitability improved 11%

Eicher Motors’ gross profit per vehicle and Ebitda per vehicle improved 11-12% q-o-q at Rs 75.2k per vehicle and `43.2k per vehicle in Q4FY23, led by a higher mix of exports, better product mix, price hikes and commodity tailwinds. However, we believe the current gross profit per vehicle should not be extrapolated; we expect the profitability to partly reverse in the coming quarters.

VECV reported revenues of `5.9 bn (42% y-o-y) in Q4FY23 and Ebitda of Rs 6.2 bn (110% y-o-y), which came broadly in line with our estimates. The company reported Ebitda margin of 10.4% in Q4FY23. 

Increase our FY2024-25E Ebitda estimates by 2-3%; maintain SELL

We have increased our FY2024-25E standalone Ebitda estimates by 2-3% due to higher ASP assumptions and increased our FY2024-25E standalone EPS estimates by 3-4% on higher other income assumptions. Furthermore, we expect Hunter to deliver 180k and 191k volumes in FY2024E and FY2025E, respectively. Demand recovery in the domestic market remains below expectations due to (i) affordability issues and (ii) muted volume performance of RE’s key states. 

Additionally, monitoring increasing competitive intensity as a potential threat to Royal Enfield’s (RE) volume and profitability in the coming years. SELL stays with a revised FV of `2,900, valuing the standalone business based on the DCF methodology.