Analyst Corner: ‘Hold’ on Eicher Motors with revised TP of Rs 23,730

We downgrade Eicher Motors (EIM) to ‘hold’ even though we raise EPS 11% and target multiple by 10% to 30x. Post the sharp ~50% run up since our transcending report, current valuations leave limited room for positive surprise sans success of new product cycle. We also revise TP to Rs 23,730 (earlier Rs 19,031). We continue to like the franchise and the structural premiumisation story. However, to monetise the same, the company needs a strong product cycle tailwind, which remains key monitorable.

Q1FY21 standalone EBITDA at Rs 12 m was below our estimate due to higher dealer incentives and fixed cost incidence. Management indicated that booking has reached pre-covid level with strong demand in tier 2/3 cities. Order backlog is at 40-50K units due to production constraints, which should normalise before the festive season.

EIM’s standalone revenue of Rs 7.6bn came broadly in line with our estimate. However, reported EBITDA was weighed down due to certain one-time covid-related incentives (~Rs 300 m) and higher fixed costincentives. Losses from the VECV JV magnified to Rs 654 m (Rs 140 m loss in Q4FY20) as VECV’s performance was impacted by ~85% dip in volumes.

Royal Enfield (RE) is well placed to capitalise on rising structural premiumisation trend and minimal replacement demand. However, a strong product cycle is imperative, especially when competitive intensity is expected to rise as the market size continues to expand. We expect RE to outpace the industry given its strong franchise and deepening reach. However, current valuations leave little room for disappointment. We, therefore, downgrade to ‘hold/SO’ from ‘buy/SO’ with revised TP of Rs 23,730, valuing RE at 30x FY22E core EPS, VECV at 25x EPS and cash per share of Rs 3,921. The stock is trading at FY20/21E PER of 42.1x/26.1x.