New launches, exports gain captured in Eicher Motors' valuations

Aided by a 10 per cent increase in volumes and 5 per cent increase in realisations

The operational performance of Eicher Motors in the July-September quarter (second quarter, or Q2) surpassed Street expectations, leading to a 2 per cent gain in the stock’s trade on Monday. As the market leader in the premium two-wheeler category, the company exhibited margin expansion despite a decline in the sales mix.

Most brokerages have revised their margin and earnings estimates for the company, increasing them by up to 6 per cent for 2023-24 (FY24)/2024-25 (FY25) to account for the Q2 performance and higher other income.

Benefiting from a 10 per cent increase in volumes and a 5 per cent rise in realisations, standalone revenues grew by 16 per cent, while consolidated revenues were up 17 per cent over the year-ago quarter.

In VE Commercial Vehicles, a Volvo Group and Eicher Motors joint venture (JV), volumes rose by 11 per cent and realisations increased by 10 per cent, resulting in a 22 per cent sales increase for the JV.

While revenues exceeded expectations, the standout was margin performance. Gross margins expanded by 190 basis points (bps) sequentially and 360 bps year-on-year to 46 per cent, driven by lower raw material costs contributing 100 bps to the increase, with the rest attributed to improved mix and inventory gains.

Despite higher employee costs and other expenses, operating profit margins expanded by 310 bps to 26.4 per cent.

On the demand front, the company indicated a growth of 13-14 per cent during the festival period, spread equally across regions. Both the recently launched Classic 350 and the Hunter 350 (launched a year ago) saw strong growth, with the former growing at a faster pace.

The company expects to maintain growth momentum, supporting its market share in the 125cc-plus segment, which stood at 32 per cent in the first half of FY24.

New product launches, such as the Himalayan 450 expected soon, could further boost volumes.

Prabhudas Lilladher believes that the recent increase in the competitive landscape has dampened Eicher’s near- to medium-term growth prospects and could chip away at Royal Enfield’s growth volumes. 
 

However, the brokerage, with an ‘accumulate’ rating, believes that volume growth from new product launches, focus on increasing export revenue mix, and a higher mix of spares and merchandise revenue should aid both revenue growth and margin expansion.

Motilal Oswal is forecasting volume growth of 11 per cent annually for Royal Enfield over 2022-23 through FY25. This projection is based on an improving supply side, new product launches, and the ramp-up in exports expected to drive the next phase of growth.

The brokerage believes that valuations at 23.8 times its FY24 earnings and 21 times FY25 earnings largely reflect the expected volume recovery but not the potential risk from the recent launches of Bajaj-Triumph and Hero-Harley-Davidson in mid-size motorcycles in India and global markets. It has thus reiterated its ‘neutral’ rating.