New launches, exports pick up to drive volume gains for Eicher Motors

Margin expansion is expected to continue on strong volumes, improving mix, say analysts

The stock of two wheeler maker Eicher Motors was the highest gainer among BSE 100 stocks, rising 6.6 per cent in trade on Friday. The gains came on the back of better than expected performance in the March quarter of the 2022-23 financial year (Q4FY23) and earnings upgrades by brokerages. Standalone revenues (Royal Enfield) were up 19.9 per cent year-on-year (YoY), led by an 18 per cent growth in volumes and a marginal uptick in realisations.
 

Volume growth was led by multiple new launches, including the Hunter 350 and Super Meteor 650. Realisations uptick of about 2 per cent to Rs 1.75 lakh per unit was led by better product mix and price hikes taken in November. Incremental volumes from new launches helped the company report a strong share of 7.5 per cent in the domestic market.
 

Brokerages expect the company to post strong volumes going ahead as recovery takes shape, exports gather momentum and new launches drive demand. Nirmal Bang Research expects volume growth to be 13 per cent over FY23-25, led by both domestic and export markets. The upcycle in the commercial vehicle (CV) space is expected to benefit the joint venture Volvo Eicher Commercial Vehicles. The company expects the CV industry to grow in double digits in FY24.
 

The firm is expanding its addressable market through distribution expansion via smaller format stores, price laddering (multiple variants), new product launches and mass personalisation through the ‘Make it Yours’ (MIY) platform, say analysts at Motilal Oswal Research.
 

The beat on Street estimates was in the operating performance. Gross margins at the consolidated level were up 60 basis points (bps) YoY and 250 bps on a sequential basis to 44.3 per cent. A significant part of the margin increase on a sequential basis was on account of lower raw material costs. In addition to these price hikes in the previous quarter, increased exports and cost saving programmes aided profitability.
 

While operating profit grew 23 per cent YoY to Rs 930 crore, margins at the operating level grew by 80 bps YoY and 150 bps quarter-on-quarter (QoQ) to 13-quarter high of 24.5 per cent. The gains were led by higher average selling prices and lower staff costs. Some of the gains were offset by increased other expenses and inventory changes.
 

The company is the preferred pick of Prabhudas Lilladher Research in the two wheeler space. Analysts at the brokerage expect volume growth from new product launches, higher export revenue mix, increase in mix of spares and merchandise revenue to aid both -- revenue growth and margin expansion.  
 

Given that the target prices are in the Rs 3,650-Rs 4,100 range, the upside from the current levels is about 10 per cent on the higher part of the valuation band. Investors can consider the stock on dips.