Eicher Motors rallies 4% after UBS upgrades stock to 'Buy', sees 29% upside

The brokerage is upbeat on the company's prospects due to promising growth outlook of Royal Enfield

Shares of Eicher Motors, the maker of Royal Enfield motorcycles, sprinted 5.9 per cent to Rs 3,938.6 per share on the BSE in Wednesday's intraday trade after global brokerage UBS upgraded the stock to 'buy' from 'neutral'.

It ended 4.2 per cent higher at Rs 3875 as against 0.12 per cent rise in the benchmark S&P BSE Sensex, and 0.47 per cent gain in the S&P BSE Auto index. 

The brokerage has also raised its target price to Rs 5,000 from Rs 4,300 – a 29 per cent upside from current levels -- enthused by the promising growth outlook of Royal Enfield.

"We think the market is missing continued strength in Royal Enfield's addressable market, lackluster response to competition, its strong customer connect, and the start of a multi-year upgrade cycle among existing customers," it said. 

RE demand set to pick up

Launches by Harley-Davidson (H-D) and Triumph, as per UBS, did not ramp up volume meaningfully and are below guidance. The cumulative volume of the three models launched by H-D and Triumph was 4,000 as of February 2024. By comparison, the brokerage forecasts 56,000 and 120,000 sales units of upcoming RE launches, led by 450cc roadster, in FY25 and FY26, respectively.

"We think the 450 roadster launch can trigger replacement demand among the 350cc customer pool, which represents only 5 per cent of new demand for RE," it said. A 3-4 per cent conversion rate could result in annual sales of 100,000-150,000 units, it added.

RE's motorcycle line-up includes 'Interceptor', 'Continental GT', 'Classic', 'Bullet', 'Thunderbird', and 'Himalayan'.

In the October-December quarter (Q3 FY24), Royal Enfield’s domestic sales volume grew 6 per cent year-on-year (Y-o-Y) to about 213,400 units. Eicher Motors launched Himalayan 450 in India in Q3, and Shotgun 650 in the UK and European markets in January 2024.

Royal Enfield’s market share in Europe was 9 per cent at the end of the first nine months of FY24. It was 8 per cent in the United States, and 9 per cent in the Asia Pacific. Eicher Motors leads India’s high-end motorcycle market by a wide margin despite intense competition, analysts say.

Analysts at BOB Capital have increased FY24/FY25 Ebitda estimates by 7 per cent/3 per cent and PAT [profit after tax] by 6 per cent/3 per cent to factor in the introduction of high-end variants, a better product mix, and easing costs. 

"We also pencil in revenue/Ebitda/ PAT CAGR of 11 per cent/15 per cent/18 per cent for the company over FY23-FY26. We raise our target price to Rs 4,045 (vs Rs 3,601 earlier); we retain HOLD," analysts at BOB Capital had after Eicher Motors declared its Q3 results.

Analysts at Nuvama Institutional Equities expect Eicher Motors to have revenue CAGR of 9 per cent over FY23-26E driven by replacement demand, new products, and recovery in exports.

UBS, on its part, expects Eicher Motors' Ebitda to grow at an 18 per cent CAGR, driven by domestic demand and a favourable backdrop for exports.

Valuation support

According to estimates, Eicher is trading at 17 per cent discount to other two-wheeler original equipment manufactures (OEMs) on a 1-year forward price-to-earnings basis vs a 47 per cent premium over the past 5 years.

"We do not believe consensus is factoring in the success of new models, especially the 450 roadster, which we believe can drive meaningful outperformance vs industry growth. We do not yet factor in a demand rebound, although that is a potential upside risk," UBS said. It estimates 3 per cent volume CAGR for the 350cc portfolio in FY24-26.

At the bourses, Eicher Motors has shed 6.4 per cent on the BSE so far in the current calendar year as against a 0.01 per cent dip in the BSE Sensex. The stock hit a 52-week high of Rs 4,201.70 on December 4, 2023, and a 52-week low of Rs 2,835.95 on March 28, 2023.