Success of new launches, margin improvement to drive Eicher Motors

September volumes were better than estimates led by the new launch Hunter 350

The Eicher Motors stock has been on an uptrend since its lows in May and has been among the top outperformers within the auto sector with gains of 34 per cent year-to-date. Strong demand for new launches, rising exports and margin expansion expectations have led to earnings upgrades. The near term trigger for the stock, which fell 5.7 per cent on Friday, would be volume growth aided by festive season sales and response to upcoming launches.

The company’s wholesale volumes for September was better than expected both for the two wheeler business as well as the medium and heavy commercial vehicle segment. The two-wheeler volumes (Royal Enfield) were up 17 per cent month-on-month while they were up 145 per cent as compared to the year ago period. At 82,097 units, the monthly volume was the highest in recent months and was led by the recently launched Hunter, a 350cc bike.

Citing dealer feedback, Varun Baxi of Nirmal Bang Research says that the company has successfully plugged the product portfolio gap by introducing the Hunter 350 and has extended its reach to those customers, which it was not catering to earlier.

While the product is adding to incremental sales, investors will keep an eye out for the extent of cannibalisation for products in this category--- the Classic 350 and the Meteor. This is because the Hunter 350 is Rs 50,000-Rs 60,000 cheaper per unit than the Classic 350, lighter and a non-cruiser bike aimed at younger, first time buyers. Motorcycles up to the 350cc capacity accounted for over 90 per cent of overall volumes for the company. What should add to the overall volume growth are exports which posted a growth 34 per cent y-o-y. Year to date exports are up over 47 per cent.

The other trigger for the stock is margin improvement. Even as gross margins remained flat at 42.7 per cent, operating profit margin of 24.7 in the June quarter of 24.5 per cent (up 80 basis points q-o-q) surprised the street as it was 100 basis points above estimates. Higher volumes and easing raw material costs should help improve margins going ahead. Mansi Lall of Prabhudas Lilladher Research expects the company to post a margin expansion of 600 basis points over FY22-25. This would be led by improved operating leverage, better realization from export markets and significant reduction in raw material costs.

ICICI Securities expects the company’s margins to improve to 26.1 per cent by FY24 on the back of higher production amid diversified product offering and increasing market share in international markets which will enable operating leverage.

Given the higher share of lower margin products such as the Hunter 350, there are worries about the profitability trend. Baxi of Nirmal Bang Research believes that there won’t be a major impact on profitability despite the rising share of lower margin products due to improving utilisation and moderating commodity costs.

What adds to the sum of parts valuations is the revival in truck business housed under the joint venture Volvo Eicher Commercial Vehicles. The segment generated domestic volume growth of 14.7 per cent while overall sales growth gain, given weaker exports, was limited to 9 per cent. Brokerages expect commercial vehicle sales to improve on the back of higher profitability of fleet operators aided by gradual price increases and correction in fuel prices.

At the current price the stock is trading at just over 29 times its FY24 earnings estimates. Further correction in the stock could be a buying opportunity.