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While the Eicher Motors stock has jumped 42 per cent since February, analysts believe most of the upsides have already been captured. Deutsche Bank’s Srinivas Rao and Amyn Pirani in a May 8 report on the company say the current price discounts optimistic scenarios about Eicher's three key drivers — motorcycles, engine supply to Volvo and market share gains in domestic commercial vehicles (CVs).
Rao and Pirani, who have a ‘hold’ recommendation on the stock, believe the company has benefitted from a substantial demographic tailwind in motorcycles which is likely to moderate in the medium term.
With competitive intensity increasing in the CVs market and high discounts being offered, Eicher Motor could have a tough time going ahead. Incumbents are likely to defend market share at the cost of pricing, limiting Eicher's ability to improve margins and cash flows in the next up-cycle, say the analysts. Valuations which are at 30 times CY14 earnings could moderate. S Arun and Ashish Kumar of Bank of America Merrill Lynch expect valuation multiples to moderate due to lower contribution from motorcycles to overall profits and a rising cash position, which will impact return ratios.
Of the 30 analysts tracking the stock according to Bloomberg, 13 have a ‘hold’ or a ‘sell’ rating, with a consensus target price at Rs 5,932. This is nine per cent lower than the current market price of Rs 6,492. In fact, given the steep price increase since February, the percentage of hold recommendations on Bloomberg has doubled.
While most analysts continue to be bullish about the medium to long-term prospects of the company, given its strong presence in the leisure motorcycles and an expanding CV base, there may not be much upside in the near term. The valuations, according to analysts, especially for the motorcycles business, is steep. At the current price, the motorcycle business is trading at an implied valuation of 26 times its estimated CY15 price to earnings ratio, which is at a 70 per cent premium to sector peers. “While the valuation will sustain in the medium term, it leaves minimal room for stock performance,” say the analysts at Deutsche Bank.
