HDFC Securities Institutional Research paints a rosy picture for the auto-maker EIM
Incorporated in 1982, Eicher Motors Ltd (EIM) is the flagship company of the Eicher Group in India and a leading player in the Indian motorcycle and commercial vehicle (CV) segments. EIM manufactures and markets its motorcycle under the iconic brand name Royal Enfield,which leads the premium motorcycle segment in India with over 95 per cent market share. EIM is a structural story on the premiumisation theme in motorcycles and is market leader more in the 250cc motorcycle segment.
The CV segment operates under EML’s joint venture with the Volvo group, called VE Commercial Vehicles Limited (VECV), which designs, manufactures, and markets reliable and fuel-efficient trucks and buses; and is leading the path in driving modernisation in commercial transportation in India and other developing markets. VECV is a strong candidate to break the duopoly of Tata Motors and Ashok Leyland in medium and commercial heavy segments. Its strong balance sheet, credible partner – Volvo and management provide additional comfort.
International presence of EIM has increased to 26 countries, with continued focus on the markets of Thailand, Brazil, Indonesia and Colombia, along with North America and Europe.
For the first quarter of 2018, Eicher Motors has reported a healthy consolidated performance, in‐line with the expectations. The revenue growth was surged 28.6 per cent YoY at Rs 2,000 crore.
The operating margins came in at 31 per cent, higher by 80bps, which was commendable given the weak commercial vehicle industry in April-June’17 quarter. The company’s gross margins in the quarter were higher by 60bps YoY.
The EBITDA growth was clocked at 32 per cent YoY at Rs 620 crore, led by robust growth in volumes and realisations, which increased three per cent.
With higher-than-expected non‐operating income and higher tax rate, profit after tax (PAT) stood at Rs 430 crore and sharp 49 per cent growth in other operating income. The volume growth was also healthy at 24.8 per cent YoY at 184,000 units.
VE Commercial Vehicles (VECV) division
For the first half of 2018, VECV segment’s performance is expected to be weak in line with the domestic commercial vehicle industry. The performance was frail owing to 28 per cent decline in volumes. It witnessed lower-than-expected share of profit at Rs 25 crore, the segment de-grew 46 per cent YoY.
VECV’s market share in the medium and heavy commercial vehicle segment increased by 80bps YoY. The ban of Bharat Stage (BS) III vehicle sales has not impacted the company, as it had very low inventory which it was able to liquidate. The management indicated that owing to lower inventory as compared to its peers, VECV was impacted less by the transition from BS-III to BS-IV.
VECV is witnessing robust volume growth traction and improving heavy duty market share over the past few months, given the wider acceptance of its Pro series range. Improved demand for the commercial vehicle is expected to provide additional positives for VECV in the calendar 2018, rendering the overall long‐term outlook for EIM as favorable.
Dividend from VECV came in at Rs 51.7 crore and aided in 22 per cent YoY growth in APAT. Other income came in significantly driven by higher dividend income from VECV.
Capex plans of Royal Enfield
The capital investment plan of Royal Enfield (RE) is progressing well. Its third manufacturing unit at Vallam Vadagal is expected to be functional in the second quarter of the current financial year by Sept 2017, with a production capacity of 825,000 in 2018 and will reach 900,000 by FY19E. The Phase II of capacity expansion can be achieved in the period 2019-20, which can scale up the annual capacity to 100,000 every month.
The volumes are forecasted at 817,000 units, one per cent lower than the management’s guidance of 825,000 for 2018.
The strong demand for RE that has waiting period stable at two months for Classic 350 and expansion of its network will help ramp‐up capacity utilisation in the upcoming plant in 2018.
Short-term outlook
Given the strong demand for two-wheelers, strong earnings momentum is expected from Royal Enfield and hence has increased the target multiple for the brand. The VECV business will show traction only in the second half of 2018 and value it nine times its expected June 2019 enterprise value-to-EBITDA ratio.
Moreover, given the in-line performance have maintained the estimates for 2018 and upcoming 2019, numbers for 2020 have been introduced.