Eicher Motors: Maintain ‘hold’ with TP of Rs 3,075

Eicher Motors (EIM) posted Q3FY21 results in line with expectations. Production ramp-up continues to lag our expectation due to bottlenecks. Production ramp-up, hence, remains a key variable (FY22E: ~75K/month; FY23E: ~85K versus Q3FY21: ~67K) given rising commodity pressure (refer to Commodity spike), intent to launch one bike (upgrade/new) a quarter, and export opportunities. A strong product cycle tailwind though forces our hand to raise target multiple to 33x (from 30x) and FY23E EPS by 7%. Our FY22 EPS is almost unchanged. Maintain ‘HOLD’ with a TP of Rs 3,075 (earlier Rs 2,602) as we roll over the valuation to Jun-22E. Upside risks arise from faster- than-expected adoption of Make IT Yourself (MIY) initiative.

Q3FY21, Operating performance in line EIM’s standalone revenue and EBITDA of ~Rs 28bn and Rs 6.6bn, respectively, came broadly in line with our estimates. However, QoQ gross margin were under pressure (down 160 bps to 41.2%), which was compensated for by cost control. Consolidated profit at Rs 5.3bn is 8% lower than our estimate due to weaker-than-expected other income and profit contribution from the VECV JV at Rs 314mn (Q2FY21: -Rs 39mn) Going ahead, rising raw material costs would weigh on gross margins. Management aims to mitigate it via price hikes (~3% taken till now), value engineering, higher contribution of accessories and operating leverage
Structural story intact.

Royal Enfield (RE) remains a strong franchise with a deeply entrenched and loyal customer base. Outlook and valuation. Priced in; maintain ‘HOLD’ We expect RE to outpace the industry given its franchise and reach. However, current valuation leave little room for disappointment.

Maintain ‘HOLD/SN’ with a TP of Rs 3,075 (RE at 33x FY22E core EPS, VECV at 25x EPS and cash per share of Rs 436). The stock is trading at FY22E/23E PER of 30.3x/24.6x.