Eicher Motors’ quarterly performance continues to impress: it reported a robust 71% yoy growth in consolidated earnings to Rs3.3bn. Earnings growth was driven by strong volume growth at both Royal Enfield (+68% yoy) and VECV (+42% yoy). This coupled with benign input costs led to a 270bps yoy margin expansion to 17%. Future triggers we see for sustained growth momentum include: 1) multiple new launches from two new platforms scheduled to be launched over the next two years; and 2) huge potential to penetrate untapped regions in India. Its steady ramp-up in exports would further boost growth; we factor in RE volumes to grow at a 30% CAGR over FY16-18E. On the back of a consistent margin expansion achieved over the last few quarters, we raise our FY17/18E earnings by 10% each. Led by robust volume growth at RE, a pick-up in volumes at VECV and a steady ramp-up of engine exports to Volvo, we now expect Eicher to post a strong 39% earnings CAGR over FY16-18E. We reiterate our BUY rating but raise our SoTP-based Fair Value to Rs22,362 (from Rs21,083 earlier).
Standalone performance continues to impress
Royal Enfield’s (RE) 5QFY16 (15 month year ending FY16) earnings grew 68% yoy to Rs3.6bn led by a strong operational performance and higher other income. EBITDA margins improved 380bps yoy (+130bps qoq) to 29.9% on the back of strong volume growth (+60% yoy) and benign input costs. EBITDA for the quarter was up 84% yoy at Rs4.6bn.
Consolidated earnings up 71% yoy
At VECV, EBITDA margins came in at 8.5%, which are up 140bps yoy, aided by strong volume growth in CVs (+42% yoy). However, discounts continued to remain high. On the back of strong margin expansion at both RE and VECV, consolidated margins improved 270bps yoy (+170bps qoq) to 17%. Overall, Eicher posted a robust 71% yoy growth in earnings to Rs3.3bn.
We raise our earnings by 10% each for FY17/FY18E
Eicher continues to post a strong operating performance each quarter – its margins have improved from 14.3% in 1QCY15 to 17% in 5QFY16. On the back of a better than expected operational performance over the last two quarters, we raise our earnings by 10% each for FY17/18E. We now factor in RE margins to improve to 29% by FY18 (Vs 28% earlier).
RE’s best-selling Classic 350 continues to enjoy a waiting time of 2-3 months on avg despite the substantial increase in capacity. Further, RE’s newly launched Himalayan has been very well accepted in the domestic market and would help support its strong volume growth. This new platform would also see the launch of other variants in the coming years. Further, RE has now raised its available production capacity for FY17 to 670k units (from the earlier 600k units), which means that capacity constraint issues are now behind it. On the other hand, VECV has also been outperforming the CV market in the last 2 quarters on the back of its new launches. Led by robust volume growth at RE, a pick-up in volumes at VECV and a steady ramp-up of engine exports to Volvo, we expect Eicher to post 39% earnings CAGR over FY16-18E. We reiterate our BUY rating but raise our SoTP-based Fair Value to Rs22,362 (from Rs21,083 earlier).