Equity Research: Eicher Motors Ltd.

A larger addressable market and improved operational performance in the company's two-wheeler sector have set Eicher Motors Limited (EML) up for a robust recovery and performance up-shift. the valuation is yet to catch up expected recovery in performance, as the stock trades at a 20-25% discount to its historical average multiples, at 24.9x P/E and 21.7x EV/EBITDA on FY2024E estimates.

A larger addressable market and improved operational performance in the company's two-wheeler sector have set Eicher Motors Limited (EML) up for a robust recovery and performance up-shift. Additionally, the CV business of the company is positioned to considerably increase its contribution to consolidated PBT, driven by anticipated market share gains, growing synergies with the JV partner (Volvo), and operating leverage advantages. The freshly introduced Hunter 350 from Royal Enfield (RE), which has a price range of Rs. 1.5–1.8 lakh and is packed with modern features, is advantageously positioned in the market. In the medium run, we predict that the Hunter 350 will increase Royal Enfield's volume and make up 13–15% of the company's motorcycles. Due to COVID-19 and a slower recovery in the premium market, EML's performance was considerably harmed over the FY2020 to FY2022 from the peak volumes achieved in the FY2019. We anticipate premiumization to increase once more in the two-wheeler market as the economy and supply restrictions return to normal. Royal Enfield is predicted to do well in the premium bike market. Considering the positive business outlook and the outstanding 48.3% CAGR in earnings growth from FY22 to FY24E.

The two-wheeler market is in a strong position to grow at double-digit rates over the coming years and surpass peak levels by FY2025-26. The two-wheeler sector is essential to India's transportation and is the most cost-effective way for individuals to move. The two-wheeler business is expected to develop when the economy returns to normal as a result of penned-up demand and rising income levels of potential clients. We anticipate that both urban and rural markets will be the main drivers of growth. The increase in inquiries and showroom traffic is the primary indicator of the rural and semi-urban markets' revival. We anticipate that the revival of urban demand will accelerate the expansion of premium scooters and bikes.

The two-wheeler market has historically seen consistent expansion, with volume declines occurring only occasionally. The two-wheeler industry, however, has seen the largest decline in annual volumes, almost declining by 36% in FY2022 from the peak volumes registered in FY2019. This decline is attributed to a number of factors, including the COVID pandemic, weak economy, supply constraints, and regulatory cost pressure. Strong government spending increases, improvements in the manufacturing sector, and encouraging agricultural growth are driving the economy's recovery. Additionally, the supply problems caused by the lack of semiconductors are steadily getting better and are anticipated to return to normal by CY2023. The two-wheeler sector is essential to India's transportation and is the most cost-effective way for individuals to move. The two-wheeler business is expected to develop when the economy returns to normal as a result of penned-up demand and rising income levels of potential clients. We anticipate that both urban and rural markets will be the main drivers of growth. The increase in inquiries and showroom traffic is the primary indicator of the rural and semi-urban markets' revival. We anticipate that the revival of urban demand will accelerate the expansion of premium scooters and bikes. Over the upcoming several years, the two-wheeler market is well positioned to experience double-digit growth. In contrast to a fall of 14% CAGR from FY19 to FY22, we anticipate domestic two-wheeler volumes will increase at a rate of 12.3% CAGR from FY22 to FY25E.

Global Footprints of EML:

Following its successful launch in India, Royal Enfield launched its super refined all-new easy cruiser, the Meteor 350, in thailand in november 2020 in a unique virtual hybrid event. riders in thailand have enjoyed the famous 650 twins, and the new meteor 350 will give them new means for pure motorcycling. the meteor 350 launch here is part of the long-term strategy to cater to the rising demand for affordable leisure riding in the core middleweight segment.

The meteor 350 was launched in the european market in december 2020. with the exceptional success of the 650 Twins and the Himalayan motorcycles, Royal Enfield has a proven track record in carving out new segments within the european motorcycling market. the meteor 350 is geared to build on this success. targeted at city commuters and weekend cruisers, small capacity upgraders and returning riders, students, first-timers and experienced bikers, it further strengthens Royal Enfield’s reputation of building motorcycles that are appealing, accessible and approachable for a broad demographic.Taking forward the global ambition, the meteor 350 was launched in australia and new Zealand in January 2021, followed by the philippines in march 2021. these are key markets for Royal Enfield in the Asia-Pacific region where a huge new audience of commuters is upgrading to royal Enfield’s robust long-distance leisure riding experience.

CE Certified jackets Designed for all weather, terrain and adventure:

Royal Enfield launched an all-new range of jackets to enhance the overall motorcycling experience with a clear focus on safety. Seamlessly integrating performance and endurance, these jackets are comfortable, stylish and carefully crafted for different weather conditions and terrains. these jackets are designed to provide international standard safety performance. while most protective riding gears only have their armours CE certified, Royal Enfield jackets have CE Certification with Class A protection for the garment in addition to CE certified armour.

Eicher Trucks & Buses:

On the exports front, ETB has sold 7,025 units in the financial year 2021-22, as compared to 6,268 units in the financial year 2020-21. Light Medium Duty (LMD) trucks (5 – 15T) market share improved from 33.8% to 38.6% in the financial year 2021-22, Heavy Duty trucks market share for VECV (Eicher and Volvo) achieved an all-time high of 7.9% in the financial year 2021- 22. In the bus segment, LMD bus market share improved from 22.4% to 25.9%.

VE Powertrain (VEPT):

VEPT delivered 30,901 engines in the financial year 2021-22 as compared to 29,383 engines in the financial year 2020- 21. With this, VEPT has delivered 1,98,265 engines since its inception to customers across the world.

Eicher Engineering Components (EEC):

EEC continued to strengthen the customer and supplier relationships and grow the business with the key global OEM customers, through enhanced share of existing businesses and new business acquisitions. To help grow the overall business and profitability, EEC implemented rapid new product developments and smooth ramp up in production with the implementation of stage-gate process, focus on cost and working capital management, optimize and expedite investments, improve productivity and meet requirements of domestic and global OEM customers. During the financial year under review, EEC received awards from key global OEM customers for excellence in quality, delivery, new product development and capacity ramp up.

High Growth in Premium segment:

We anticipate that both urban and rural markets will be the main drivers of growth. Markets in rural and semi-urban areas are already exhibiting indications of recovery, driven by an increase in inquiries and showroom traffic. Going forward, we anticipate that an increase in urban demand will accelerate the expansion of premium bikes and scooters. Assuming an 8–10 year replacement cycle, we anticipate a rise in replacement demand from 28% in FY22 to 35% in FY25E, driven mostly by buyers' desire to upgrade. The premium bikes are anticipated to expand more quickly than the entry-level and entry-level bikes since volumes are predicted to recover in the future. Two-wheeler OEMs are likewise concentrating on premiumizing bikes with the addition of features, safety, and technology.

Stable Exports:

Indian two-wheeler export markets continue to be less impacted by COVID-19, resulting in higher company growth. Going forward, the main growth engine for the two-wheeler industry will continue to be exports. Due to their strong product portfolios, substantial market presence, and prior exposure to Indian markets, Bajaj Auto, TVS Motor, and Royal Enfield are anticipated to benefit significantly from the export demand. Long-term prospects for Indian firms are provided by the massive under-penetration of key export markets.

CV Industry will lead to higher growth:

We anticipate that there will be a significant increase in the domestic demand for CVs in FY2023 and FY2024, which will be fueled by stronger economic activity, better financing options, and rising truck and bus operator profitability. With record tax revenues and a planned investment in infrastructure of Rs145 trillion over the next five years, the economy is expanding rapidly. We anticipate that a surge in e-commerce, agriculture, infrastructure, and mining industries will further the robust improvement in MHCV sales. The usage of technology and digitalization is altering the fleet owners' overall experience, assisting them in cost savings, fuel efficiency improvements, and safety measure improvements. As corporate offices and educational institutions begin operations, the bus and three-wheeler categories are anticipated to steadily improve. The domestic CV industry, especially MHCV segment is largely dominated by three players, such as Tata Motors, Ashok Leyland and Eicher Motors, cumulatively having market share more than 95%.

New Launches in Pipeline:

In the upcoming years, Royal Enfield plans to introduce a variety of new goods, including variations. The Hunter 350 was recently unveiled by it. The management disclosed their intention to expand the J-series platform with two new variations. On the Twins platform, the business also intends to add two versions and five new derivative vehicles. The business also intends to increase the number of platforms it offers. Additionally, the business currently has no intentions for the LS410 platform. The company plans to release updated models every three months and anticipates introducing a new model in around two years. It helps to reduce costs and shorten the payback period by using a single platform.

Multi-year Upcycle is due for Eicher Motors:

EML is anticipated to profit from the CV industry's multi-year upswing by focusing on niche markets, bolstering the robustness of its product line, and expanding the importance of technology and digitalization to fleet owners. The business has a robust product line and is a market leader in its sector for heavy- and light-duty trucks. Despite fierce competition from Ashok Leyland and Tata Motors, the company has improved its market share overall (details are mentioned below). According to management, there is a significant duopoly on the Indian market for heavy-duty trucks, with the top two competitors controlling about 90% of it. Due to the market's strong duopoly, the top two competitors have a very devoted customer base, and it is exceedingly challenging for other players to gain market share in this area. However, VECV has gradually increased its position in the HD truck market, which presently stands at 7.4% for Q1FY23 from 4.5% in FY19, thanks to its technological competence (supported by Volvo). We anticipate that its JV, VE Commercial Vehicle (VECV), would considerably increase its contribution to PBT from 3% in FY22 to 12% in FY24E, driven by operating leverage advantages and an increase in market share.

Financials:

Conclusion:

A larger addressable market and improved operational efficiency in the business' two-wheeler division are what will propel EML's recovery and performance into high gear. Additionally, the company's commercial vehicle division is prepared to considerably increase its contribution to consolidated PBT, driven by anticipated market share gains, growing synergies with the JV partner (Volvo Group), and the advantages of operating leverage. Eicher Motors Ltd (EML) is well poised to show strong recovery in its overall performance, driven by its increase in addressable market size and improvement in operational performance in the two-wheeler division, while the CV division is expected to benefit from a multi-year CV upcycle. Given a strong business outlook and robust earnings growth of 48.3% CAGR during FY22-24E, the valuation is yet to catch up expected recovery in performance, as the stock trades at a 20-25% discount to its historical average multiples, at 24.9x P/E and 21.7x EV/EBITDA on FY2024E estimates.

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  Himanshu

  10 January, 2023, 3:04 pm
  Such a nice Article
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