Eicher Motors Limited (EML) reported lower than expected numbers in Q2FY19 at the consolidated level. Consolidated revenue was up 11% yoy (down 5% qoq) at Rs2,408cr, marginally lower than expectation of Rs2,435cr. Operating performance was affected by higher operating, manufacturing and employee expenses. Consolidated EBITDA came in at Rs729cr, up 7% yoy (down 10% qoq), missing estimate of Rs766cr. EBITDA margin contracted 121bps yoy (149bps qoq) to 30.3%. EML reported consolidated PAT (adjusting for loss in discontinued JV) of Rs566cr, up 9% yoy (down 2% qoq). PAT missed estimate by 8%. Reported PAT was up 6% yoy (down 5% qoq) at Rs549cr.
Highlights from Q2FY19 post result conference call
Strike at Oragadam continues, production volumes lost from end-September till October is 25,000 units. Loss is about 800-900 units per day.
Management admitted that waiting period is coming down. Some models are available off-the-shelf.
Q2FY19 and Q3FY19 will have a higher component of launch related expenses. Media spends will continue to remain high in Q3FY19.
Currently about 40-45% of RE motorcycles are being financed against 33% a year ago.
Production target for FY19 cut from 9,50,000 to 9,25,000 due to ongoing strike.
Standalone (Royal Enfield) performance highlights
Standalone performance in Q2FY19 was clearly below expectation. Revenue was up 11% yoy (down 6% qoq) at Rs2,404cr, missing estimate of Rs2,432cr. Top-line constituted of volume growth of 4% yoy (volume decline of 7% qoq) and realization growth of 7% yoy (1% qoq). The jump in realization was due to better product mix and due to the fact that RE’s latest models are sold with rear disc brakes, which command better realization.
Operating performance was affected by higher promotional expenses related to new launches and due to a swift growth in employee expenses (up 31% yoy, 3% qoq). Consequently, EBITDA came in at Rs736cr, up 7% yoy (down 10% qoq), missing estimate of Rs778cr. EBITDA margin contracted 127bps yoy (169bps qoq) to 30.6%. This was the lowest EBITDA margin in ten quarters. Apart from higher expenses, low operating leverage also pulled down margins.
Standalone PAT (reported) was Rs481cr, down 1% yoy (19% qoq). Standalone PAT consisted of exceptional expense of Rs17.52cr, which was impairment loss in value of JV, Eicher Polaris Private Limited, which closed w.e.f. March 09, 2018. Adjusting for the extraordinary item, PAT would have been 3% yoy higher (16% qoq lower) at Rs490cr.
VECV performance highlights
VECV revenue came in-line with estimates at Rs2,966cr, up 27% yoy (14% qoq). This was helped by volume growth of 24% yoy (15% qoq) and realization growth of 2% yoy (flat qoq). Realization was 2% higher than estimates.
However, the revenue performance was marred by weaker-than-expected EBITDA margin of 9%, implying contraction of 20bps (yoy and qoq). EBITDA came in at Rs267cr, up 24% yoy (11% qoq) and missed estimate of Rs277cr.
VECV PAT was 49% yoy higher (20% qoq higher) at Rs142cr, lower than expectation of Rs148cr.
EML currently faces certain issues in its RE franchise such as weakening demand, dwindling order book, labour unrest at its Oragadam (near Chennai) plant leading to production loss. The management has cut its FY19E production guidance from 9,50,000 motorcycles to 9,25,000 motorcycles to factor in the loss in production volumes.
Additionally, the weak volume uptake has resulted in capacity utilization dropping below 100% for the first time in several years, which could put pressure on margins as operating leverage reduces. The management also sounded caution on rising input costs and stated that the pain could persist for some more time.
Investors will keenly watch out for response to EML’s 650cc Twins (Interceptor and Continental GT), which were launched recently, in India and abroad. While the motorcycles have generated a lot of initial interest in India, we prefer to be cautious as these motorcycles are priced between Rs2.7 lakh and Rs3 lakh (estimated price in Delhi as per website www.bikedekho.com). Given the current weak sentiment surrounding automobiles in India, customers may be wary of owning bikes with higher price tags.
VECV has performed fairly strong in this quarter, though it did miss our estimates on the margin front. We feel that the current CV cycle could begin to lose strength post FY21, once BS-VI settles in. Till then, volumes will remain strong and VECV will continue to post robust numbers.
We continue to like RE’s differentiated products that face little or no competition in India and VECV’s product line-up which offers the latest technology. We also like EML’s management pedigree and balance sheet strength. However, given the headwinds facing RE currently, we remain cautious of the valuations that the stock is trading at. At 20.5x FY20E EPS, we feel that the stock has little room for upside. Hence, we retain REDUCE rating on the stock with target price of Rs21,340.
Eicher Motors Ltd is currently trading at Rs. 21,900, down by 602 points or 2.68% from its previous closing of Rs. 22,502 on the BSE.
The scrip opened at Rs. 22,489 and has touched a high and low of Rs. 22,489 and Rs. 21,804.05 respectively. So far 56,609 (NSE+BSE) shares were traded on the counter. The stock is currently trading above its 200 DMA.
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