Q1FY24 Review: Eicher Motors: Q1 margin beat doesn’t project into future

4 Aug 2023 , 01:10 PM

Eicher’s Q1 Ebitda beat analysts of IIFL Capital Services estimate by 4%, due to margin surprise (lower operating expenses). However, the beat doesn’t give confidence to increase margin projections, as Royal Enfield’s (RE) upcoming launches would focus on market share and volumes, rather than profitability. This is especially so, after recent entry of Harley Davidson and Triumph (with aggressive pricing) into a segment which has so far been a near-monopoly for RE. Triumph received 17,000 bookings in 3 weeks. Harley is yet to announce its order-book status. However, in a market of only 70,000 units a month, even small volumes for competitors can make big dents for RE. Analysts of IIFL Capital Services maintain their BUY rating, in view of the long-term premiumisation potential in motorcycles. However, they are cautious in the near term, till they assess the market-share hit for RE and its new model strategy to counter the same. 

Q1 beat on lower operating expenses: 

Q1 revenue grew 17% YoY on 22% volume growth. Gross margin contracted 20bp QoQ, due to weaker mix (higher revenue share of Hunter, and lower exports). However, moderation in operating expenses led to Ebitda margin expanding 110bps YoY and QoQ, leading to 4% beat on Ebitda. VECV performance was strong with revenue up 27% and Ebitda up 77% YoY (in line with est.). 

Q1 margin surprise unlikely to project into future: 

The recent entry of Harley Davidson and Triumph into the “350cc & above” category with aggressive pricing has raised concerns on RE’s market share (currently 92%). As a result, RE may be circumspect on pricing of its upcoming new models. Analysts of IIFL Capital Services expect RE to focus on volumes and protecting market-share, rather than margins. 

Analysts of IIFL Capital Services are cautious in the near-term, till they assess market-share hit for RE: 

In the last three quarters, RE averaged 28% YoY volume growth, entirely driven by Hunter. Analysts of IIFL Capital Services expect growth to moderate to single-digit starting August 2023, as Hunter enters the YoY base. The initial excitement for affordable Harley Davidson and Triumph models is likely to eat into RE’s new order flow. They await clarity on whether this excitement sustains and/or if RE would be able to retain its customers with new launches. Over the medium-term, premiumisation may ensure high growth for the category, which may help RE sustain growth even with a lower market-share.