Q2FY24 Review: Eicher Motors: Margin surprise in Q2; volume growth key

13 Nov 2023 , 01:26 PM

Eicher’s Q2 Ebitda came in 4% above analysts of IIFL Capital Services estimate, driven by higher gross margin (lower input cost). Royal Enfield’s (RE) domestic volume growth tapered down to 3% YoY in Aug-Oct 2023, after Hunter entered the YoY base and also as new competition entered the segment (earlier almost a monopoly for RE). RE recently launched the all-new Bullet 350 and plans to launch Himalayan 450 very soon. Analysts of IIFL Capital Services need to see if RE is able to accelerate growth rate post these launches. From a longer term perspective, RE’s growth would depend on acceleration in premiumisation within the motorcycle industry, now that some market-share loss seems to be a given. Analysts of IIFL Capital Services largely maintain their Ebitda estimates, but upgrade EPS by 2-5% (other income). Retain BUY with TP of Rs3780. 

Q2 Ebitda 4% above estimate: 

RE rev grew 17% YoY (in-line) on a 10% volume growth. Gross margin (GM) expanded 190bp QoQ (170bp beat). GM expansion was driven by lower RM (100bp), mix and inventory valuation due to higher production vs sales. Ebitda margin improved 80bp QoQ to 26.4% (60 bps beat). Absolute Ebitda came in 4% above analysts of IIFL Capital Services estimate. VECV (CV JV) results were largely in line with analysts of IIFL Capital Services estimates. 

RE’s growth has slowed with new competition and with Hunter in the YoY base: 

RE’s domestic volume growth tapered down to 3% YoY in Aug-Oct 2023. The Hunter model launched in Aug 2022 and is now in the YoY base. Analysts of IIFL Capital Services have seen new competition enter the 350cc+ segment (Harley Davidson and Triumph). RE recently launched the all-new Bullet 350. It has plans to launch the Himalayan 450 this month. They need to see if RE is able to accelerate growth rate post these launches. Mgmt. mentioned that RE clocked 14% YoY volume growth in the festive season. 

Continued premiumisation in Motorcycle industry is critical for RE: 

All these years, RE had 90%+ market share in the 350cc+ category. Hence, even a moderate growth in the category ensured that RE grew at a similar rate. Now analysts of IIFL Capital Services have credible competition in the segment, and some market-share loss for RE seems to be a given. This implies that the category of premium motorcycles will need to grow at a high rate for RE to continue growing despite loss of share. The category has started gaining share within overall motorcycles, now at 8.2% after languishing at 6.0-6.5% share over FY17-FY22.