Q3FY24 Review: Eicher Motors: Q3 largely in-line; weak growth rate a concern

14 Feb 2024 , 02:54 PM

Eicher’s Q3 results were largely in line with estimates, with small Ebitda beat in motorcycles (Royal Enfield, RE) offset by margin miss in VECV (CV business). RE has seen sharp deceleration in volume growth, leading to volume under-performance vs industry. This has been due to moderation in >250cc motorcycle segment as well as market-share loss for RE within the segment. Although RE margins are holding up for now, Analysts of IIFL Capital Services are not confident of margins sustaining if volume growth and market-share stay under pressure. Analysts of IIFL Capital Services also note that 15-20% of Eicher’s consolidated EPS comes from VECV. The CV industry has seen sharp moderation in growth in recent months. A CV down-cycle (not in our estimates) would result in EPS cuts. Analysts of IIFL Capital Services cut FY25/FY26 EPS by 2-3% on lower volumes. Retain ADD with TP of Rs 3950 (2% upside). 

Q3 results largely in line with estimates: 

Eicher’s Q3 consol. revenue grew 12% YoY on 3% volume growth. Revenue came in 2.5% above Analysts of IIFL Capital Services estimate due to higher spare part sales. Ebitda margin expanded 300bp YoY but contracted 30bp QoQ. Absolute Ebitda came in 2% above estimate on top-line beat. Higher taxes and lower share of profits from VECV (margin miss) resulted in Consol. PAT missing Analysts of IIFL Capital Services est. by 2%. 

RE’s volume growth is weak; underperforming industry: 

RE’s domestic retails have grown at 2-3% YoY since Sep (as per Vahan portal), against 2W industry growth of 12-15%. This has coincided with a cool-off in the ‘>250cc’ motorcycle category (relative to overall 2Ws) as well as market-share loss for RE, post launch of Harley Davidson X440 by Hero and Triumph models by Bajaj. RE had seen solid YoY growth for 13 months (Aug 2022 to Aug 2023), driven by the affordable ‘Hunter’ model. With Hunter in the YoY base, growth rate has moderated substantially. 

CV industry tapering off; would hurt earnings growth in VECV: 

VECV (CV business) would account for 15-20% of consolidated EPS in FY25. The volume trajectory of the CV industry has weakened in recent months. Analysts of IIFL Capital Services recently cut FY24 MHCV industry growth from 10% to 6%. They are currently building 7% and 0% volume growth for the CV industry in FY25 and FY26. If there is a down-cycle in CVs, it would drag down consolidated EPS.