Eicher Motors: Entering a low EPS growth phase

28 Feb 2024 , 10:18 AM

Recommendation: Reduce

Target Price: ₹3,570

In Dec-Feb, it is down 2% YoY. Slowdown in RE has coincided with cooling-off of ‘>250cc’ category (relative to 2W industry), as well as market-share loss for RE in ‘>250cc’ category. Analysts at IIFL Securities expect RE’s growth to stay muted for at least two more quarters. In recent years, RE has offset volume loss of Classic 350 (40% below peak), with Meteor (FY21) and Hunter (FY23). However, RE may be running out of high-volume white spaces around the 350cc segment. Meanwhile, CV segment (15% of Consolidated EPS) is peaking out and may become a drag on EPS growth. Overall, IIFL expects EPS growth to decelerate to 7% CAGR over FY24-26. Analysts at IIFL Securities have downgraded the stock from Add to Reduce.

RE’s retails have grown only 3% YoY in the past six months

In the Q3FY24 call, management asserted that RE’s retails grew 13% YoY in the festive season (largely in line with 2W industry). However, as per Vahan, RE’s retail registrations are up only 3% YoY over the last six months (Sep’23- Feb’24). Over a similar period (Sep-Jan; Feb yet to be reported), RE’s domestic wholesales are up 4% YoY, largely in line with retails. This implies that sales were quite weak before and after the festive season.

Category slowing; RE losing share

Slowdown in RE’s growth has coincided with two factors. The ‘>250cc’ motorcycle category has cooled off relative to the overall 2W industry. The ‘>250cc’ category increased from 6.0-6.5% of the overall motorcycle industry over FY17-FY22, to ~9% in H2FY23. Since then, it has come off to ~8%, indicating a cool-off in premiumisation. Moreover, RE’s market-share in the ‘>250cc’ category has slipped from 93% in FY23 to 86% in recent months, triggered by the launch of Harley Davidson X440 by Hero and Triumph models by Bajaj.

RE running out of white spaces to expand the category?

With 93% market-share in the >250cc category (FY23), RE was almost a monopoly. Unlike other auto OEMs, RE could grow only by expanding the category and not winning share from the competition. Sales of Classic 350 (top selling model) are down 40% from FY18/FY19 peak and are plateauing at lows. RE tasted success with Meteor 350 (cruiser) and Hunter 350 (lower priced street bike). Unless RE launches new models with wide-appeal (not niche), differentiated from its existing portfolio, growth may stagnate.