Eicher Motors' Q1FY19 results (Outperformer) - Robust quarter; management maintains production guidance

Q1FY19 results

• Consolidated PAT in-line: Eicher Motors consolidated PAT at Rs 5.7bn (up 25% yoy) was ~4% below expectations. While the operating performance met expectations, a dip in the other income and higher tax rate impacted profitability.
• RE margins steady: RE revenues at Rs25.3bn (up 34% yoy) were driven by a robust 27% volume growth. Standalone EBITDA margins at 32.3% (+90 bps yoy, +60bp qoq) were 50bps above expectations. Despite hardening commodity costs, gross margins declined only marginally on a sequential basis (down 30 bps qoq). Further operating leverage benefits were visible as staff and other expenses declined by 50 bps and 40 bps respectively. Other expenses have been at slightly elevated on higher marketing spends.
• VECV shines: Income from VECV was at Rs26bn (+45% yoy) led by a 41% yoy growth in volumes. The operating leverage and cost cutting measures lead to margins expanding to 9.2% (up 90 bps yoy) The expansion in margins despite higher discounting resulted in a PAT of Rs118mn (up 78% yoy).
• Concall highlights- (a)The company continues to maintain its production guidance of 950,000 units for FY19 (b) New product variants – the Thunderbird X and Gun Metal Classic have exceeded demand estimates. The new variants now comprise 50% of RE’s order backlog. (c) With an increase in production the gap between demand and supply is now decreasing, particularly in lean months. As a consequence barring the new variants, a large part of the portfolio can be delivered in under 4 weeks. (d) The company continues to focus on distribution network to expand marketshare.  It looks to add ~100 dealers p.a. (currently there are 840 dealers). (e) The new 650cc twin motorcycles will be launched globally in November.

Key positives: Improved RE EBITDA margins; robust VECV performance

Key negatives: Weaker than estimated other income  

Impact on Financials: We maintain our estimates.

Valuation and View

The RE franchise continues to expand its appeal to premium commuters, led by high brand equity and little competition in its niche segment. VECV is equally well placed to take advantage of a potential recovery in the LCV space. While growth rates are likely to be slower than previous years, we believe RE can continue to grow well above industry growth We believe the strong growth (FY18-20E EPS CAGR 25%+) justifies current valuation of ~23x FY20 EPS. Maintain Outperformer with a SOTP based TP of Rs35,000.