Eicher Motors' Q1FY20 results (Outperformer) - Stress persists; strategicsteps initiated

Q1FY20 results

• Operating performance a tad below: Eicher Motors adjusted consolidated PAT at Rs 4.5bn (down 22% yoy) met estimates. While operating performance was a tad below expectations, this was offset by a lower tax rate.
• Realisations rise; gross margins steady: RE revenues at Rs23.8bn (down 6.5% yoy) were driven by a sharp (+15% yoy; 2% qoq) increase in realization even as volume declined by 19% yoy. The realisation growth reflects an increase in vehicle prices on account of the introduction of the ABS/ rear disc brake and a higher share of the 650cc twins in the portfolio. Notably, the gross margins remained stable (flat qoq) despite cost pressures. This was offset by a sharp increase in employee costs (up 24% qoq) on account of seasonal increments. The other expenses came off on a sequential basis (down 10%) despite negative operating leverage (sequentially volumes declined 6%) largely due lower promotional costs (Q4FY19 had been impacted by the launch of the 650cc twins). Consequently, EBITDA margins at 25.8% declined a little more than anticipated (down 160bps qoq, 600bps yoy; estimate 26.5%).  As a result, PAT at Rs4.5bn declined by 22% yoy.
• Concall highlights- (a) The company will be expanding its studio dealerships to 500 dealerships by the end of Q2. This is higher than the previous guidance of 350 units. These dealerships that will be profitable at even monthly sales of 10 units. (b) The waiting period on the 650 twins now 3-4 months with a very strong response even as the company rolls out the vehicle in interior centres. (c) The company will look at new variants in the next 2 months. Generically, the company stated that it has the ability to launch new products without a disc brake/single channel ABS if required. This seems to imply that the company may launch lower end variants of its bikes to increase volumes. (d) The demand is stressed on account of the liquidity crunch, weak economy and rural stress. While conversion rates remain high footfalls have come down meaningfully.

Key positives: Sharp increase in realisations

Key negatives: Higher than expected employee costs  

Impact on Financials: We cut our FY20/21 estimates by ~18%/14% to account for the lower than expected volume growth and slightly lower margins.

Valuation and View

The near term outlook on the 2W industry remains stressed with no green shoots visible. The weak environment coupled with regulatory push related high price hikes have added to the stress. We are however enthused by the company’ strategic push on the dealership network, the success of new products and its intent of launching new variants to suit customer needs. We believe that the company’s core strength – its brand equity – remains intact despite the current slowdown. Valuations at ~18XFY21 are now more reasonable. Maintain Outperformer with a TP of Rs18000 (20XFY21).