Eicher Motors' Q2FY19 results (Outperformer) - Steady Quarter

Q2FY19 results

• Consolidated PAT marginally below estimates: Eicher Motors adjusted consolidated PAT at Rs 5.6bn (up 9% yoy) was ~2% below expectations. The variance was largely on account of higher expenses linked to the launch of the 650cc twins.
• Realisations rise; gross margins steady: RE revenues at Rs24bn (up 11% yoy) were driven by a 7% realization growth while volumes supported with a 4% yoy growth. The realisation growth reflects a shift towards high value vehicles in the product mix. This improved mix also led to gross margins improving (+80 bp qoq) despite hardening commodity prices. This was however offset by negative operating leverage (sequentially volumes declined 7%) and higher promotional costs linked to the launch of the new 650cc twins (other expenses increased +190bp qoq). Consequently, EBITDA margins at 30.3% (down 170 bps qoq) were a tad disappointing.
• VECV steady: Income from VECV was at Rs29.6bn (+27% yoy) led by a 24% yoy growth in volumes while a 3% increase in realization supported revenues. EBITDA margins came in at 9% (-20 bps yoy;-20 bps qoq). Consequently, PAT grew by 49% to Rs 1.4bn.
• Concall highlights- (a) While the increased regulatory costs (insurance/ABS) had made an impact in the near term, the company believes normalcy seems to be returning to the market (b) The worker strike at Oragadam plant continues as the company will not compromise its principles. This is leading to a production loss of ~7-800 units per day (utilisation levels ~75%). Consequently, the company revised its production guidance to 925,000 units for FY19. (c) Order book for RE stands at 2-3 weeks largely led by premium products. (d) Phase 2 of Vallam Vadagal will commence from 2HFY20.

Key positives: Improved RE gross margins; robust VECV performance

Key negatives: Higher than expected other expenses  

Impact on Financials: We cut our FY19/20 estimates by ~10% to account for the lower than expected volume growth.

Valuation and View

While RE faces near term company specific issues (the strike) and regulatory concerns (insurance/rear disc), we believe that over the medium term the RE franchise will continue to expand its appeal to premium commuters, led by high brand equity and little competition in its niche segment. While growth rates are likely to be slower than previous years, we believe RE can continue to grow well above industry growth. Further, value growth will likely outstrip volume increases as new products (including the twins) improve realisations. We believe the strong growth (FY18-20E EPS CAGR 17%) justifies current valuation of ~20x FY20 EPS. Maintain Outperformer with a SOTP based TP of Rs27,000 (24XFY20).