Eicher Motors' Q3FY19 results (Outperformer) - Inline, Sharp jump in realisations

Q3FY19 results

• Operating performance inline: Eicher Motors adjusted consolidated PAT at Rs 5.3bn (up 3% yoy) was ahead of estimates. While the operating performance met expectations, a sharp increase in other income boosted profitability.
• Realisations rise; gross margins steady: RE revenues at Rs23.4bn (up 3% yoy) were driven by a sharp (+10% yoy; 5% qoq) increase in realization even as volume declined by 6% yoy. The realisation growth reflects an increase in vehicle prices on account of the introduction of the ABS/ rear disc brake. Notably, the gross margins remained stable (flat yoy) despite hardening commodity prices – this seems to indicate that RE has been able to pass on the regulatory cost push without compromising on margins. 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/ employee costs increased 76bps qoq). Consequently, EBITDA margins at 29% declined a bit sequentially.
• VECV weak: Income from VECV was at Rs28.2bn (+9% yoy) led by a 4% yoy growth in volumes. EBITDA margins were weak at 6.6% (-210 bps yoy;-20 bps qoq) on account of higher discounting, negative operating leverage and commodity pressures. Consequently, PAT declined by 43% to Rs762mn.

Concall highlights- (a) While the increased regulatory costs (insurance/ABS) had made an impact in the near term, the company believes normalcy is returning to the market (b) The waiting period on the 650 twins now stretches to 5-6 months. The company expects to have a production capacity of 4000-5000 units by the beginning of the next fiscal year. (c) Despite a weak festival season, the inventory with dealers remains well under 2 weeks. (d) The company has taken a price hike of ~2% in February to offset commodity pressures. 

Key positives: Sharp increase in realisations

Key negatives: Higher than expected other expenses  

Impact on Financials: We cut our FY19/20 estimates by ~6%/10% to account for the lower than expected volume growth and slightly lower margins.

Valuation and View

While RE’s volumes could face pressure in the near term as regulatory cost push  (insurance/rear disc/ABS) impacts demand, we believe that over the medium term the RE franchise will continue to expand its appeal to premium commuters. While growth rates are likely to be slower than previous years, we believe RE can continue to grow well above industry. Further, revenue growth will likely outstrip volume increases as new products (including the twins)/ features (ABS)  improve realisations. Maintain Outperformer with a SOTP based TP of Rs25,000 (24XSept2020).