Eicher Motors' Q2FY20 results (Outperformer) - Steady quarter; strategic steps bearing fruit

Q2FY20 results

• Steady quarter: Eicher Motors adjusted consolidated PAT at Rs 5.8bn (up 1% yoy) was ahead of estimates. While the operating performance met consensus estimates, the PAT surprise was on account of a lower tax rate.
• Realisations rise; gross margins steady: RE revenues at Rs22bn (down 9% yoy) were driven by a sharp (+15% yoy; 2% qoq) increase in realization even as volume declined by 21% 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 – this seems to have offset the negative impact of the introduction of lower priced models. Notably, unlike peers which showed an expansion in gross margins, RE’s gross margins remained stable (down 40 qoq) – the management indicated that there had been limited benefit of lower commodity costs in the current quarter. In addition, the impact of negative operating leverage was visible as other expenses rose by 110bps qoq. Consequently, EBITDA margins came in at 24.7% (down 110 bps qoq, 560bps yoy). The PAT was boosted by a lower tax rate due to a change in the tax rate.
• Concall highlights- (a) The company has expanded its studio dealerships to 500 dealerships – the initial response to these dealerships has been strong and the company will add more dealers in the coming quarters. (b) The company registered double digit volume growth on a retail level during the festival season. Consequently, inventory levels have come down sharply – the inventory throughout the system (dealer, goods in transit and company) is under 3 weeks. With the BSVI transition looming, the company will look to align wholesale and retail volumes. (c) The product innovations and lower priced models have received a positive response from customers with sales of the Bullet 350X showing an uptrend. Apart from the reduced price, the new variants offer more colours/options are attracting customers. (d) The company continues to focus on exports and is continuously increasing its exclusive dealership network (57 dealerships in 22 cities).

Key positives: Sharp increase in realisations

Key negatives: Higher than expected other expense  

Impact on Financials: We raise our FY20/21 estimates by ~5% each to account for a lower tax rate.

Valuation and View

While the transition to BSVI is a challenge for the 2W industry, RE is better placed than its peers (the cost push could be meaningfully lower for RE). Further, we are enthused by RE’s strategic push on the dealership network, the success of new products and the launch of new variants to suit customer needs. We believe that the company’s core strength – its brand equity – remains intact despite the current slowdown. Premium valuations at ~24XFY21 are justified given the underlying brand strength. Maintain Outperformer with a TP of Rs25000 (27XFY21).