Company update: Eicher Motors (Outperformer) - The legend rolls on

A surge in Royal Enfield’s (RE) volumes (CAGR of 36% over FY15-18) raises concerns on whether a less exclusive bike could damage RE’s brand equity (and consequently volumes) going forward. To counter check these concerns we commissioned a survey of RE owners (in cities where its marketshare is >10%). While the survey suggests a perceptible loss of exclusivity, the higher PARC (population of vehicles on the road) seems to be a positive influence on the purchase decision of an RE. We believe RE’s dealership-led penetration in a number of states too would add to the volume growth over next few years. Notwithstanding our estimate of a relative slowdown in volumes (18% CAGR over FY18-FY20E), RE will continue to outpace the industry growth. A contraction (from ~100% in FY15 to 27% at present) in RE’s premium valuation (over peers) more than adequately reflects the relative slowdown in volume growth. Maintain an Outperformer rating on Eicher Motors with a target price of Rs35,000 (upside of 25%).

Sharp rise in PARC provides comfort: RE’s PARC (population of vehicles on the road) has grown ~30% over last 10 years. There are concerns on whether the loss of exclusivity could hurt RE’s volumes going forward. While ~75% of respondents in our survey believe RE is now a less exclusive brand, yet surprisingly, ~85% stated that the higher PARC increases their preference for an RE. The apparent dichotomy indicates that popularity feeds on itself – increased vehicle count on the street perhaps brings about a comfort level for the RE buyer and adds to peer pressure while making the decision to buy the bike (RE’s popularity was a key reason that led to buying decisions in the past). It is likely that RE buyers feel a sense of belonging to a less exclusive but still premium/bold group (like Apple). Our survey suggests RE’s brand equity would benefit its foray into the 650cc segment.

Underpenetrated dealership network suggests saturation point may be distant: Our detailed analysis of Eicher Motors’ state-wise dealership network and market share brings forth two aspects: (a) there is a strong correlation between RE’s dealership network and market share and (b) despite current volumes, RE’s dealership network seems ~30% underpenetrated. Based on our analysis of ’premiumisation’ trends, we believe that despite potential marketshare losses, RE’s volumes could significantly outpace the overall motorcycle market beyond FY20E.

Sturdy ride; Maintain Outperformer: We expect RE to significantly outpace the domestic industry over the longer term despite strong growth in recent years. Eicher Motors deserves to trade at 27% premium to peers, given RE’s strong brand equity, expanding distribution network and 21% earnings CAGR over FY18-20E. Maintain an Outperformer rating on the stock with a target price of Rs35,000