Eicher Motors' Q2FY18 results (Outperformer) - Steady performance

Q2FY18 results

• Consolidated PAT a tad below estimates: Eicher Motors consolidated PAT at Rs 5.2bn (up 25% yoy) was a tad short of expectations. While RE recorded higher than expected margins, the realisations a tad bit. The performance of VECV was also a positive.
• RE margins steady: RE revenues at Rs21.7bn (up 22% yoy) were driven by a robust volume growth of 25% yoy, however realizations declined by 2% qoq possibly on a weaker product mix and GST related adjustments. EBITDA margins at 31.5% (up 60bps yoy, 50bp qoq) were in line with expectations. Gross margins continued to improve (up 80 bps qoq) despite commodity cost pressures – this likely reflects the improved scale linked bargaining power with vendors. This was partially offset by higher other expenses/ staff costs which likely reflects start-up costs linked to capacity ramp up. 
• VECV performance faces headwinds: Income from VECV was at Rs23.4bn – a growth of 19% yoy (volume growth of 12%). The operating leverage and cost cutting measures lead to margins expanding to 9.2% (up 200 bps yoy; +90bp qoq). The expansion in margins despite higher discounting resulted in a PAT of Rs950mn (up 45% yoy).
• Concall highlights- (a) The company recently unveiled 2 motorcycles of 650cc – the initial response to the motorcycles has been robust (b).(d) No price hike was taken in RE in 2QFY18. (c) The waiting period for the Classic 350 cc is between 6-8 weeks with order intake continuing to be higher than supplies. (d) The company will produce 825,000 units in FY18 and will have the capacity for 900,000 units for FY19. It could expand capacities in a period of less than a year, if it demand persists.

Key positives: Improved performance of VECV

Key negatives: Lower than estimated revenue growth 

Impact on Financials: We trim our estimates for FY18/19 by 1-3% on lower realisation growth for RE.

Valuation and View

The RE franchise continues to expand its appeal to premium commuters, led by high brand equity and little competition in its niche segment. VECV is equally well placed to take advantage of a potential recovery in the LCV space. The on-going phase of multi- year, hyper growth (FY17-20E EPS CAGR 26%) justifies current valuation of ~26xSept19 EPS. Maintain Outperformer with a SOTP based TP of Rs35,000.