Eicher Motors' Q4FY18 results (Outperformer) - Another robust quarter; RE margins expand

Q4FY18 results

• Adj consolidated PAT above est: Eicher Motors consolidated adj PAT at Rs 6.5bn (up 41% yoy) was ~5% above our estimates. The variance was largely on higher than expected EBITDA margins by RE and VECV. Reported PAT of Rs 4.6 bn (flat yoy) though was impacted by Rs1.9 bn impairment on the company’s termination of its Polaris JV.
• RE margins continue to expand: RE revenues at Rs25.3bn (up 34% yoy) were driven by a robust 27% volume growth. Standalone EBITDA margins at 32.3% (+90 bps yoy, +60bp qoq) were 50bps above expectations. Despite hardening commodity costs, gross margins declined only marginally on a sequential basis (down 30 bps qoq). Further operating leverage benefits were visible as staff and other expenses declined by 50 bps and 40 bps respectively. Other expenses have been at slightly elevated on higher marketing spends.
• VECV shines: Income from VECV was at Rs33.1bn (+30% yoy) led by a 33% yoy growth in volumes. The operating leverage and cost cutting measures lead to margins expanding to 9.5% (up 130 bps yoy; +250bp qoq). The expansion in margins despite higher discounting resulted in a PAT of Rs177mn (up 51% yoy).
• Concall highlights- (a) The waiting period is 4-6 weeks as key markets (Karnataka/ Maharashtra) rebounded. Growth in Uttar Pradesh has been extremely strong. New product variants – the Thunderbird X/Himalayan Sleek have been well received. (b) The company continues to focus on distribution network to expand marketshare.  It looks to add ~100 dealers p.a. (currently there are 825 dealers). Notably, even new dealers earn a high RoCE. (c) Apart from the new plant, RE will look to expand its capacity through productivity gains (FY19 production target is 950,000 units) (d) It will set up a network for sale of 2^nd hand RE bikes partly to maintain residual value for its bikes (e) It will focus on exports in Thailand/Indonesia whilst doubling its exclusive dealership network (to 50-60) over the next 3 years.

Key positives: Improved RE EBITDA margins; Improved VEC performance

Key negatives: Impairment expenses from the Polaris JV  

Impact on Financials: We largely maintain our estimates

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, well above industry CAGR growth (FY17-20E EPS CAGR 26%) justifies current valuation of ~24x FY20 EPS. Maintain Outperformer with a SOTP based TP of Rs35,000.