MOSL: EICHER MOTORS (Buy)-All set for next leg of growth; driven by high-potential, under represented BIMARU states

EICHER MOTORS: All set for next leg of growth; driven by high-potential, under represented BIMARU states

(EIM IN, Mkt Cap USD12.3b, CMP INR30550, TP INR35572, 16% Upside, Buy)

High-potential markets like BIMARU under-represented

We see high growth potential in key motorcycling markets like BIMARU (Bihar, MP, Rajasthan and UP). These under-penetrated 2W markets not just offer higher scope for motorcycles but also for aspirational products like RE. RE’s market share in these states is currently 3-4% (v/s 6% for pan-India). With network expansion focused on these high potential tier-2 markets, we expect these states to continue to grow strongly at 36% CAGR over FY18-20, contributing ~24% to RE’s domestic volume. We expect UP to become the largest market for RE by FY20 (5th largest in FY17).

 State-wise demand model suggests 20% CAGR

Assuming no capacity constraints, based on our state-wise demand model, we see potential of 20% CAGR in domestic volumes over FY18-20. However, assuming 2nd phase of 3rd plant comes on-stream from April 2019, we model ~16% volume CAGR.

 Demand moderation in select key states due to systemic pressures

In key states like Maharashtra, Karnataka and Tamil Nadu, there are signs of demand moderation. While Tamil Nadu witnessed decline for the first time in 3QFY18, volumes in Maharashtra and Karnataka have been declining since 4QFY17and 2QFY18 respectively, primarily impacted by systemic factors like (a) weakness in IT sector impacting demand in Pune and Bangalore, (b) increase in road tax in Karnataka and Maharashtra, and (c) high penetration in key cities (15-25% of motorcycles v/s 6% pan-India).