MOSL: EICHER MOTORS (Buy)-Higher RM and staff costs impact margins
EICHER MOTORS: Higher RM and staff costs impact margins; Accelerating pace of setting up RE Studios
(EIM IN, Mkt Cap USD6.5b, CMP INR16350, TP INR19000, 16% Upside, Buy)
- revenues declined ~6.5% YoY to ~INR23.8b (v/s est. INR23.3b). Higher other income restricted PAT decline to ~22% at ~INR4.5b (in-line).
- RE's net realization improved 0.6% QoQ (+13.5% YoY) to INR128k (v/s est. ~INR127k). EBITDA margin declined 160bp YoY (-640bp QoQ) to 25.9% (v/s est. 27.3%) due to higher RM and staff costs (seasonal factors).
- VECV's realizations increased ~6% YoY (+11% QoQ) to INR1.69m (v/s est. ~INR1.57m). Higher discounts and negative operating leverage impacted EBITDA margins (-370bp YoY to 5.5% v/s est. 6.2%).
- Earnings call highlights: (a) Accelerating the pace of setting up RE Studios to improve accessibility of RE products, with ~350 outlets by 1HFY20 and ~500 outlets by end-FY20 (v/s earlier target of 350 outlets in FY20). (b) Added six exclusive stores in the international market, taking the total count to 48 exclusive stores. It is targeting ~80 such stores in the next 1.5-2 years. (c) Dealer inventory is <1 month. Barring exceptions, its network is financially healthy with no problems in either dealer/customer financing. (d) The 650cc Twins still have 3-4 months waiting period; it is now inching towards a monthly run-rate of 5k units. (e) No benefit of commodity cost in 1QFY20, expect benefits to reflect in 2Q-3QFY20. (f) For RE, it is planning transition to BS6 in 4QFY20 only.
- Valuation & view: We are lowering our EPS estimates for FY20/FY21 by 6%/9%, as we cut volumes/margins for both businesses. The stock trades at ~22.3x/19x FY20E/FY21E consol. EPS. We have lowered P/E multiple for RE from 22.5x to 20x to factor in the step-down in its growth trajectory. Maintain Buy.
Eicher Motors is engaged in the Indian automobile industry. Its 50-50 joint venture with the Volvo group, VE Commercial Vehicles Limited, designs, manufactures and markets reliable, fuel-efficient commercial vehicles of modern technology, engineering components and provides engineering design solutions. Co. manufactures and markets Royal Enfield motorcycles and exports its bikes to over 25 countries including developed countries such as U.S., Japan, U.K. and several European countries. Co.'s business activities fall within a single business segment, automobile products and related components.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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