Premium launches drive growth for Eicher in Q3 FY24
Outlook promising, supported by better fleet utilisation and resilience in rural demand.
Highlights:
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- A strong set of numbers in Q3 FY24, driven by new premium products and focus on yield improvement
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- Domestic demand outlook positive for medium to long term
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- Export market faces challenges, Eicher is managing it well
- Stock trades at a discount to fair value; accumulate
Eicher Motors Ltd (
; CMP: Rs 3,872.3; M Cap: Rs 1,05,598 crore; Rating: Overweight) is maintaining its robust financial performance, fuelled primarily by new products in the higher engine-capacity segment.
The company’s prospects look promising because of a combination of factors, including pent-up demand for motorcycles, new products, a growing preference for premium bikes, increasing momentum in export demand, substantial enhancements in the commercial vehicle (CV) segment, and improved fleet utilisation.
Quarter in a nutshell
Despite the marginal volume growth in Q3 FY24, Royal Enfield (RE) recorded a 12.3 percent year-on-year (YoY) increase in net revenue, attributed to the introduction of higher CC products with better realisation. Consequently, there was an expansion of 305.1 basis points (bps) in the EBITDA (earnings before interest, tax, depreciation, and amortisation) on a YoY basis.
Simultaneously, the performance of VECV, the joint venture with the Volvo Group, improved significantly with a YoY volume growth of 14 percent. The benefits of operating leverage, combined with the corrections in commodity-linked prices, resulted in a 136.4 bps expansion in the EBITDA margin.
Outlook
New products to drive demand momentum
One of the key drivers of RE’s financial performance over the last few quarters is the new products that it kept on launching across segments. In the quarter gone by, RE further strengthened its portfolio and rolled out two new motorcycles — the new Himalayan, and the
Shotgun 650, while closing the year with a new edition of the Motoverse. As per the management, these motorcycles have resonated very strongly with consumers across the world.
Looking ahead, the company has a robust pipeline of new products scheduled for the next five years and beyond, targeting global consumers. Despite challenges in the export markets, EML has maintained a smooth course and gained market share across most regions. Notably, efforts to expand the network have included entering the Brazilian market in FY23, presenting significant opportunities. The management is confident of the company’s export performance in the future.
Regarding commodity cost pressures, the management has signalled a positive development, indicating that raw material prices are expected to remain stable or may soften, going forward. This softening is expected to have a favourable impact on margins in the coming periods.
In terms of the export market outlook, the management indicated that the demand environment is subdued. However, the company is making efforts to continue to capture market share with the help on new products.
Taking steps for electric vehicles
Throughout the year, the company solidified a strategic alliance with Stark Future SL, a prominent European manufacturer of high-performance electric motorcycles, through a €50 million investment. This partnership encompasses joint efforts in research and development for electric motorcycles, the sharing of technology, technical licensing, and collaborative manufacturing. Beyond electric bikes, the company is focusing on developing commercial electric vehicles (EVs).
VECV outlook positive
The company is optimistic that the demand momentum will continue thanks to the significant pick-up in economic activities. The outlook for the remainder of the fiscal year appears promising, supported by better fleet utilisation, resilience in rural demand, and a resurgence in the mining, construction, and highways sectors.
Valuation
Our sum-of-the-parts (SOTP) valuation suggests that the stock is trading at an 11.7 percent discount to fair value and we advise investors to accumulate the stock for the long term.
Risks
Any weakness in demand can hurt its financials. Moreover, adverse commodity price movements can increase raw material costs and hit operating profitability.
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