We initiate coverage on Eicher Motors with an UW rating as we believe that the valuation multiples from the current 33x/28x on FY16E/17e will moderate as growth rates ease and competition increases. After witnessing years of robust sales increases at Royal Enfield (54% CAGR over CY10-15E), growth is expected to ease from hereon off an elevated base—this is reflected in a sharp reduction in waiting periods. Further, competition is launching new products in the lifestyle biking segment. In the CV (commercial vehicles) business, VECV (VE Commercial Vehicles Ltd is a joint venture between the Volvo Group and Eicher Motors Ltd) has made limited headway in a competitive M/HCV segment as competition has gained market share over the year, driven by aggressive discounting. Thus, while the stock has corrected by over 20% from peak levels (post the sharp stock price run-up earlier in the year), we believe that these factors will drive it lower.
Growth rates to moderate at RE: Royal Enfield has witnessed a healthy 54% CAGR over CY10-CY15E as sales have been driven by latent demand for lifestyle bikes, an improved product portfolio at Royal Enfield and a more than doubling of the dealer network. However, the waiting periods for the RE bikes have been coming off lately, from ~6 months a year ago. We believe that growth rates will moderate from elevated levels earlier as: (i) latent demand is now normalising, (ii) a demanding base effect.
Competition is now emerging in the lifestyle biking segment as Bajaj Auto has recently expanded the Avenger series of bikes, albeit at a lower range i.e., 150-220cc category, which are priced ~30% below the RE products. Thus, Bajaj is attempting to downsize this segment. The initial response to these bikes has been encouraging as the OEM has ramped up production from under 4,000 units p.m. in 2Q to 20,000 units expected in December due to the encouraging response from the market.
VECV: Limited headway in a competitive market: Despite the roll-out of the next-generation Pro Series range of commercial vehicles for the Indian market by VECV, the OEM has made limited headway, particularly in the 16-40T M/HCV range. The market share has come off from 4.4% to 3.5% in this segment and the overall share in the CV segment has come off by 190bp to 12% due to aggressive discounting by incumbents.
Price Target (PT): We set a March-16 sum-of-parts (SOTP) based PT of R13,000—we value the VECV commercial vehicle business at 8.75x EV/Ebitda and we value the Royal Enfield business at 26x forward P/E.
Key risks: Sharper-than expected demand for RE products driven by new product launches, market share gains in the CV business.
Investment Summary
We initiate coverage on Eicher with an UW rating as we believe that the valuation multiples from the current 33x/28x on FY16E/17e will moderate as growth rates ease and competition increases. After witnessing years of robust sales increase at Royal Enfield (54% CAGR over CY10-15E), growth is expected to ease from hereon off an elevated base.
Further, competition is launching new products in the lifestyle biking segment. In the CV business, VECV has made limited headway in a competitive M/HCV segment as competition has gained market share over the year, driven by aggressive discounting.
Royal Enfield—Pent-up demand is normalising and competition is stepping in
The OEM has witnessed healthy growth over CY10-CY15 YTD as growth has been driven by latent demand for lifestyle bikes, an improved product portfolio at Royal Enfield and an expanding dealer network (which has more than doubled to 450 units currently). Thus, RE volumes have risen from 5,000 units p.m. in CY10 to over 40,000 units currently—sales have grown at a CAGR of 54% over CY10-15e. However, the waiting period for the RE bikes have been reducing lately— from ~6 months a year ago to less than a month for several variants (particularly in the 500cc category) and between 1-3 months for the 350cc category. We believe that growth rates will moderate from elevated levels earlier as: (i) pent-up demand is now easing, a demanding base effect.
(ii) Further, competition is gradually emerging in the lifestyle biking segment. Currently, RE derives the bulk of its sales from the entry 350cc segment (~90% of sales) range, while the 500cc products remain niche offerings. Bajaj Auto has recently expanded the Avenger series of lifestyle bikes, albeit at a lower range i.e., 150-220cc category, which are priced ~30% lower than the RE products. Thus, Bajaj is attempting to downsize this segment, in an attempt to attract value-conscious customers in our view.
Exports – a medium-term opportunity: Management is aggressively focusing on expanding its presence in the overseas markets to drive its next leg of growth—particularly in USA, Europe. They have set up showrooms in nodal cities such as London, Paris, Dubai etc. Further, they have appointed senior personnel to drive their international business including Rod Copes—President Royal Enfield North America—(ex Harley Davidson), Simon Warburton in UK—Head Product planning and strategy (ex Triumph), Pierre Terblanche, head of the industrial design team (ex Ducati), amongst others.
We believe that after witnessing
aggressive revenue growth over the past few years, growth rates are likely to moderate from hereon. After growing sales at a CAGR of 54% over CY10-15e, Royal Enfield is expanding capacity from 520,000 units to 900,000 units
over CY15-18, implying a capacity increase of 20% CAGR over this period. (Royal Enfield will increase production to 620,000 units with its Oragadam plant in CY16E. Further, the third greenfield plant proposed in Vallam Vadagal in Tamil Nadu is expected to be onstream in CY18—it will raise capacity to 900,000 units).
VECV commercial vehicle business—Limited headway in a competitive market: Post Eicher and Volvo’s collaboration in 2008, VECV launched its next-generation Pro Series range of commercial vehicles for the Indian market from 2013 onwards.
However, despite the rollout of the new products—which are developed with inputs from Volvo, the OEM has been unable to expand its market share in the heavy duty segment i.e., 16-40T range. Management highlights that their market share has been impacted due to ggressive discounting by local OEMs (Ashok Leyland, Tata Motors). Further, the incumbents have a wider distribution network across the country as compared to VECV, which is in the midst of its network expansion. The market share has come off from 4.4% to 3.5% in the M/HCV segment (16T and above) and the overall share in the CV segment has come off by 190bp to 12%.
The Ebitda margins at the VECV business have been range bound at between 7-8% over the past few years.
The VE Powertrain facility supplies medium duty engines to Volvo’s global requirements including Euro V and VI engines. However, the scale-up in this segment has been gradual, with the JV supplying ~1,000 Euro VI engines p.m., primarily to Europe.
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