We downgrade Eicher Motors to ‘sell’ (earlier ‘reduce’) despite a strong earnings growth trajectory, as the stock is discounting a fairly optimistic volume growth for the Royal Enfield business.
The stock trades at 23x CY15e EPS, which, we believe, is quite expensive. We have raised our earnings estimates by 12-19% over CY14/15 to factor in higher volume and Ebitda margin estimates for the RE business. We have raised our target price to R8,300 (from R6,150) based on the sum-of-the-parts valuation methodology.
Royal Enfield reported net profit of R133.4 crore (+153% y-o-y), which was 6% above our estimates for Q2CY14. Volumes grew 85% y-o-y and average selling prices increased 2.4% y-o-y. Gross margin improved by 540 bps, driven by scale benefits in raw-material sourcing, richer product mix and operating leverage benefit.
Ebitda margin came in at 25.1% (+700 bps y-o-y). We believe this could improve further with a sharp increase in volumes over the next two years, led by operating leverage benefit. The company has raised volume target of Royal Enfield to 3 lakh units (from 2.8 lakh units) in CY14 and expects more than 4 lakh unit volumes in CY15. The company indicated a five-month waiting period currently across its model line-up.
Volvo Eicher Commercial Vehicles reported a net profit of R24.1 crore (-4% y-o-y) due to a sharp rise in depreciation costs despite a strong growth in Ebitda (+23% y-o-y). Volumes grew 3% y-o-y, led by light commercial vehicle volumes while heavy-duty truck volumes remained under pressure.
- Kotak Institutional Equities