Eicher Motors (EICMOT)

CMP: | 2,615 Target: | 2,920 (12%) Target Period: 12 months HOLD

August 13, 2021 Steady quarter, volume growth to be back-ended…

About the stock: Eicher Motors (EML) is the market leader in the >250 cc premium Particulars motorcycle segment (FY21 market share at 93.5%) through its aspirational models Particular ₹ crore under the Royal Enfield (RE) brand, such as Bullet, Classic, Interceptor among others. Market Capitalization 71,468

 Via its JV with Volvo i.e. VECV (EML has 54.4% stake), the company has a Total Debt (FY21) 157 7,806 presence in the CV space as well (6.4% FY21 market share) Cash & Investments (FY21) EV (FY21) (₹ crore) 63,819  Strong net cash positive b/s with healthy return ratios metrics 52 week H/L (₹) 3036 / 2007 Equity capital ₹ 27.3 Crore Update Result Face value ₹ 1

Shareholding pattern Q1FY22 Results: The company posted relatively steady Q1FY22 results Sep-20 Dec-20 Mar-21 Jun-21  Consolidated net sales declined 32.9% QoQ to | 1,974 crore Promoter 49.3 49.2 49.2 49.2  EBITDA margins at 18.4% were down 319 bps QoQ FII 28.2 28.9 29.1 28.8  Consequent consolidated PAT was down ~55% QoQ to | 237 crore DII 9.9 9.4 9.1 9.5 Other 12.7 12.5 12.6 12.5

Price Chart What should investors do? EML’s stock price has grown at ~5% CAGR from 4000 20,000

~| 2,200 levels in August 2016, thereby outperforming the Nifty Auto index. 3000 15,000  We retain HOLD rating on EML amid delayed volume ramp up, especially at 2000 10,000 Royal Enfield, due to near term supply constraints (global chip shortage) 1000 5,000 0 0 Target Price and Valuation: We value EML at | 2920 on SOTP basis; assigning 30x

PE to RE business and 25x PE to VECV business on FY23E (earlier TP | 2,970).

Feb-19 Feb-20 Feb-21

Aug-18 Aug-20 Aug-21 Aug-19 EML (LHS) Nifty (RHS)

Recent event & key risks Key triggers for future price performance:

 Vinod Dasari (CEO of RE) stepped

 We expect 15% FY21-23E RE volume CAGR aided by low base, abating of Research Equity Retail

down w.e.f. August 13, 2021

supply constraints, pent up demand, undiminished brand pull, network – expansion benefits and higher exports  Key Risk: (i) higher than anticipated sales volume growth  Continued VECV outperformance in CVs to lead to market share gains; we over FY21-23E, (ii) Input cost build 27% FY21-23E volume CAGR as cyclical recovery gathers pace pressure on margins

 Overall FY21-23E consolidated net sales CAGR expected at 23.4%, with Research Analyst margins seen rising to 24.2% by FY23E riding on operating leverage gains Shashank Kanodia, CFA

ICICI Securities Securities ICICI [email protected]

Jaimin Desai Alternate Stock Idea: In our auto OEM coverage, we like M&M. [email protected]  Focused on prudent capital allocation, UV differentiation & EV proactiveness

 BUY with a target price of | 1,000

Key Financial Summary

5 year CAGR 2 year CAGR Key Financials FY19 FY20 FY21 FY22E FY23E (FY16-21) (FY21-23E) Net Sales 9,797.1 9,153.6 8,720.4 -11.1% 10,623.4 13,284.5 23.4% EBITDA 2,903.1 2,180.3 1,781.3 -6.2% 2,260.7 3,212.0 34.3% EBITDA Margins (%) 29.6 23.8 20.4 21.3 24.2 Net Profit 2,202.8 1,827.5 1,346.9 1.1% 1,772.8 2,635.6 39.9% EPS (₹) 80.8 67.0 49.3 64.9 96.4 P/E 32.4 39.0 53.1 40.3 27.1 RoNW (%) 24.8 18.3 11.8 14.0 18.0 RoCE(%) 27.8 17.3 11.3 13.7 17.8

Source: Company, ICICI Direct Research Result Update | Eicher Motors ICICI Direct Research

Key takeaways of recent quarter & conference call highlights Q1FY22 Results:  RE volumes for the quarter were at ~1.24 lakh units (down 39.6% QoQ), while ASPs rose 7% sequentially to | 1.52 lakh/unit.  EBITDA margin decline of 319 bps to 18.4% was despite ~130 bps gross margin expansion (vs. our expectation of ~70 bps contraction) due to negative operating leverage  VECV JV posted revenues of | 1,639 crore with EBITDA and loss after tax placed at | 18 crore and | 72 crore, respectively. The company’s share of losses from VECV JV at | 39.4 crore were far higher than anticipated (| 12.8 crore)  EML informed that Vinod Dasari, CEO of RE, would be stepping down from his role effective August 13, 2021 in order to pursue his personal interests. B Govindarajan, COO of RE since 2013, would now head RE as Executive Director

Q1FY22 Earnings Conference Call highlights

 The company expects supply constraints surrounding semiconductors to gradually start easing from H2FY22E onwards, thereby leading to improvement in production and sales volumes. Underlying demand is healthy in geographies where lockdowns are not in force  Q1FY22 export volumes of 18,963 units was the best ever performance  Directionally, the company wants to grow non motorcycle sales (e.g., apparels and accessories) to 20% of revenues  The company has more than doubled domestic touchpoints to 2,000+ over the past two years. Exclusive stores count outside India increased by eight to 140+ as of Q1FY22

 Make It Yours (MIY) platform is now accounting for ~80% bookings of key RE models  Gross profit per unit has increased due to price hikes, better model mix in India, higher export contribution and increasing share of non-motorcycle pie like accessories and apparel  EML said electrification would be a long drawn process in its served segment of middleweight motorcycles but has begun background work for the same  Going forward, commodity headwinds in Q2FY22E would be limited to low single digits. EML has fully passed on absolute cost increases arising out of commodity inflation from the past year  RE financing levels at 45-47% are largely unchanged from last year

Peer comparison

Exhibit 1: ICICI Direct coverage universe (2-W) CMP TP Rating Mcap 2-W Lakh volumes EBITDA margin (%) RoCE (%) P/E Company ₹ ₹ ₹ crore FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E Bajaj Auto (BAAUTO) 3,766 4,350 Hold 1,09,064 36 41 46 17.8 15.3 16.0 18.2 19.3 22.5 23.9 22.5 19.5 Hero Moto (HERHON) 2,783 3,440 Buy 55,577 58 67 73 13.0 12.5 13.0 20.8 23.1 24.5 18.8 16.3 14.2 Eicher Motors (EICMOT) 2,615 2,920 Hold 71,468 6 7 8 20.4 21.3 24.2 11.3 13.7 17.8 53.1 40.3 27.1

Source: Company, ICICI Direct Research; Note – Bajaj Auto volumes above are for its 2-W business Eicher Motors is a leader in >250cc bike segment. The company is witnessing supply side issues (global chip shortage) which are weighing on volumes ramp up in the near term. We expect new product launches at RE to be delayed till supply chain constrains ease in due course of time.

ICICI Securities | Retail Research 2 Result Update | Eicher Motors ICICI Direct Research

Exhibit 2: Variance Analysis Q1FY22 Q1FY22E Q1FY21 YoY (%) Q4FY21 QoQ (%) Comments Topline came in ahead of estimates tracking more Total Operating Income 1974 1812 818 141.3 2940 -32.9 than anticipated rise in ASPs at Royal Enfield Raw Material Expenses 1073 1048 475 125.7 1654 -35.1 RM costs were contained at 57.8% of sales with Purchase of traded goods 69 36 26 167.2 85 -19.4 gross margins expanding 130 bps QoQ Employee Expenses 223 199 177 26.3 225 -0.9 Other expenses 246 216 136 80.5 341 -27.9 Other expenses for Q1FY22 were at 12.5% of sales EBITDA 363 314 4 9,477.0 634 -42.8 EBITDA margins for the quarter were ahead of EBITDA Margin (%) 18.4 17.3 0.5 1792 bps 21.6 -319 bps estimates tracking beat on gross margins Other Income 122 129 114 6.8 114 7.1 Depreciation 112 125 98 13.7 125 -10.6 Depreciation was a tad lower on QoQ basis Interest 6 4 5 26.5 4 63.5 Total Tax 90 113 5 1,904.2 162 -44.4 PAT for the quarter was ahead of estimates tracking PAT 237 222 -55 -529.7 526 -54.9 beat on operating margins Key Metrics Royal Enfield ASP(|) 152,501 145,410 133,269 14.4 142,559 7.0 ASPs at RE were up 7% QoQ at | 1.5 lakh/unit ASP's at VECV arm were also robust and came in at VECV ASP (| lakhs) 28.2 20.2 30.1 -6.2 19.8 42.4 | 28.2 lakh/unit Source: Company, ICICI Direct Research

Exhibit 3: Change in estimates FY22E FY23E Comments (| Crore) Old New % Change Old New % Change Marginally tweak estimates tracking management Revenue 10,539 10,623 0.8 12,355 13,284 7.5 commentary on supply constraints and intent to grow apparel & accessories share of business over FY21-23E EBITDA 2,265 2,261 -0.2 2,892 3,212 11.1 EBITDA Marginally tweak estimates incorporating stabilisation of RM 21.5 21.3 -21 bps 23.4 24.2 77 bps Margin (%) costs in H2FY22 and operating leverage benefits PAT 1,823 1,773 -2.8 2,388 2,636 10.4 We now expect earnings to grow at a CAGR of 40% over FY21- EPS (|) 67 65 -2.8 87 96 10.4 23E, albeit on a low base Source: ICICI Direct Research

Exhibit 4: Assumptions Current Earlier Comments FY19 FY20 FY21 FY22E FY23E FY22E FY23E Lowered estimates tracking supply constraints. We Royal Enfield 826,098 695,839 612,060 675,065 810,117 772,054 830,118 now expect RE volumes to grow at a CAGR of 15% volumes over FY21-23E to 8.1 lakh units in FY23E Royal Enfield ASPs estimates get revised upwards tracking 117,603 129,465 140,044 154,785 162,359 144,802 147,658 ASP/unit (|) Q1FY22 results and greater export thrust Volumes at VECV are now expected to grow at 27% VECV volumes 72,860 48,786 41,265 51,122 66,070 55,727 69,650 CAGR over FY21-23E to 66k units in FY23E Source: ICICI Direct Research

ICICI Securities | Retail Research 3 Result Update | Eicher Motors ICICI Direct Research Financial story in charts Exhibit 5: Topline and EBITDA margin trend 14,000 35.0

12,000 29.6 30.0 We expect sales to grow at 23.4% CAGR in FY21- 10,000 25.0 23E amid 15% RE sales volume CAGR. EBITDA 23.8 24.2 21.3 margins are seen at 24.2% in that time frame 8,000 20.4 20.0 crore % ₹ 6,000 15.0

4,000 10.0

2,000 5.0 9,797 9,797 9,154 8,720 10,623 10,623 13,284 - - FY19 FY20 FY21 FY22E FY23E Net Sales EBITDA margin RHS) Source: Company, ICICI Direct Research

Exhibit 6: PAT and EPS trend 3,000 120

2,500 100 96

2,000 81 80 PAT at Eicher Motors is seen growing at 40% CAGR 67 crore 65 over FY21-23E, albeit on a low base

₹ 1,500 60 per per share

49 ₹ 1,000 40

500 20 2,203 2,203 1,828 1,347 1,773 2,636 - - FY19 FY20 FY21 FY22E FY23E

PAT EPS (RHS)

Source: Company, ICICI Direct Research

Exhibit 7: Return ratios trend 100.0 90.0 80.0 70.0 60.0 % 50.0

40.0 87.2 RoCE profile at Eicher Motors is seen improving to 81.1 81.1

27.8 27.8 ~18% levels gradually by FY23E. Due to high share 30.0 24.8 18.3 18.3 55.2 18.0 18.0 17.8 17.8

17.3 17.3 of cash & cash equivalents as a percentage of 50.3 50.3 14.0 14.0 13.7 13.7

20.0 11.8 11.3 11.3 networth, RoIC at Eicher Motors are seen >50% 36.0 36.0 10.0 - FY19 FY20 FY21 FY22E FY23E RoE RoCE RoIC

Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 4 Result Update | Eicher Motors ICICI Direct Research

Exhibit 8: RE segment penetration by state

Source: Company, ICICI Direct Research

Exhibit 9: SOTP (target price) table Amount Remarks Two-wheeler business-Royal Enfield FY23E EPS (₹) 91 Target PE multiple(x) 30.0 Valued RE business at 30x P/E Per share value (₹) 2,745 Target market cap (₹ crore) 74,820 CV business-VECV FY23E PAT (₹ crore) 357 Target PE multiple(x) 25.0 Valued VECV business at 25x P/E Target market cap (₹ crore) 8,929 Contribution towards EML 0.54 EML has 54.4% stake in VECV Target market cap towards EML (₹ crore) 4,857 Per share value-VECV Eicher (₹) 176 Total target market cap (₹ crore) 79,677 Per share value (₹ ) 2,920 Source: ICICI Direct Research

Exhibit 10: Valuation Summary Net Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE (₹ cr) (%) (₹) (%) (x) (x) (%) (%) FY18 8,965.0 27.5 71.9 17.3 36.4 23.7 29.9 35.3 FY19 9,797.1 9.28 80.8 12.4 32.4 22.6 24.8 27.8 FY20 9,153.6 (6.6) 67.0 (17.0) 39.0 29.7 18.3 17.3 FY21 8,720.4 (4.7) 49.3 (26.5) 53.1 35.8 11.8 11.3 FY22E 10,623.4 21.8 64.9 31.6 40.3 27.6 14.0 13.7 FY23E 13,284.5 25.0 96.4 48.7 27.1 18.7 18.0 17.8 Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 5 Result Update | Eicher Motors ICICI Direct Research

Financial Summary

Exhibit 11: Profit and loss statement | crore Exhibit 12: Cash flow statement | crore (Year-end March) FY20 FY21 FY22E FY23E (Year-end March) FY20 FY21 FY22E FY23E Total operating Income 9,153.6 8,720.4 10,623.4 13,284.5 Profit after Tax 1,827.5 1,346.9 1,772.8 2,635.6 Growth (%) -6.6 -4.7 21.8 25.0 Add: Depreciation 381.5 450.7 479.2 531.4 Raw Material Expenses 4,770.9 4,846.7 6,024.2 7,445.4 (Inc)/dec in Current Assets 64.7 -990.5 143.1 -440.6 Employee Expenses 795.8 843.3 906.9 958.6 Inc/(dec) in CL and Provisions -12.5 597.2 99.2 643.9 Other Expenses 1,181.5 983.1 1,165.9 1,365.9 CF from operating activities 1718.0 951.1 1982.5 2773.8 Total Operating Expenditure 6,973.3 6,939.1 8,362.8 10,072.5 (Inc)/dec in Investments -878.1 1,880.8 -1,300.0 -1,800.0 EBITDA 2180.3 1781.3 2260.7 3212.0 (Inc)/dec in Fixed Assets -746.9 -508.7 -450.0 -450.0 Growth (%) -24.9 -18.3 26.9 42.1 Others 700.0 433.2 510.0 614.0 Depreciation 381.5 450.7 479.2 531.4 CF from investing activities -925.0 1805.3 -1240.0 -1636.0 Interest 18.9 16.5 14.8 13.3 Issue/(Buy back) of Equity 0.0 0.0 0.0 0.0 Other Income 543.3 453.2 511.7 596.5 Inc/(dec) in loan funds -42.3 13.0 -50.0 -10.0 PBT 2,323.2 1,767.3 2,278.4 3,263.8 Dividend paid & dividend tax -410.3 -464.6 -546.6 -683.3 Others 0.0 0.0 0.0 0.0 Others -355.1 574.9 0.0 0.0 Total Tax 527.4 451.5 572.1 822.5 CF from financing activities -807.7 123.3 -596.6 -693.3 PAT 1827.5 1346.9 1772.8 2635.6 Net Cash flow -14.7 2,879.7 145.9 444.6 Growth (%) -17.0 -26.3 31.6 48.7 Opening Cash 2,965.2 2,950.5 5,830.2 5,976.1 EPS (₹) 67.0 49.3 64.9 96.4 Closing Cash 2950.5 5830.2 5976.1 6420.7 Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Exhibit 13: Balance Sheet | crore Exhibit 14: Key ratios (Year-end March) FY20 FY21 FY22E FY23E (Year-end March) FY20 FY21 FY22E FY23E Liabilities Per share data (₹) Equity Capital 27.3 27.3 27.3 27.3 EPS 67.0 49.3 64.9 96.4 Reserve and Surplus 9,953.6 11,410.8 12,636.9 14,589.3 Cash EPS 81.0 65.8 82.4 115.9 Total Shareholders funds 9980.9 11438.1 12664.3 14616.7 BV 366.1 418.5 463.4 534.8 Total Debt 144.4 157.4 107.4 97.4 DPS 12.5 17.0 20.0 25.0 Deferred Tax Liability 252.2 221.5 269.8 337.4 Cash Per Share 249.7 285.6 338.5 420.7 Others 198.1 270.2 275.1 282.0 Operating Ratios (%) Total Liabilities 10575.5 12087.2 13316.7 15333.5 EBITDA Margin 23.8 20.4 21.3 24.2 Assets PBT / Net sales 19.7 15.3 16.8 20.2 Gross Block 3,669.7 4,176.2 4,690.5 5,140.5 PAT Margin 20.0 15.4 16.7 19.8 Less: Acc Depreciation 1,292.2 1,742.9 2,220.9 2,752.3 Inventory days 22.8 36.6 30.0 30.0 Net Block 2377.5 2433.3 2469.6 2388.2 Debtor days 3.5 6.6 5.0 5.0 Capital WIP 312.2 314.3 250.0 250.0 Creditor days 40.2 64.3 50.0 50.0 Total Fixed Assets 2,689.7 2,747.6 2,719.6 2,638.2 Return Ratios (%) Investments 5,748.8 3,902.2 5,252.2 7,102.2 RoE 18.3 11.8 14.0 18.0 Inventory 572.4 874.6 873.2 1,091.9 RoCE 17.3 11.3 13.7 17.8 Debtors 86.8 158.2 145.5 182.0 RoIC 55.2 36.0 50.3 81.1 Others 252.4 869.3 740.3 925.7 Valuation Ratios (x) Cash 2950.5 5830.2 5976.1 6420.7 P/E 39.0 53.1 40.3 27.1 Total Current Assets 3,862.0 7,732.2 7,735.1 8,620.3 EV / EBITDA 29.7 35.8 27.6 18.7 Creditors 1,007.8 1,535.8 1,455.3 1,819.8 EV / Net Sales 7.1 7.3 5.9 4.5 Provisions 73.7 90.2 85.5 106.9 Market Cap / Sales 7.8 8.2 6.7 5.4 Others 792.7 845.4 1029.9 1287.8 Price to Book Value 7.1 6.2 5.6 4.9 Total Current Liabilities 1,874.2 2,471.4 2,570.6 3,214.5 Solvency Ratios Net Current Assets 1987.9 5260.8 5164.5 5405.8 Debt/Equity 0.0 0.0 0.0 0.0 Other Non current asset 149.2 176.5 181.5 188.5 Current Ratio 0.7 1.0 0.9 0.9 Application of Funds 10575.5 12087.2 13316.7 15333.5 Quick Ratio 0.2 0.5 0.5 0.5 Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 6 Result Update | Eicher Motors ICICI Direct Research

Exhibit 15: ICICI Direct coverage universe (Auto & Auto Ancillary) Sector / Company CMP TP M Cap EPS (₹) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) (₹) (₹) Rating (₹ Cr) FY21P FY22E FY23E FY21P FY22E FY23E FY21P FY22E FY23E FY21P FY22E FY23E FY21P FY22E FY23E Apollo Tyre (APOTYR) 225 275 Buy 14,257 5.5 10.2 16.6 40.7 21.9 13.5 6.7 7.0 5.1 7.6 6.1 9.1 6.4 5.5 8.4 Ashok Leyland (ASHLEY) 134 150 Buy 39,106 -1.1 1.1 4.4 -125.0 121.2 30.4 78.6 32.0 15.7 -1.9 4.8 15.7 -4.4 4.5 16.5 Bajaj Auto (BAAUTO) 3,769 4,350 Hold 1,09,064 157.4 167.7 193.6 23.9 22.5 19.5 17.7 16.5 13.9 18.2 19.3 22.5 18.1 18.9 21.4 Balkrishna Ind. (BALIND) 2,300 2,825 Buy 44,463 59.8 67.0 78.4 38.5 34.3 29.3 25.2 22.1 19.1 19.3 19.9 21.0 19.2 18.7 19.0 Bharat Forge (BHAFOR) 825 1,000 Buy 38,410 -2.7 17.2 25.1 NM 48.0 32.9 47.4 22.4 17.5 2.2 9.3 12.7 3.3 14.0 16.8 Eicher Motors (EICMOT) 2,615 2,920 Hold 71,468 49.3 64.9 96.4 53.1 40.3 27.1 35.8 27.6 18.7 11.3 13.7 17.8 11.8 14.0 18.0 Escorts (ESCORT) 1,265 1,325 Hold 15,506 71.2 67.7 78.2 17.8 18.7 16.2 11.1 11.9 9.7 18.7 14.7 15.1 16.2 13.6 13.8 Hero Moto (HERHON) 2,783 3,440 Buy 55,577 148.4 170.8 196.5 18.7 16.3 14.2 11.9 10.0 8.6 20.8 23.1 24.5 19.5 20.7 21.7 M&M (MAHMAH) 776 1,000 Buy 96,472 2.3 33.6 39.1 344.7 23.1 19.9 14.4 13.5 11.8 9.5 9.8 10.9 2.7 10.9 11.4 Maruti Suzuki (MARUTI) 7,012 6,400 Reduce 2,11,818 140.0 153.1 228.5 50.1 45.8 30.7 31.5 26.3 18.0 4.3 5.9 9.5 8.2 8.5 11.7 Minda Industries (MININD) 719 725 Buy 19,556 7.6 10.9 19.1 94.6 66.1 37.6 28.1 23.5 16.6 9.1 10.6 16.7 10.4 14.2 19.6 Motherson (MOTSUM) 224 270 Buy 70,738 3.3 5.4 9.0 NM 41.3 24.9 15.6 11.3 8.3 6.7 12.4 19.5 8.8 12.7 18.8 Tata Motors (TATMOT) 306 375 Buy 1,17,167 -35.0 0.9 37.9 NM 355.3 8.1 5.2 5.0 3.3 6.3 7.9 14.8 -23.6 0.6 20.3

Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 7 Result Update | Eicher Motors ICICI Direct Research

RATING RATIONALE ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according -to their notional target price vs. current market price and then categorizes them as Buy, Hold, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock

Buy: >15% Hold: -5% to 15%; Reduce: -15% to -5%; Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093 [email protected]

ICICI Securities | Retail Research 8 Result Update | Eicher Motors ICICI Direct Research

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Since associates of ICICI Securities and ICICI Securities as a entity are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report.

ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report.

Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report.

We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities.

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ICICI Securities | Retail Research 9