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Eicher Motors Update | 17 May 2018 Sector: Automobile Eicher Motors All set for next leg of growth Jinesh Gandhi - Research Analyst ([email protected]); +91 22 3982 5416 Suneeta Kamath - Research Analyst ([email protected]) | Deep Shah - Research Analyst ([email protected]) Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital. Eicher Motors Contents: Eicher Motors | All set for next leg of growth Summary ............................................................................................................. 3 Expanding market share in growing segment ........................................................ 4 Next leg of growth to come from rural, semi-urban areas ...................................... 6 RE needs to address few challenges .................................................................... 13 Exports: huge potential in unexplored mid-size bikes .......................................... 15 VECV to benefit from strong tailwind in the CV industry ...................................... 17 Valuation and view............................................................................................. 18 Scenario analysis indicates favorable risk-reward ................................................ 20 SWOT analysis .................................................................................................... 21 Operating metrics............................................................................................... 22 Story in charts: Multiple growth drivers .............................................................. 23 Financials and Valuations ................................................................................... 24 17 May 2018 2 Eicher17 May Motors 2018 Update | Sector: Automobiles Eicher Motors BSE SENSEX S&P CNX 35,149 10,683 CMP: INR30,550 TP:INR35,572(+16%) Buy All set for next leg of growth… …driven by high-potential, under represented BIMARU states High-potential markets like BIMARU under-represented: We see high growth Stock Info potential in key motorcycling markets like BIMARU (Bihar, MP, Rajasthan and Bloomberg EIM IN UP). These under-penetrated 2W markets not just offer higher scope for Equity Shares (m) 27 motorcycles but also for aspirational products like RE. RE’s market share in 52-Week Range (INR) 33484 / 26000 these states is currently 3-4% (v/s 6% for pan-India). With network expansion 1, 6, 12 Rel. Per (%) -7/-7/-13 focused on these high potential tier-2 markets, we expect these states to M.Cap. (INR b) 832.7 continue to grow strongly at 36% CAGR over FY18-20, contributing ~24% to RE’s M.Cap. (USD b) 12.3 Avg Val, INRm 1427.0 domestic volume. We expect UP to become the largest market for RE by FY20 Free float (%) 49.5 (5th largest in FY17). State-wise demand model suggests 20% CAGR: Assuming no capacity Financials Snapshot (INR b) constraints, based on our state-wise demand model, we see potential of 20% Y/E Mar 2018 2019E 2020E CAGR in domestic volumes over FY18-20. However, assuming 2nd phase of 3rd Net Sales 89.6 107.7 129.4 plant comes on-stream from April 2019, we model ~16% volume CAGR. EBITDA 28.1 35.1 43.8 PAT 21.8 28.6 36.7 Demand moderation in select key states due to systemic pressures: In key EPS (INR) 799.6 1,050.3 1,347.1 states like Maharashtra, Karnataka and Tamil Nadu, there are signs of demand Gr. (%) 27.0 31.3 28.3 moderation. While Tamil Nadu witnessed decline for the first time in 3QFY18, BV/Sh (INR) 2,579 3,424 4,538 volumes in Maharashtra and Karnataka have been declining since 4QFY17and RoE (%) 35.2 35.0 33.8 2QFY18 respectively, primarily impacted by systemic factors like (a) weakness in RoCE (%) 30.1 30.3 30.6 IT sector impacting demand in Pune and Bangalore, (b) increase in road tax in P/E (x) 38.2 29.1 22.7 Karnataka and Maharashtra, and (c) high penetration in key cities (15-25% of P/BV (x) 11.8 8.9 6.7 motorcycles v/s 6% pan-India). Shareholding pattern (%) Export market a huge opportunity, but ramp-up to be gradual: RE is focused on As On Mar-18 Dec-17 Mar-17 creating a mark in developing markets like LatAm and South East Asia. By Promoter 50.5 50.5 50.6 appealing to these markets as a step-up aspirational product with an accessible DII 5.9 5.5 4.0 cost of ownership vis-à-vis competitors, it is expanding its exclusive dealership FII 31.0 32.1 32.5 outlets. Its new launches, the 650cc twins would further help establish its Others 12.6 11.8 12.9 presence in these markets. We believe that export markets can be a meaningful FII Includes depository receipts contributor to volumes in five years, but ramp-up would be back-ended. VECV volumes to clock 14% CAGR over FY18-20: We expect VECV to benefit Stock Performance (1-year) Eicher Motors from strong tailwinds in the domestic CV industry, with volumes growing at 14% Sensex - Rebased CAGR over FY18-20. Further, with signs of discount levels reducing and 37,000 expansion of dealership network, VECV would regain lost market share in the 34,000 LMD and HD segment. Valuation and view: We expect RE volumes to grow at 16% CAGR over FY18-20. 31,000 We believe the next leg of growth would be driven by (a) strong volume growth 28,000 in relatively under-penetrated markets, (b) expansion of dealership network in 25,000 these under-penetrated markets, providing better brand accessibility, (c) timely production ramp-up to meet demand, and (d) ramp-up in exports led by new Feb-18 Aug-17 Nov-17 launches and expansion of exclusive outlets in target markets. We maintain our May-18 May-17 multiples (P/E of 27.5x for RE and EV/EBITDA of 10x for VECV). We reiterate our Buy rating on the stock, with an SOTP-based TP of INR35,572 (FY20E). 17 May 2018 3 Eicher Motors Expanding market share in growing segment RE has significant headroom to gain market share in premium segment We expect the premium segment (>150cc) of the motorcycle industry to grow at ~13% CAGR over FY18-22E, as against motorcycle industry growth of 5.4% and 2W industry growth of 8.7%. This value migration is expected to be driven by upgrading by the existing motorcycling population, especially in urban markets, as well as first-time buyers directly buying premium motorcycles. With its niche positioning, we believe an expanding premium segment would provide further impetus for RE to grow and capture a larger share of the pie. Consequently, we expect RE to outperform the premium motorcycles segment, with ~15% volume CAGR over FY18-20E. While premium segment is expected to capture ~31% of the motorcycle market by FY22E, RE’s share within premium motorcycles is expected to expand to ~29% by FY22E (refer exhibit 3). Exhibit 1: Value migrating from 100cc to premium Exhibit 2: … where RE enjoys virtual monopoly with ~95% segment, particularly Premium >250cc segment market share Economy Executive Premium 150-250cc Premium >250cc 4% 1% 1 6 18 10 18 21 Royal Enfield Bajaj 63 52 44 Others 18 23 25 95% FY12 FY17 FY22E Source: MOSL, Company Source: MOSL, Company Exhibit 3: Premium’s share within m/cycles to expand to 31% by FY22E, with RE’s market share of premium segment to expand to 29% by FY22E 15.6m 12.6m Motorcycle Ind 10.1m 4.87m [31%] Premium M/Cycle 2.93m 1.57m [23%] 1.4m [16%] 121k 801k [29%] [8%] [27%] RE FY13 FY18 FY22E Note: % in brackets is market share of the segment i.e Premium share in total motorcycle and RE’s share in Premium; Source: SIAM, MOSL 17 May 2018 4 Eicher Motors Exhibit 4: Share of Premium (>150cc) motorcycles to expand to ~31% of motorcycles by FY22E Note: % in circle represents share of premium segment in motorcycles Source: MOSL Exhibit 5: Segment leaders generally enjoy disproportionate Exhibit 6: RE to gain further market share in premium market share segment RE market share within premium motorcycles 82.7 28.7 27.0 26.9 27.4 28.0 24.0 59.0 57.6 22.2 47.8 42.6 15.5 28.8 31.2 27.2 13.0 16.2 RE TVS Bajaj HMSI HMSI HMSI Bajaj HMCL HMCL HMCL FY15 FY16 FY17 Economy Exec. 100cc Exec. 125cc Scooters Premium FY18E FY19E FY20E FY21E FY22E Source: SIAM, MOSL Source: SIAM, MOSL 17 May 2018 5 Eicher Motors Next leg of growth to come from rural, semi-urban areas Large part of RE’s ongoing network expansion is in tier-2 cities & beyond Key motorcycling markets like BIMARU are under-represented; offer significant room for aspirational product like RE to expand market share. Expansion of dealership network with emphasis on under-represented markets to provide better brand accessibility. State-wise volume estimates suggest ~20% CAGR in domestic volumes over FY18-20E. However, based on current visibility of capacity, we estimate ~15% CAGR over FY18- 20E. Signs of demand moderation in certain states like Maharashtra, Karnataka and Tamil Nadu are due to systemic pressure like (a) weakness in IT sector impacting demand in Pune and Bangalore, (b) increase in road tax in Karnataka and Maharashtra, and (c) high penetration in key cities (15-25% of motorcycles v/s 6% pan-India). High potential markets like BIMARU under-represented; to drive next leg of growth Strong growth to continue in key motorcycling BIMARU states: We see high growth potential in key motorcycling markets like BIMARU (Bihar, MP, Rajasthan and UP), Jharkhand, Orissa and Assam. These under-penetrated 2W markets not just offer higher scope for motorcycles, but also for aspirational products like RE. RE has room to increase market share in these markets: RE currently has low market share in these states (3-4% v/s market share of 6% nation-wide). With RE’s network expansion focused on these high potential tier-2 markets, we see significant room for expansion of market share.
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