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Eicher Motors
Expensive, post stock rally
Raise PO, Downgrade rating
Following a 117% YTD stock rally well ahead of expectations, we downgrade our
rating to Underperform from Buy. This is driven by (1) cut in EPS forecasts by 5%-
10% over CY10-11E, on weak Q3, and (2) expensive valuations. Our revised PO
at Rs 1,312 (up from earlier Rs1,160) is on similar imputed multiples for core
business, but recognizes cash at face value as well as the contribution from the
engine business.
Q3 impacted by rising costs
Q3 profit grew 41% to Rs387mn, but 27% lower than our estimates, as margins
were impacted by higher input and emission related costs. As a result, EBITDA
grew at a slower 43% to Rs 839mn (est Rs962mn), despite in line sales. We cut
our margin assumptions by 60-130bps (or ~15%) over CY11-12E.
Business fundamentals are intact
Eicher’s business prospects seem brighter with the Commercial vehicles JV (with
Volvo) being recently chosen as outsourcing hub for medium duty engines of
Volvo’s global requirements. In the interim, a positive CV cycle and niche
positioning in premium bikes will drive 20% sales and 24% EBITDA CAGR.
But stock is expensive on a 1-year perspective
Stock is overvalued on our revised sum of parts based PO which includes the
following additional elements (1) cash at face value or Rs 374/sh compared to
earlier 40% discount, on certainty over utilization, and (2) engine business at 13x
P/E, or Rs 149/share, being discounted to FY12E.
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