Eicher Motors - Initiation - Centrum

Eicher Motors

Neutral

Target Price: Rs2,290

CMP: Rs2,249

Upside: 2%

Well placed but at rich valuations

Eicher Motors Ltd. (EML) is the 3rd largest M&HCV (medium and heavy commercial vehicle) manufacturer in India with overall market share of 12.2% in the domestic truck market. While EML commands a significant market share of 38% in the medium tonnage trucks (GVW of 7.5T-12T), it has been able to consistently increase its market share in >12T segment to 4.1% from 1.1% in CY2009, thanks to its association with Volvo. We expect market share gains for EML to continue in >12T segment driven by its focused product and market strategy. We expect domestic CV sales volumes to grow at a CAGR of 17% over CY12E-CY14E. Domestic motorcycle sales volumes are also likely to continue at a CAGR of 29% over CY12E‐CY14E led by a healthy order book and capacity expansion. Robust volume growth in CVs and motorcycles is likely to result in positive operating and financial leverage over CY12E‐CY14E. Though, we continue to like the stock, we are initiating coverage on the company with a Neutral rating as it offers limited upside from current levels based on our SoTP valuations of Rs.2,290. 

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m  Momentum in HCV’s may deliver three-year CAGR of 17%: EML has outpaced the industry in CV sales volumes since its joint venture - VE Commercial Vehicles (VECV) – with Volvo AB in July-08. We estimate this trend to continue with domestic CV sales volumes estimated to grow at a CAGR of 17% over 2012E-2014E due to rising penetration in the HCV segment. The HCVs have been well received by freight operators due to their lower cost of ownership (largely driven by better fuel efficiency compared to its peers). We understand that repeat purchases now account for ~25% of HCV sales for the company. VECV is also setting up an engine plant to largely cater to Volvo’s global requirements.

m  Healthy order book + new capacity additions to drive growth in motorcycles: We estimate domestic motorcycle sales volumes to grow at a CAGR of 29% over 2012E-2014E due to the healthy order book (waiting period of 8-10months, interaction with dealers indicate order back log of 55-60k vehicles) and capacity expansions (new plant to be operational by 1QCY13). EML’s vehicles continue to witness robust demand despite entry of new manufacturers, due to their unique product positioning, where cruiser motorcycles are offered at a price significantly below that of peers.

m  Operating leverage to drive robust total income growth of 24% over CY12E-CY14E: Total income is estimated to grow at a CAGR of 24% over CY12E-CY14E on account of robust sales volume growth. EBITDA margins are likely to increase from 9.8% in CY11 to 11.0% in CY14E as a result of improvement in margins in both the segments driven by operating leverage. Spurred by strong revenue growth and operating performance, we estimate PAT to register a strong CAGR of 29%.

m  Valuations and Recommendations: At CMP of Rs.2,249, the stock is currently trading at 15.7x CY12E EPS of Rs.143 and 12.4x CY13E EPS of Rs.182. We are initiating coverage on the stock with a Neutral rating as it offers limited upside from current levels based on our SoTP valuations of Rs.2,290. 

Thanks & Regards, 

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