Eicher Motors:: Operating performance disappoints ; Maintain Neutral :: Centrum

Operating performance disappoints ; Maintain Neutral
The 3QCY13 operating performance of Eicher Motors (EML) reflected significant
pressure on its Truck & Bus segment with VECV’s EBITDA margins coming at 5.8% (one
of the lowest in the past several quarters) compared to our estimate of 7.3%. Royal
Enfield business also marginally disappointed with EBITDA margins at 15.1% compared
to our estimate of 15.8%. As a result, Consolidated EBITDA margins for EML stood at
7.5% compared to our estimate of 8.9%. Though the Royal Enfield business is doing
extremely well, we continue to believe that current discounts and negligible rise in fleet
operators’ pricing power suggest weak demand environment for M&HCV goods
segment. We expect the recovery to be gradual for the M&HCV goods segment over
2HFY13-FY14E and await meaningful signs of recovery in the investment cycle before
re-rating the stock. We continue to maintain our Neutral rating on the stock with target
price of Rs.2,433.

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VECV drags consolidated profits: While the operating performance for Royal Enfield
was lower by 6% compared to our estimate, VECV (CV business) significantly
disappointed with operating performance coming lower by 25%. Net revenues at Royal
Enfield stood at Rs.2.8bn compared to our estimate of Rs.2.9bn, lower by 1.7%. This was
largely on account of lower than expected ASP (Average selling price per unit) which
stood at Rs.91,556, lower by 1% QoQ. EBITDA margins for the quarter stood at 15.1% vs.
our estimate of 15.8%. Lower ASP coupled with higher than expected other expenditure
(Rs.369mn vs. est. Rs.325mn) led to lower than expected operating performance. We
understand that higher advertising spend on the new product launch (Thunderbird 500)
would have lead to higher other expenditure. Net revenues at VECV stood at Rs.12.1bn
compared to our estimate of Rs.12.7mn, lower by 5%. This was largely on account of
lower than expected ASP (Average Selling Price per unit) which stood lower by 6.7% vs.
our estimate of 6% QoQ. We understand lower realization is largely attributable to
higher discounts in the M&HCV goods space. Higher levels of discounts across OEMs in
the M&HCV space continue to reflect weak demand environment. Hence, Consolidated
EBITDA margin stood at 7.5% compared to our estimate of 8.9%.
Con call takeaways: 1) Capex of Rs.1.5bn on the new motorcycle plant will be
completed by 1QCY13; overall two-wheeler capacity will be expanded by 150k units by
1QCY13. 2.) Capex in JV to be maintained at Rs.15bn over CY12-CY14 3.) Truck & Bus
capacity at VECV to be expanded by 1,000 units per month in CY13; the current T&B
monthly capacity stands at 5,500 units. 4.) To maintain its long term target of achieving
100k units of sales at VECV by 2015. 5.) It has recently won an order from Gujarat State
Transport Undertaking for 1,000 buses.


Valuations and Recommendation: At the CMP of Rs2,562, the stock is currently trading
at 19.1 x CY12E consolidated EPS of Rs134 and 14.2x CY13E consolidated EPS of Rs180.
We continue to maintain our Neutral rating on the stock with target price of Rs2,433.