VECV, RE to pull up performance together! • Eicher Motors:: ICICI Securities, PDF link

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VECV, RE to pull up performance together!
• Eicher Motors’ (EML) Q3CY14 results were largely in line with our
estimates, especially on the topline and margins front, while PAT
came in higher-than-expected
• The performance from RE has been strong again with the second
25%+ EBITDA performance, which could have been better if not for
various branding exercise related expenses
• VECV’s performance has also been admirable in a tough CV cycle,
posting implied EBITDA margins of ~7%, easily the best in industry
Royal Enfield –shining gem of Indian two-wheeler industry
Royal Enfield (RE), the world’s oldest active motorcycle brand, with its
uniquely classical and powerful bikes, has over time developed a cult
status among India’s emerging higher middle class and is perceived to be
in a league of its own. RE’s performance has continued to be unaffected
by the weakness in the overall auto industry with waiting periods still long
for RE bikes despite the expanded capacity. We believe RE’s
outperformance is likely to continue as the share of leisure bikes
increases from measly levels of ~2% currently. With new products to
cater to both domestic and international markets, RE’s growth appears on
a strong wicket. With ~25% EBITDA margins and ~40% return ratios,
Royal Enfield is a shining gem in the Indian two-wheeler industry with a
dominant market share in the >250 cc leisure biking market.
VECV has best business profile among CV manufacturers!
In our view, on business/financial front, the VECV JV boasts of the best
business model among its peers, which is reflected in the fact that even in
the worst CV cycle seen by the industry, VECV’s margins have stayed in
the positive territory, declining to 5.3% in the last quarter vis-à-vis
incumbents Tata Motors and Ashok Leyland whose operating margins
have slipped considerably in the red. VECV has already managed to
increase its market share in the M&HCV segment to ~12% in FY14 from
~8% in FY09. With the new launches of the “Pro-series” trucks, we
believe as the market expands in coming years VECV would gain market
share in the higher tonnage space, maintain dominance in the ICV space.
RE in strong growth phase; valuations set to trace HOG’s historical path
With unrelenting demand likely to render the expanded capacity
inadequate in coming two years, RE is likely to double the capacity
beyond the ~600,000 unit capacity post CY16E. With Indians lapping up
cruiser bikes from Royal Enfield and seeing huge waiting periods, we
believe RE is set to trace a similar path to Harley-Davidson’s (HOG) high
growth phase (1998-2003). During this period, where topline, bottomline
grew ~2.5x, ~3.5x respectively, with EBITDA margins expanding from
~19% to ~27% and RoEs improving from 23% to 29%, HOG’s average
valuations were ~30x on forward basis. We believe with similar financials
panning out for RE, its valuations are likely to replicate HOG’s journey.
Uncontested business, margins in new orbit = multiples re-rating
EML has justifiably been commanding a premium over other auto OEs,
with strong earnings growth. With RE’s business on full throttle and VECV
benefitting from an economic revival, we upgrade our peer valuation
parameters (relative valuation vis-à-vis HOG’s high growth phase
multiple) and ascribe a higher multiple of 34x, 25x CY15E, CY16E EPS for
RE (PEG ~0.4x CAGR CY13-15E/16E), VECV at 15x, 14x CY15E, CY16E
EV/EBITDA, respectively, to arrive at an SOTP target price of | 15000. We
upgrade the stock to BUY with an upside potential of ~14%.

LINK
http://content.icicidirect.com/mailimages/IDirect_EicherMotors_Q3CY14.pdf