Eicher Motors (4QCY14) : Strong growth outlook. Maintain BUY ::HDFC Sec

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Strong growth outlook Royal Enfield (RE) maintained healthy gross margins in 4QCY14, however, it reported a modest miss at the operating level as a result of front loading expenses for investments in product development, capacity expansion and network enhancement. The VECV JV performance was ahead of expectation with strong gross margin improvement during the quarter. Consolidated APAT rose by 60% YoY to Rs 1.54bn. With a clear road map being laid out for ramping up RE capacity, the mgt is now focused on creating infrastructure related to all other verticals of the business for achieving its ambition of becoming a market leader in the global mid-sized motorcycle segment. Concurrently, EIM is in the process of ramping up its new product portfolio which we believe will coincide with the likely recovery in CV segment. We expect EIM’s consolidated EPS to rise by 56% CAGR over CY14-17E. Despite substantial investments across both businesses, EIM should generate robust FCF. We maintain our BUY rating with a revised TP of Rs 17,275 as we roll forward our SOTP valuation by six months. Key results/earnings call highlights  Standalone APAT rose by 85% YoY on the back of strong volume growth and EBITDA margin expansion. Mgt believes that there is scope for further gross margin expansion with the recent price hike of 2% and further cost efficiencies from increased scale of business. EIM is investing heavily in the business with an aspiration to become a global market leader in midsized motorcycle. Besides the vast opportunity in the domestic market, EIM mgt believes that LATAM and SEA could be significant volume markets in future  RE bikes continue to have ~5 months of order backlogs. The company is on track to increase capacity to 450k units in CY15, which at peak level could be ramped up to ~ 700k units.  VECV JV reported better than expected topline growth of 27% YoY, driven by 15% YoY increase in volumes and 11% YoY Net ASP jump. With higher LMD mix during the quarter, the company reported 40bps QoQ improvement in EBITDA margin to 7.3%. Company believes that the recently launched Pro 6000 & 8000 series of HD trucks offer significant value to its customers in terms of fuel efficiency/payload and thus expects to gain market share as supplies ramp-up.

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