Did Royal Enfield Bullet price hikes of Rs 3,000 other measures help Eicher Motors? As share price soars 6%, Morgan Stanley, others decode

Eicher Motors is the parent company of iconic motorcycle maker Royal Enfield, which manufactures the cult Bullet and other bikes. How the company fares depends much on Bullet and other bike sales too. Brokerages take us for a drive-through. Eicher Motors share price has soared by 6%. Morgan Stanley maintains an overweight rating with a target of Rs 2560. Q2 FY21 results beat expectations: RE (Royal Enfield) Q2 volumes were down 9.6% YoY to 151 k units. Decline in volumes was partially offset by strong ASPs (+5% YoY), leading to a revenue decline of 3% YoY. Kotak Institutional Equities say Q2 FY21 was a decent quarter for Eicher Motors despite challenges. Kotak maintains SELL rating on Eicher Motors with a target price of Rs 1920.

Higher ASPs were supported by:

a)      Price hikes of Rs 3k for Bullet and Rs 2k for other models in Sep '20
b)      Higher sales of spares. Gross margin contracted 320 bps YoY to 42.3% in Q2, improving sequentially from 38% in Q1, as the Rs 10k credit incentive scheme was discontinued in Q2. EBITDA came in at Rs 4.8 bn,higher than expectations of Rs 3.7 bn and Bloomberg consensus of Rs 4.4 bn. Overall net profit stood at Rs 3.6 bn vs. expectations of Rs 2.9 bn.

Key takeaways from the conference call:

Strong demand recovery:

Demand rebounded quite strongly with higher bookings than last year. Current waiting period is more than a month, due to supply constraints. Management said that the backlog is 125k bookings currently. Within a week of launch, Meteor 350 has gained significant traction, with bookings at >8k now.

Online orders gaining traction:

RE saw a 700% surge in online inquiries and has tripled its conversion rate to 13-14% as compared to pre-COVID levels. Make-itYours (MiY) personalization initiative has gained significant traction with customers. All new launches will be added to this platform.

Supply chain issues largely resolved; production improving sequentially:

Supply chain issues due to the pandemic have largely been resolved and RE has increased production from 30k units in June to 70k units in October. Some model-specific issues persist and the company is working towards resolving the same. RE plans to undertake a few minor de-bottlenecking initiatives to expand its production capacity further.

Volvo JV:

EBITDA stood at Rs 1.2 bn up 9% YoY, driven by the strong cost-saving initiatives. Volumes declined 28% YoY as against an industry decline of 46%, indicating market share gains during the quarter. CNG vehicles are gaining significant traction due to a surge in e-commerce. BS6 range is also making strength in roads in areas like mining, construction and e-commerce. The company is planning to expand its exports to five more countries beyond the existing 35 countries.

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Other key highlights:

Apparel and accessories business posted growth of 20-30% YoY despite the impact of Covid-19. During the quarter, the company added 25 regular and 133 studio stores. RE also added six new stores internationally in Cambodia, Costa Rica, Mexico, etc. As it enters new geographies and launches new models, the company has guided for an increase in marketing spends.

Kotak Institutional Equities say Q2 FY21 was a decent quarter for Eicher Motors despite challenges. Kotak maintains SELL rating on Eicher Motors with a target price of Rs 1920. Eicher Motors reported standalone EBITDA of Rs 4.8 bn (-11% yoy), 13% above estimates due to cost-cutting initiatives. Kotak expects swift recovery in volumes during second half FY21 on account of a strong order book. Valuations remain expensive despite building in swift recovery in volumes from FY2022E onwards. Competitive intensity in the mid size motorcycle segment is going to increase over the medium term, which needs to be closely monitored. The stock price is currently trading at 26.9X FY2022E standalone EPS.