Analyst Nook: Downgrade Eicher Motors to ‘maintain’ with TP at Rs 2,600

icher inventory has carried out nicely prior to now one yr, up 90% since its Covid-19 trough (April 2020).

Royal Enfield’s (RE) long-term prospects are nonetheless optimistic with rising penetration of premium bikes and bettering high quality. Nonetheless, the enterprise is prone to face headwinds in 2021 from demand slowdown and commodity value rises. We retain our TP of `2,600, however downgrade to ‘Maintain’ as we expect the chance/reward is unfavourable.

Eicher inventory has carried out nicely prior to now one yr, up 90% since its Covid-19 trough (April 2020). This has been pushed by a creditworthy enterprise efficiency. Royal Enfield (RE) volumes have been resilient in current months, led by demand for higher-end bikes and in addition the launch of Meteor. RE demand resilience has behaved extra consistent with automotive demand and never the general 2W business, which has been sluggish. Nonetheless, over the following one yr, we see a number of dangers to the inventory, from a slowdown in demand and in addition commodity headwinds. Whereas, long-term positives stay by way of premium bikes under-penetration and bettering product high quality for RE, at this stage the chance/reward appears unfavourable to us, particularly publish the final one yr’s re-rating.

Impending dangers to volumes and margins. Demand has been resilient for RE in current months. Nonetheless, April has began sluggish (based mostly on seller suggestions) and in our view rising Covid-19 instances might affect sentiment and demand. The corporate has taken one other value hike of Rs 4,000-5,000 in April (round 3%) and that has impacted buying sentiment as nicely. Commodity value hikes will proceed to be a problem for the complete business, together with Eicher. The corporate has now taken a 4-5% value hike since January, however nonetheless will not be sufficient to cowl the complete commodity headwind. General, consensus appears to have factored in gross sales quantity of 70-72K/month for RE in FY22 and round 75-77K/month in FY23 (together with exports) and that appears cheap. Nonetheless, at this stage rising enter costs and a delayed combine enchancment might result in draw back dangers to our EBITDA margins expectations of c24% in FY22.

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