Royal Enfield Motors Ltd. Classic 500 Squadron Blue Despatch limited edition motorcycles. (Photographer: Dhiraj Singh/Bloomberg)

HSBC Hits The Brakes On Eicher Motors; Says Growth Will Moderate In Coming Quarters

Eicher Motors Ltd.’s growth is likely to moderate to "mid-to-high teen" levels in the coming quarters, challenging the stock's premium valuations, HSBC Global Research said in a report.

The brokerage house downgraded the Royal Enfield-maker’s stock to ‘Hold’ from ‘Buy’, even as it raised the target price to Rs 35,000 from Rs 30,500 currently. 23 of the 41 analysts who track the stock have a ‘Buy’ rating, while 7 have 'Hold’ rating, according to Bloomberg. The consensus 12-month target price is Rs 32,008, which indicates a fall of 1.7 percent from the Friday’s closing price.

Compared with the 50 percent-plus compound annual growth rate for the past six years, we expect volume growth to moderate to 13-15 percent in three years, limiting upside to current valuations.
HSBC Global Research Report

"Valuations are likely to come under pressure" as competition in the motorcycle market increases over the decade, added HSBC. The stock has run up 50 percent in 2017 and is trading at 33 times FY19 consolidated earnings estimates, and nearly 37 times standalone FY19 earnings estimates. Valuations refer to a company's price to earnings ratio, and indicates how much investors must pay per rupee of earnings. The increase in per-capita income in lower income states like Uttar Pradesh and Bihar, which will be crucial for Royal Enfield’s volume growth in the coming years, will be “gradual at best”, noted HSBC.