Eicher Motors’ Stock Falls After Analysts Highlight Expensive Valuation
Macquarie Capital said Eicher has been consistently underperforming peers on both volume growth and margins since FY18.
Shares of Eicher Motors Ltd. declined after at least four research firms downgraded the stock citing expensive valuations.
The owner of Royal Enfield Motorcycles has been consistently underperforming peers on both volume growth and margin since FY18, according to Macquarie Capital.
The allure of investing in Eicher is based on the expectation of strong growth outperformance relative to the industry due to premiumisation. In reality, however, the company has lost 100 basis points of market share within domestic motorcycles since the end of its waiting period in FY18.Macquarie Capital Note
Macquarie expects the growth outperformance to continue to disappoint despite being an aspirational brand due to affordability issues. “ Yet, the stock is trading at a significant premium to two-wheeler peers, which is ‘unjustified’.”
That somewhat aligns with the views of Dolat Capital Market, IDBI Capital and ICICI Direct Research.
Eicher Motors’ net profit rose 7% year-on-year to Rs 533 crore in the quarter ended December, according to an exchange filing. Its revenue jumped 19% over the year earlier as sales recovered in the festive season. Operating margin, however, contracted to 24% from 25%.
Shares of Eicher Motors fell as much as 6.9%, before paring losses. The stock has gained nearly 50% in the last 12 months compared with a 26% rally in the S&P BSE Sensex.
Of the 45 analysts tracking the two-wheeler maker, 22 have a ‘buy’ rating, seven suggest a ‘hold’ and 16 recommend a ‘sell’, according to Bloomberg data. The stock is trading 2.4% below its 12-month consensus price target of Rs 2,755 apiece.
Here’s what some brokerages had to say about Eicher Motors’ Q3 performance:
Dolat Capital Market
Downgrades to ‘sell’ from ‘reduce’ but raises price target to Rs 2,727 from Rs 2,387 apiece.
Retains positive view on the company’s fundamentals due to its leadership in the premium two-wheeler segment, but cuts stock rating on valuation.
After a sharp run-up in the stock over the past months, current valuation adequately captures the next two years’ growth prospects for Royal Enfield motorcycles.
IDBI Capital
Downgrades to ‘reduce’ from ‘hold’; with target price at Rs 2,650 against Rs 2,460 apiece earlier. But that’s a 9% downside from the stock’s current market price.
Recent increase in share price prompted change in rating; valuations expensive.
Values Royal Enfield business at 22 times and Volvo Eicher Commercial Vehicles business at 15 times.
“Royal Enfield’s Q3 FY21 consolidated revenue was broadly in line with our and consensus estimates, whereas Ebitda was below our and consensus estimates on account of higher operating expenses.”
Positive macro factors, vaccination programme in place, more cities opening up are improving sentiments for good retail demand.
Expects domestic two-wheeler industry to see a double-digit growth for FY22 on a low base.
Builds volume growth estimates for FY22/FY23 to more than 21%/13%, factoring the strong recovery in two-wheeler domestic market.
Expects revenue, Ebitda, earnings to grow at 9%, 6%, 10%, respectively, CAGR over FY20-FY23, with Ebitda margin of nearly 23% on account of a rise in realisation, strong traction from new product launches, healthy order book and recovery in tier I cities.
ICICI Direct Research
Retain ‘hold’ with a target price of Rs 3,050 apiece.
At the current market price it is trading near its long-term forward valuation multiples and captures the positives adequately, leaving limited room for upside.
Volume run rate has improved but supply concerns are yet to abate convincingly.
It will continue to benefit from aspirational discretionary buying, courtesy its undiminished brand pull.
VECV will possesses strong demand visibility in coming quarters as the domestic commercial vehicle cycle has bottomed out.
Margin performance is set to be more subdued, courtesy sharp input commodity price inflation
Nirmal Bang
Maintains ‘accumulate’; with target price at Rs 2,750 apiece.
Eicher is looking to expand Royal Enfield brand internationally, with a long-term goal to increase the share of exports to 20%.
Margins are likely to take a hit in the medium term due to higher commodity prices and costs resulting from Bharat Stage-VI emission standards.
Batlivala & Karani
Maintains ‘hold’, increases price target to Rs 3,001 from Rs 2,760 apiece.
“Considering marginally below-expected performance and management commentary of one-month order book (lower than expected), we expect the stock to open negative.”
Watch for production ramp-up on improved supply chain and backlog in orders.