Eicher Motors Among Top Nifty 50 Laggards On HSBC Downgrade
The logo of Eicher Motors Ltd.’s Royal Enfield division is seen on an attendant’s riding jacket at the company’s display area at the Auto Expo in New Delhi. (Photographer: Graham Crouch/Bloomberg)

Eicher Motors Among Top Nifty 50 Laggards On HSBC Downgrade

Eicher Motors Ltd. was among the top laggards on the Nifty 50 after HSBC Global Research downgraded the maker of Royal Enfield motorcycles citing a slowdown in demand and rising commodity prices.

“Demand has been resilient for Royal Enfield in recent months. However, April has started sluggish (based on dealer feedback) and rising Covid-19 cases may impact sentiment and demand,” the research firm said in a report, as it lowered its stance on the two-wheeler stock to ‘hold’ from ‘buy’. It, however, retained the price target at Rs 2,600 apiece, implying a 4.9% upside from Tuesday’s closing.

Also, “commodity price hikes will continue to be an issue for the entire industry, including Eicher”. The company, it said, has taken a 4-5% price hike since January. While that still may not be enough to cover the entire commodity headwind, it has impacted purchasing sentiment.

According to HSBC, the consensus sales volume of 70,000-72,000 units a month for Royal Enfield in FY22 and 75,000-77,000 per month in FY23 (including exports) appears to be reasonable. But “at this stage, rising input prices and a delayed mix improvement could lead to downside risks to our Ebitda margin expectations of about 24% in FY22”.

Rural India was expected to drive two-wheeler sales in India, buoyed by a good monsoon, a bumper crop, increased government spending to boost the economy and less severe Covid-19 restrictions compared to urban centres. But a series of price hikes prior to the pandemic, followed by a lockdown, caused sales to tumble. Besides, transition to BS-VI emission standards hurt. Sales of entry-level or budget motorcycles, according to Crisil, fell nearly 27% in the last year—the highest for a segment that accounts for about 60% of total motorcycle volumes and 36% of overall two-wheeler volumes.

In the long term, however, HSBC continues to expect higher penetration for premium motorcycles and hence a structural tailwind for Royal Enfield. “Quality for Royal Enfield bikes has been improving significantly with every new launch and bodes well to expand the addressable market,” it said. “From a competition perspective, while there has been some impact from Jawa and HMSI (Honda Motorcycle and Scooter India Ltd.), it has not been significant so far.”

Still, the headwinds in the near term outweigh the opportunity as current valuations leave little scope for disappointment, HSBC said in the note.

Key downside risks

  • The Covid-19 pandemic lasting longer than expected can have material impact on estimates.
  • Unsuccessful new launches.
  • A decline in premium motorcycle demand could have a negative impact on valuation.
  • New luxury cruiser motorcycle launches by competitors at attractive pricing are a key risk to volumes. The Launch of Bajaj Auto’s Triumph is a key downside risk from a competition perspective.
  • A sustained increase in commodity prices.

Key upside risks

  • Stronger-than-expected success of new product launches driving overall volumes for Royal Enfield.
  • Moderation in commodity headwinds is an upside risk to earnings.
  • Better export traction for the premium portfolio of Royal Enfield.
  • A sharp recovery in commercial vehicle business is already in HSBC’s estimates; however, acceleration in infra-led demand and increase in freight rates is also a positive.

Shares of Eicher Motors fell as much as 4.3% in early trade on Thursday at Rs 2,386 apiece. Of the 46 analysts tracking the company, 22 have a ‘buy’ rating, eight suggest a ‘hold’ and 16 recommend a ‘sell’, according to Bloomberg data. The average of the 12-month consensus price target implies an upside of 18%.

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