Eicher Motors Stock Falls As Brokerages Stay Cautious On Supply Woes, Royal Enfield CEO Exit
Shares of Eicher Motors Ltd. fell as analysts turned cautious on the maker of Royal Enfield motorbikes, saying the exit of the premium brand’s chief executive, deepening of the global chip shortage, lack of new models and rising competition pose as near-term challenges.
The two-wheeler maker saw its net profit fall by more than half sequentially in the quarter ended June. Its revenue, operating income, too, declined and margin narrowed from the preceding three months.
Eicher Motors’ sales dropped 40% over the preceding quarter at 1.24 lakh units in the April-June period.
Its commercial vehicle unit, Volvo Eicher Commercial Vehicle, too, saw sales tumble 68% to 5,806 units.
While Siddhartha Lal, managing director at Eicher Motors, agreed that the quarter presented a challenging environment for the automotive sector overall, he said the company “stayed resilient and delivered the strongest ever quarter for Royal Enfield in international markets”.
“In India, our bookings saw an uptick in June as local lockdowns and restrictions were gradually lifted across the country.”
But the semiconductors shortage, Lal said, continues to be a concern, and is likely to hamper production for the ongoing quarter ending September, and possibly through the rest of the year as well.
The company also informed the bourses that Vinod Dasari has stepped down as the CEO of Royal Enfield. He said the Americas aided the international performance of the motorbike brand. Though constraints on account of local and global supply chain disruptions continue to impact production, “with a growing preference for personal mobility among consumers, improving economy and demand sentiment, and our strong product pipeline, we are optimistic about stronger recovery once supply chain stabilizes during the second half of the year”.
Shares of Eicher Motors declined as much as 3.5% in early trade on Friday to Rs 2,526 apiece. Of the 43 analysts tracking the company, 19 have a ‘buy’ rating, 11 suggest a ‘hold’ and 13 recommend a ‘sell’, according to Bloomberg data. The average of 12-month consensus price targets implies a upside of 7.3%.
Here's what brokerages made of Eicher Motors' Q1 FY22 results:
Maintains ‘buy’, but cuts target price to Rs 3,200 from Rs 3,250, implying a potential upside of 22.35%.
Eicher’s Q1 Ebitda fell 43% sequentially amid Covid, although Royal Enfield’s gross profit per vehicle was at all-time-high despite rising metal costs. Royal Enfield’s near-term outlook is clouded by chip shortages hurting production, lack of clarity on product launch timeline, and untimely CEO exit.
But continues to like Eicher given Royal Enfield’s strong franchise, limited competition, low risk of EVs and potential for volume ramp-up as chip issues ease.
Royal Enfield is well-placed to benefit from the potential demand recovery and premiumisation in Indian two-wheelers; however, an uptick in volumes and product launches would be key to stock performance.
Maintains ‘sell’ with a target price of Rs 2,050, implying a potential downside of 22%.
Volumes declined by almost 68% sequentially as Covid-led lockdowns impacted commercial vehicle industry volumes.
Vinod Dasari’s resignation comes as a negative surprise considering he had become the face of Royal Enfield business over the last two years spearheading various initiatives.
B Govindarajan, the new director of Royal Enfield business, is a veteran with rich experience in production and supply chain management but has had limited exposure on the demand side — sales and marketing, distribution, etc. Will keenly watch out for his execution on this front.
Cuts FY22 earnings per share estimates by 12% given significant underperformance on volume front so far and continued delay in new model launches.
Both extent of volume recovery and margin performance could disappoint in FY22-23.
Rising competition in premium bike segment with entry of credible new players (Honda with recent launches and Bajaj-Triumph next year) is an added concern over the medium term and premium valuations unjustified.
Maintains ‘neutral’ rating, hikes target price from Rs 2,700 to Rs 2,800, implying a potential upside of more than 7%.
Current valuation appears rich, and the research house expects medium-term growth for Royal Enfield in the domestic market to be inline with overall market growth.
As supply chain disruptions improve gradually, production expected to hit ideal levels only by FY22-end.
Company indicated that it completely passed on commodity inflation till Q1. However, it sees some further commodity pressures in Q2.
Management said Royal Enfield’s first two-wheeler EV is still far away from launch, as they do not see economic viability for similar driving experience vehicle.
Maintains ‘overweight’ stance at a target price of Rs 3,145, implying a potential upside of 20%.
Eicher’s gross profit per unit rose 9% sequentially, highest among automakers, thus reflecting better pricing power.
The CEO’s departure and limited visibility on near-term production will be an overhang.
Core thesis on exports rising and new models supporting demand remains intact.
Despite steep commodity pressures, gross margin improved 30 basis points sequentially, thanks to a higher share of exports, better mix on the domestic side of business, and price increases.
Management did not guide on FY22 production numbers, but continued supply-side challenges remain a key near-term risk to outperformance call.
Maintains ‘buy’ with a target price of Rs 3,250, implying a potential upside of 24%.
Eicher’s performance beat was driven by Volvo Eicher CV, while Royal Enfield was in line with estimates.
Delayed product launches (first due to the second Covid wave and now due to the semiconductor shortage) have shifted the recovery timelines to the second half of the fiscal.
Near-term uncertainties due to supply-chain issues notwithstanding, the recently launched Meteor and upcoming products would help expand the addressable markets and drive the next phase of growth for Royal Enfield.
Kotak Institutional Equities
Maintains ‘sell’ with a target price of Rs 2,340, implying a potential downside of 10.6%.
Expects a swift recovery in volumes from the second half led by rebound in economic activity, and strong order book coupled with lean inventory.
However, valuation remains expensive.
Competitive intensity in the mid-size motorcycle segment is likely to increase over the medium term, which may negatively impact Royal Enfield’s volume growth trajectory and profitability.