By Akash JainVice President - Equity Research, Ajcon Global Services
Eicher Motors’ Q3FY18 results were in line with our expectations and expect Q4FY18 to be much stronger. With the commencement of its third plant at Vallam Vadagal, its total capacity will go upto 9,00,000 units in FY19. Plan for Phase-II expansion at the Vallam Vadagal plant would be finalised in May 2018. In the absence of Phase-II expansion, production capacity would be 900k for FY19.
The management expects strong growth in 7 out 10 states where Royal Enfield has a market share of 2-4 percent. The Company recently hiked prices by 1 percent on 350 CC models. The company is looking to expand its dealership network in smaller towns for its flagship product “Royal Enfield”. The Company estimates dealership network to 925 by FY19 which would augur well to its topline. In addition, the management is looking to capture the under-penetrated 250-750 cc market globally and has already opened exclusive stores in Colombia, two in UK, one each in UAE, France, Spain, Australia and Indonesia.
In VECV segment, the management expects strong demand owing to thrust on infrastructure, pick up in mining activities, take off in e-commerce and due to the strict overloading restrictions in some markets. The company is operating at 100 percent utilisation level in VECV segment and expects the momentum to sustain.
The company is trading at a P/E of 28x of FY19 estimated EPS which is at a premium. However, with strong brand equity of Royal Enfield (RE), RE segment business reporting excellent set of numbers and VECV segment picking, we believe, it is fair to provide premium to company’s valuations. Our target for 6 months would be Rs 34,000.
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