Motilal Oswal expects Royal Enfield volumes to decline around 13 percent in FY20, but grow 15.6 percent in FY21.
Eicher Motors share price gained 1.6 percent intraday on November 22 after Motilal Oswal advised buying the stock with a target of Rs 25,000, implying 14 percent potential upside from current levels.
In fact, Eicher is its “high conviction idea” as the company is preparing for the next leg of growth. "Worst seems behind, we expect recovery from second half of FY20 and double-digit growth in FY21," the brokerage said.
Eicher’s workhorse Royal Enfield witnessed demand weakness for the first time since its resurrection in 2008, as it is in perfect storm with weak industry environment, substantial cost inflation and a new competitor.
After witnessing severe headwinds over the last 12 months, Motilal Oswal expects volumes to recovery gradually.
"The company is now focusing on expanding its addressable market size by (a) improving its product quality, (b) launching new products, (c) expanding dealerships (in sync with capacity expansion), and (d) driving a paradigm change in its retail identity, which in turn should improve growth sustainability," the brokerage said.
After Vinod K Dasari joined as the CEO, the company renewed its strategy to expand Royal Enfield sales by expanding its distribution network through smaller format stores, price laddering by offering multiple 'trim' levels and mass customisation, it said. There has been credible progress in all the three areas, the brokerage said.
"The initiatives are expected to gradually reflect in volume recovery over the next three-six months, as industry-wide headwinds recede. Unlike other 2-wheeler players, Royal Enfield is better placed in terms of (a) inventory, which is at 2.5-3 weeks against 5-7 weeks for other players, and (b) impact of BS6, which is at 5-7 percent for Royal Enfield versus 10-12 percent for other players," said Motilal Oswal.
Recently, the company launched 650cc Twins, which ramped up to 4,570 units in October (around 1,700 in India and 2,800 in exports). In India, the waiting period for the 650cc Twins is three-four months.
Motilal Oswal expects Royal Enfield's volumes to decline around 13 percent in FY20, but foresees a growth of 15.6 percent in FY21.
"FY21 volumes should be driven by the upgraded Classic/Thunderbird and the success of the 650cc Twins in India and the export market. The stock is now trading at 30.1x/23.7x FY20/FY21 consolidated EPS, which is at around 22 percent discount to its 5-year average P/E and is factoring in the moderate volume recovery (and 450bp decline in margins from peak)," it said.
BS-VI-related cost inflation coupled with an increase in competitive intensity could lower Eicher's growth potential, it added.
The stock has rallied 39 percent in the last three months. It was quoting at Rs 22,200, up Rs 242.70, or 1.11 percent, on the BSE at 1306 hours.
Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.LIVE NOW... Video series on How to Double Your Monthly Income... where Rahul Shah, Ex-Swiss Investment Banker and one of India's leading experts on wealth building, reveals his secret strategies for the first time ever. Register here to watch it for FREE.