Reduce Eicher Motors; target of Rs 2600: Emkay

Emkay Global Financial Services is bearish on Eicher Motors and has recommended reduce rating on the stock with a target of Rs 2600 in its March 25, 2013 research report.

• Royal Enfield’s new plant to help double capacity by CY14 and improve margins as the new plant is much more efficient
• Engine project likely to ramp-up to 100,000 units in next four years with a double-digit EBITDA margin
• While near-term truck demand remains weak, structural drivers in place for VECV to improve upon market share
• We believe that EIM is a good structural story – 30%/48% Revenue/EBITDA CAGR in CY12-CY14
• However, maintain REDUCE owing to rich valuations 

Royal Enfield- Capacity expansion to trigger a new phase of growth: RE new plant is set to commission in April and the management is confident of further increasing capacity at the new plant to >200,000 units by CY14-end while the old plant’s capacity would be gradually drawn down. While the 7-8 month waiting periods for RE bikes would be likely addressed by end-CY13 the management is already exploring ways to utilize the expanded capacity by further beefing up distribution network in tier 3/4 towns and export market. The new plant is much more efficient that the old one and gives significant levers to the company for improving upon margins over the 15% mark.
 
Engine project to take off from July: The MDEP is expected to commission by July and only gradually ramped up – therefore CY13 volumes are likely to be less than 10k units. Mgmt sounded confident of achieving full utilization of 100,000 units in four years time with a double-digit margin. Eventually all medium duty engine requirements for the Volvo group and the new series of trucks from Eicher (to be rolled out by year-end) would be met using engines from the MDEP. 

VECV- Foundation for further market share gains in place: The current demand environment remains poor with very little visibility for any improvement over the next six months. VECV however, as per its plans, has gained market share in both ICV and M&HCV segments in the last one year by improving upon its dealership/service network and strengthening product portfolio. Further with the commissioning of the bus body plant, management expects to improve upon its market share in buses as well. The new series of trucks with much higher inputs from Volvo is slated to roll out from Dec-2013 onwards and with a big leap in technology should further help gain market share.
 
Structural growth story – a tad expensive: EIM remains one of the best structural stories within the auto pack – we envisage a 30%/48% revenue/EBITDA CAGR over CY12-CY14. However, the valuations at ~15x P/E on the core business (excluding other income) on our bullish CY14 est, seem to be already discounting much of the growth potential in the stock price. We maintain our REDUCE recommendation on the stock with a TP of Rs 2,600 (earlier at Rs 2,500).

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