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  • Stock recommendation: Eicher Motors — Sell — Target price Rs 24,000

    Compliance cost pressures could lead to slowdown

    Publish date: August 10, 2018

    Results update

    Eicher Motors delivered an impressive earnings result, but the potential price increase of Royal Enfield bikes has taken the sheen off the first quarter performance. That’s because the introduction of anti-braking system (ABS) in FY2020 and shift to BS-VI by FY2021 is likely to drive up the price of Royal Enfield bikes by at least 10%.

    Key highlights

    • The company’s standalone net profit surged by 30% (YoY), while its EBITDA expanded by 31% (YoY).
    • The bike maker also saw a 3.9% increase in net realizations due to a better product mix.
    • VE Commercial Vehicles, which is in a venture with the Eicher group, also reported robust earnings — the revenues, EBITDA and net profit grew by 45%, 61% and 78% (all YoY figures) respectively.
    • Royal Enfield saw a 23% (YoY) increase in terms of volume, though Maharashtra and Karnataka witnessed a slowdown in sales due to hike in road tax. The management believes they can produce 950,000 units in FY2018, suggesting that the iconic brand will increase by 16% in the next fiscal.

    Valuation & outlook

    The management feels their marquee product — the Royal Enfield bikes — has further room for improvement. But, we feel the bike’s volume growth could be impacted due to higher compliance costs, which would drive up the bike’s price by at least 10%.

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