New additions to Bullet family augur well for Eicher Motors stock

Valuations, however, factor in the gains

Premium two-wheeler motorcycle manufacturer Eicher Motors delivered a better- than-expected operational performance in the June quarter for the 2022-23 financial year (Q1FY23). Aided by lower than estimated raw material costs, margins were 100 basis points higher than brokerage estimates. Hopes of profitability gains from easing commodity prices, volume uptick on the back of new launches and better product mix have led to upward revision of earnings estimates by up to 5 per cent.

The immediate gains for the stock which was up about a per cent in trade was on account of the 24.3 per cent operating profit margins which surprised the Street. Margins were 670 basis points higher than in Q1FY22 and 60 basis points better than Q4FY22, aided by price hikes and lower than expected inflation.

Going forward, raw material costs are expected to be stable as the company has neutralised the higher input costs with a price hike of Rs 3,000 per unit for its 350cc motorcycles and Rs 5,000 per unit for the 650cc bikes. While some of the earnings growth would be driven by margin improvement, the key trigger for the stock would come from volume gains.

Revenue growth in Q1FY23, at 2 per cent, was due to volume and average selling price going up a per cent each on a sequential basis. Volumes, which were up 51 per cent year-on-year (YoY) to 1.87 lakh units, were dented by chip shortages. The company indicated that demand remained strong for the Classic and Meteor bikes.

However, the Street will focus on the incremental volumes the company can generate from the new launch Hunter 350, given its attractive pricing of Rs 1.5 lakh for the factory model and differentiated (lighter, non-cruiser, urban fit) product offering. While most brokerages believe that this can lead to higher volumes, Rishi Vora and Eswar Bavineni of Kotak Institutional Equities, however, highlight that the new launch could eat into existing demand while competition could put sales under pressure.

“While we expect upgrade demand to partly drive sales of Hunter 350, we also expect cannibalisation of Bullet, Classic and Meteor volumes. Our channel checks indicate muted demand for the existing portfolio due to affordability issues. Also, increase in competitive intensity over the next few years in the above 250cc motorcycle segment will further impact its volume growth trajectory.”

Motilal Oswal Research is, however, bullish about the company’s prospects. Jinesh Gandhi and Aniket Desai of the brokerage believe that an improving supply-side, product launches, and ramp-up in exports will drive the next phase of growth for the company. This, coupled with stable commodity prices, will support margin and drive earnings growth, they add.

The company achieved its highest quarterly exports of 29,000 units in Q1FY23. Mansi Lall of Prabhudas Lilladher Research expects the export business to witness significant growth of 30 per cent annually, over FY22-24 led by channel expansion and market share gains.

She expects operating leverage to kick-in, given new model launches in the pipeline, commodity cost moderation and stabilising chip supply. What should aid consolidated financials is the cyclical recovery of medium and heavy commercial vehicle business which is housed in the joint venture Volvo Eicher Commercial Vehicles.

While there are multiple triggers for the stock, valuations at 31 times are on the expensive side as compared to Bajaj Auto and Hero MotoCorp, which trade at 15-20 times earnings and share a similar return on equity profile, points out JM Financial Research. Investors should await consistent improvement in the volume trajectory before considering the stock.