Analyst Corner: Downgrade Eicher Motors to ‘hold’ with TP at Rs 2,600

icher stock has performed well in the past one year, up 90% since its Covid-19 trough (April 2020).

Royal Enfield’s (RE) long-term prospects are still positive with growing penetration of premium bikes and improving quality. However, the business is likely to face headwinds in 2021 from demand slowdown and commodity price rises. We retain our TP of `2,600, but downgrade to ‘Hold’ as we think the risk/reward is unfavourable.

Eicher stock has performed well in the past one year, up 90% since its Covid-19 trough (April 2020). This has been driven by a creditworthy business performance. Royal Enfield (RE) volumes have been resilient in recent months, led by demand for higher-end bikes and also the launch of Meteor. RE demand resilience has behaved more in line with car demand and not the overall 2W industry, which has been sluggish. However, over the next one year, we see multiple risks to the stock, from a slowdown in demand and also commodity headwinds. While, long-term positives remain in terms of premium bikes under-penetration and improving product quality for RE, at this stage the risk/reward seems unfavourable to us, especially post the last one year’s re-rating.

Impending risks to volumes and margins. Demand has been resilient for RE in recent months. However, April has started sluggish (based on dealer feedback) and in our view rising Covid-19 cases may impact sentiment and demand. The company has taken another price hike of Rs 4,000-5,000 in April (around 3%) and that has impacted purchasing sentiment as well. Commodity price hikes will continue to be an issue for the entire industry, including Eicher. The company has now taken a 4-5% price hike since January, but still may not be enough to cover the entire commodity headwind. Overall, consensus seems to have factored in sales volume of 70-72K/month for RE in FY22 and around 75-77K/month in FY23 (including exports) and that looks reasonable. However, at this stage rising input prices and a delayed mix improvement could lead to downside risks to our EBITDA margins expectations of c24% in FY22.