RESULTS REVIEW 2QFY20 09 NOV 2019 Eicher Motors - 2QFY20... Eicher Motors NEUTRAL ¢â‚¬© Meeting lowered

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  • RESULTS REVIEW 2QFY20 09 NOV 2019

    Eicher Motors NEUTRAL

    Meeting lowered expectations RE reported in-line operating results, with EBITDA margins at 25% (-90bps QoQ). We recently upgraded Eicher Motors to NEUTRAL as the corporate tax rate cuts will enable the co to partially offset input cost pressures. We raise our EPS by ~3% over FY20-22 and have a revised TP of Rs 19,650 as we value the core RE business at 22x Sep-21 EPS vs. 19x earlier (at 20% premium to mass market OEMs). HIGHLIGHTS OF THE QUARTER  Financials: Vols for RE declined 21% YoY to 166k units.

    However, realizations at Rs 1,30,970 grew 15/2% YoY/QoQ on higher exports. Standalone revenue/EBITDA declined 9/24% YoY. EBITDA margins were in-line with our estimates at 25% (-490/-90bps YoY/QoQ). Higher other income (+52% YoY) partially offset the impact of the above. Standalone PAT grew 19/15% YoY/QoQ owing to tax adjustments. Consolidated profit was up +1/27% YoY/QoQ at Rs 5.7bn (vs our estimate of Rs 4.5bn). Weak performance at VECV impacted the consolidated results.

     Demand outlook: Retails have risen sharply in the festive season. Management’s strategy to open 250 new studio stores as well as the price reduction (Bullet ES) has resulted in significantly higher retails in Oct-19, post which the channel stock has now fallen to under 3 weeks. In our 2QFY20 Preview note we highlighted that demand

    will benefit from here on led by corporate actions, good monsoons and a benign base.

     Exports growth led by the Twins: Exports have risen sharply to ~4k per month (from 1.5k earlier) as the Twins are rolled out across international markets. While management highlights that the initial consumer response has been encouraging; we believe that exports are a medium term opportunity. As RE is a new entrant in the mid sized category (above 500cc), ramping up the distribution is the key challenge.

     VECV’s performance remained sedate as industry retails are impacted by the axle load related capacity increase. Thus, EBITDA margins are weak at 5.2% (-30bps QoQ). CV sector recovery is delayed. Industry awaits announcement of a scrappage scheme.

    STANCE We recently upgraded the stock to NEUTRAL as (1) Lowering of corporate tax rates will partially offset revenue/margin pressures from the price reductions as well as the impending BSVI transition (2) Eicher’s strategy of opening new format stores/launching entry variants is driving footfalls (3) Realizations are being supported by the growth in export markets, led by the Twins.

    Financial Summary: Consolidated YE March (Rs mn) 2QFY20 2QFY19 YoY (%) 1QFY20 QoQ (%) FY18 FY19 FY20E FY21E FY22E Net Sales 21,925 24,082 (9.0) 23,819 (8.0) 89,650 97,971 97,253 108,138 121,712 EBITDA 5,414 7,293 (25.8) 6,145 (11.9) 28,076 29,031 24,393 27,061 31,238 APAT 5,727 5,663 1.1 4,518 26.8 21,797 22,203 20,678 22,356 26,421 Diluted EPS (Rs) 210.1 207.7 1.1 165.7 26.8 799.6 814.5 758.6 820.1 969.2 APAT Growth (%) 27.2 1.9 (6.9) 8.1 18.2 P/E (x) 27.1 26.6 28.6 26.4 22.4 RoE (%) 35.2 27.8 21.2 19.5 19.6 Source: Company, HDFC sec Inst Research

    INDUSTRY AUTOS CMP (as on 08 Nov 2019) Rs 21,701 Target Price Rs 19,650 Nifty 11,908 Sensex 40,324 KEY STOCK DATA Bloomberg EIM IN No. of Shares (mn) 27 MCap (Rsbn) / ($ mn) 592/8,313 6m avg traded value (Rsmn) 2,827 STOCK PERFORMANCE (%) 52 Week high / low Rs 25,350/15,197 3M 6M 12M Absolute (%) 29.1 6.7 (4.2) Relative (%) 21.1 0.0 (18.6) SHAREHOLDING PATTERN (%) Jun-19 Sep-19 Promoters 49.3 49.3 FIs & Local MFs 4.8 7.3 FPIs 33.2 31.9 Public & Others 12.7 11.5 Pledged Shares 0.0 0.0 Source : BSE Aditya Makharia aditya.makharia@hdfcsec.com +91-22-6171-7316 Mansi Lall mansi.lall@hdfcsec.com +91-22-3021-2070

    HDFC securities Institutional Research is also available on Bloomberg HSLB & Thomson Reuters

    https://www.hdfcsec.com/hsl.docs/Autos,%20Aviation%20&%20Logistics%20-%202QFY20%20Results%20Preview%20-%20HDFC%20sec-201910112209146408514.pdf mailto:aditya.makharia@hdfcsec.com mailto:mansi.lall@hdfcsec.com

  • EICHER MOTORS: RESULTS REVIEW 2QFY20

    Valuation summary  We have a NEUTRAL rating on Eicher with a revised

    TP of Rs 19,650 (earlier Rs 16,280).

     We increase multiple on the RE business to 22x (earlier 19x). We value the core RE business at a 20% premium to mass market OEMs.

     The higher multiples factor in the benefits from the corporate tax cuts, which provide room to partially absorb the impact of the recent price cuts as well as the emission related cost hikes. The recent pick-up in retails has lowered the system inventories, which will facilitate a smooth transition to BSVI.

    SOTP Valuation (Rs.)

    Stake

    held (%) Valuation

    methodology Multiple

    (x) Value/sh

    (Rs)

    Royal Enfield 100 P/E on Sep-21E core EPS 22 18,864

    VECV 54.4 P/E on Sep21E 13 786 TP (Rs) 19,650 Source: HDFC sec Inst Research

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  • EICHER MOTORS: RESULTS REVIEW 2QFY20

    Quarterly Financials Snapshot: Standalone Particulars (Rs mn.) 2QFY20 2QFY19 YoY (%) 1QFY20 QoQ (%) 1HFY20 1HFY19 YoY (%) Volumes (in units) 166,589 210,102 (20.7) 183,589 (9.3) 350,178 435,463 (19.6) Net ASP (Rs/veh) 130,973 114,423 14.5 128,144 2.2 129,490 113,648 13.9

    Net sales (incl OOI) 21,819 24,041 (9.2) 23,526 (7.3) 45,344 49,490 (8.4) Material Expenses 11,896 12,176 (2.3) 12,725 (6.5) 24,622 25,274 (2.6) Employee Expenses 1,783 1,706 4.5 2,041 (12.6) 3,824 3,359 13.8 Other Operating Expenses 2,679 2,972 (9.9) 2,667 0.5 5,345 5,449 (1.9) Total Expenditure 16,359 16,855 (2.9) 17,433 (6.2) 33,791 34,082 (0.9) EBITDA 5,460 7,186 (24.0) 6,093 (10.4) 11,553 15,408 (25.0) Depreciation 890 718 23.9 868 2.5 1,758 1,417 24.1 EBIT 4,570 6,468 (29.3) 5,225 (12.5) 9,795 13,991 (30.0) Other Income 1,450 953 52.1 1,884 (23.0) 3,333 2,213 50.6 Interest Cost 27 8 264.0 29 (7.1) 57 15 285.7 PBT 5,993 7,413 (19.2) 7,079 (15.3) 13,072 16,190 (19.3) Tax 288 2,599 (88.9) 2,097 (86.3) 2,385 5,464 (56.4) RPAT 5,705 4,814 18.5 4,982 14.5 10,687 10,726 (0.4) EPS 209.3 176.6 18.5 182.8 14.5 392.0 393.5 (0.4) Source: Company, HDFC sec Inst Research

    Margin Analysis: Standalone As % of sales 2QFY20 2QFY19 YoY (bps) 1QFY20 QoQ (bps) 1HFY20 1HFY19 YoY (bps) Material Expenses 54.5 50.6 387 54.1 43 54.3 51.1 323 Employee Expenses 8.2 7.1 108 8.7 (50) 8.4 6.8 165 Other Operating Expenses 12.3 12.4 (9) 11.3 94 11.8 11.0 78 Total Expenditure 75.0 70.1 487 74.1 87 74.5 68.9 566 EBITDA 25.0 29.9 (487) 25.9 (87) 25.5 31.1 (566) RPAT 26.1 20.0 612 21.2 497 23.6 21.7 190 Tax as % of PBT 4.8 35.1 (3,026) 29.6 (2,481) 18.2 33.7 (1,550) Source: Company, HDFC sec Inst Research

    ASP hike (+15% YoY, 2% QoQ) driven by improved product mix (exports) as well as safety related cost increases EBITDA margins were in-line with our estimates at 25% (- 490/-90bps YoY/QoQ). Depreciation charges were higher as the Vallam plant capacity is commissioned Standalone PAT grew 18.5% YoY owing to higher other income and tax adjustments (lower tax rate of 4.8%). Lower taxes was due to the write back of deferred tax of Rs 538mn post the introduction of revised corporate tax norms

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  • EICHER MOTORS: RESULTS REVIEW 2QFY20

    Quarterly Financials Snapshot: VECV Rs mn 2QFY20 2QFY19 YoY (%) 1QFY20 QoQ (%) 1HFY20 1HFY19 YoY (%) Volumes (in units) 11,370 18,696 (39.2) 13,331 (14.7) 24,701 35,023 (29.5) Net Sales 20,040 29,660 (32.4) 22,550 (11.1) 42,590 55,750 (23.6) EBITDA 1,050 2,670 (60.7) 1,250 (16.0) 2,300 5,070 (54.6) EBITDA margin (%) 5.2 9.0 -376 bps 5.5 -30 bps 5.4 9.1 -369 bps PAT 150 1,420 (89.4) 380 (60.5) 530 2,600 (79.6) Source: Company, HDFC sec Inst Research Quarterly Financials Snapshot: Consolidated Rs mn 2QFY20 2QFY19 YoY (%) 1QFY20 QoQ (%) 1HFY20 1HFY19 YoY (%) Net sales (incl OOI) 21,925 24,082 (9.0) 23,819 (8.0) 45,744 49,559 (7.7) EBITDA 5,414 7,293 (25.8) 6,145 (11.9) 11,559 15,389 (24.9) EBITDA margin (%) 24.7 30.3 -559 bps 25.8 -110 bps 25.3 31.1 -578 bps Depreciation 898 722 24.5 876 2.5 1,774 1,423 24.7 EBIT 4,516 6,571 (31.3) 5,269 (14.3) 9,785 13,966 (29.9) Other Income 1,450 940 54.4 1,204 20.5 2,654 1,536 72.9 Interest Cost 44 18 148.3 47 (5.4) 91 33 174.6 PBT 5,922 7,493 (21.0) 6,426 (7.8) 12,348 15,468 (20.2) Tax 278 2,602 (89.3) 2,117 (86.9) 2,395 5,458 (56.1) Share of JV profit 83 772 (89.2) 209 (60.2) 292 1,415 (79.4) RPAT 5,727 5,663 1.1 4,518 26.8 10,245 11,425 (10.3) EPS 210.1 207.7 1.1 165.7 26.8 375.8 419.1 (10.3) Source: Company, HDFC sec Inst Research

    VECV margins at 5.2% remains affected due to weak industry environment Consolidated PAT at Rs.5.7bn was up +1% YoY, +27% QoQ Eicher’s large capex programs are now behind as the Vallam Phase II has been commissioned and the technical centers have been set up. The OEM will incur a spend of Rs 7bn in FY20

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  • EICHER MOTORS: RESULTS REVIEW 2QFY20

    Volume Assumptions in units FY18 FY19 FY20E FY21E FY22E RE 820,493 823,828 764,653 817,529 899,282 % YoY 23.1 0.4 (7.2) 6.9 10.0 VECV 65,932 72,969 59,376 62,112 68,128 % YoY 12.6 10.7 (18.6) 4.6 9.7 Total volumes 886,425 896,797 824,029 879,641 967,410 % YoY 22.3 1.2 (8.1) 6.7 10.0

    RE average ASP (Rs) 108,098 118,890 127,153 132,243 135,315 % YoY 3.3 10.0 6.9 4.0 2.3 Source: Company, HDFC sec Inst Research

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