Buy This Large Cap Auto Sector Stock For Target Price Of Rs 4,125: Axis Securities

Stock Outlook

On NSE, the Current Market Price (CMP) of Eicher Motors is Rs 3,688.45 apiece. Its 52-week low is Rs 2,159.55 apiece recorded in March 2022, and the 52-week high is Rs 3,787.25 apiece recorded in September 2022.

Returns on investments

In the past 1 week, it gave 3.93% positive return, whereas, in the past 1 month it gave 6.46% positive return. Over the past 1 year, it has given a 29.1% positive return. In the past 3 years, it gave 91.71% positive return. In the past 5 years, it gave 16.8% positive return.

 

Transitioning Towards Growth Phase

According to the brokerage firm "RE domestic sales contracted by 13% CAGR over FY19-22 led by multiple headwinds. Covid-led lockdowns and higher vehicle prices on account of commodity inflation, weak consumer sentiments, and supply-chain constraints led to lower sales. However, both demand and supply constraints are easing now and lowering commodity prices coupled with vehicle prices that are expected to remain stable would drive an uptick in sales moving forward. In order to gauge the market sentiments, we interacted with over 22+ dealers on a pan-India basis. Our channel checks suggests 20% higher enquiries and footfall in Sep'22 and strong customer response towards the newly launched Hunter 350."

It added, "RE's wholesale sales number stood at 70,112 in Aug'22, up 53% YoY and 26% MoM, indicating an easing of production constraints. If the prevailing sales volumes sustain, RE will transition toward a volume growth phase. Against this backdrop, Sep'22 wholesale numbers will be key monitorable to ascertain whether production issues are over. With robust demand, expansive product portfolio, easing supply chains, expanding distribution network, and rapidly growing international sales, we model volume growth of 19% CAGR FY22-25E. The volume growth will drive higher operating leverage, which along with the correction in commodity prices, should lead to EBITDA margin expansion (+510bps over FY22-25)."

Demand Outlook in RE

The continuous price hikes to overcome regulatory costs such as BS-IV to BS-VI, mandatory 3-year insurance on new 2W purchases, increased road taxes and commodity inflation resulted in stagnant volumes over the past few years. With the introduction of Hunter 350 at a very aggressive price point, the management has reiterated its focus on volume growth. The model is attracting price-sensitive customers who like the RE brand and also those who want a bike with ease in manoeuvrability. After channel check on the pan-India level, most dealers are projecting higher demand this festive season with a few even suggesting overall volumes to cross pre-Covid levels. The overall bookings by mid-Sep'22 across all dealers have increased by 15%-20%. The aggressive pricing of Hunter 350 has increased enquiries from customers who were earlier looking to purchase motorcycles of other OEMs but are now desiring to become a part of the RE motorcycle brand.

Dealer Margin

Dealer margins in the latest model Hunter 350 are comparatively lower by ~Rs 1,500 than other models in the 350cc portfolio. However, considering the increased volume of sales, dealers expect a boost in overall profits.

Improved Supplies

The dealers informed that supplies from the company which were heavily disrupted due to Covid-19 have improved. However, they believe complete normalisation will take place in future months. The average delivery period for existing models is less than 15 days across all dealers and for the newly launched Hunter 350, it is between 25 to 60 days.

Buy For a target price of Rs 4,125 apiece

The brokerage said, "We roll forward our valuation from Mar'24 to Sep'24 and upgrade our rating on the stock from HOLD to BUY with a revised TP of Rs 4,125 (Rs 3,120 earlier). We value RE standalone business at 27x (from 24x earlier) on Sep'24 EPS (Rs 3,675) and VECV at 12x EV/EBITDA (from 11x earlier) Sep'24 EBITDA (Rs 448), implying an upside of 11% from the CMP."

Disclaimer

The stock has been picked from the brokerage report of Axis Securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.