Eicher Motors - Lower other income and higher tax rate drags profitability - Nirmal Bang

Eicher Motor results were marginally below estimates. Standalone business benefitted from strong demand and price hikes. Despite tough operating environment, the company gained market share in heavy commercial vehicles.

Key Highlights

Eicher Motors Ltd (EML's) consolidated revenues increased 23.6% YoY to Rs 1,585 crs in Q2CY12 against Rs 1,283 crs in Q2CY11 due to 8.9% YoY volume growth in the Commercial Vehicle business to 12,016 units and 48.1% YoY volume growth in the Royal Enfield business to 27,519 units.

EBITDA grew 11.0% YoY to Rs 180 crs in Q2CY12. Higher increase in operating expenses (+25% YoY) limited the growth in EBITDA. The company reported significant growth employee cost (up 34.6% YoY and 14.4% QoQ) and other expenses grew 42.8% YoY resulting from higher incentives provided in order to push sales.

PAT stood flat with a marginal 0.5% YoY decline to Rs 75.96 crs in Q2CY12. This was led by higher depreciation; lower other income during the quarter and higher tax rate. Other income declined 26.7% YoY to Rs 31 cr. The tax rate stood at 33.9% in Q2CY12 as compared to 29.1% in Q2CY11 and 32.1% in Q1CY12. Lower tax rate was due to lower other income and lower R&D expenses which accounts for tax benefit.

Key positive

Eicher Motors is doubling the installed capacity of Royal Enfield to 150,000 units p.a. by setting up a new plant in Chennai by early CY13 to meet increasing demand. The capex plan is on track which will enable the company to reach a run rate of 12,000-13,000 units per month from current 10,000 units per month.

Moreover, Volvo Eicher Commercial Vehicles (VECV) will produce medium-duty engines for the Volvo group globally. The company is setting up an engine plant with a capacity of 85,000 units p.a, which will commence in early 2013. It will manufacture Euro 3 and 4 compliant engines and the Euro 5 & 6 base engines. This project will give VECV a huge technological edge along with additional revenue stream from CY13E.

Valuation & Recommendation

Eicher Motors has witnessed the impact of the slowdown which is evident in the overall commercial vehicle industry. The company has a strong balance sheet with a credible management which is likely to help the company to manage the slowdown in a more effective manner going forward.

Standalone net cash stands at Rs 590 cr whereas net cash at VECV stands at Rs 850 cr. At CMP the stock is trading at P/E of 14.74x CY12E and 12.04x CY13E. We continue to maintain our BUY rating on the stock with a target price of Rs 2,578 based on P/E multiple of 15x on CY13E EPS of Rs 172.

Source : Equity Bulls

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