Eicher Motors - Revving up the Engine - Systematix

Eicher Motors (EIM) is a market leader in 2W cruise bike (2W) segment, with over 90% market share, holds >31% market share in Light and Medium Duty (LMD) Cargo segment in India in addition to >12% market share in Bus segment. Indian HCV market being characterized by duopoly of domestic players, offers huge opportunity for entrants such as - EIM, a combination of domestic experience and global leadership. An unchallenged monopolistic presence in fast growing 2W segment, opportunities in domestic HCV/Bus segment, and 'Future Ready' JVs - Polaris Industries augur well for medium-long term revenue/profit growth. We, therefore, assign EIM a BUY rating with a two year target of Rs.3620/share.

Brief background of business

EIM is a leading LMD CV manufacturer and the force behind the thundering 'Royal Enfields'. EIM, through a plethora of structural changes in the last decade, has emerged as a strong/focussed player in domestic CV and cruise bike industry. EIM is the third largest player in the domestic CV industry with >11% share of the total Indian CV market, through its 54.6% JV with Volvo. Also, it enjoys a monopolistic presence in the Indian 2W cruise bike segment. A position captured not by aggressive pricing but by its engineering capabilities and niche branding.

Going forward, EIM plans to capture ~15% of domestic HCV market by 2015, through differentiated offerings to meet latent market demand, and to offer a larger portfolio of cruise/leisure automobiles to Indian and other emerging markets. However, we have been very conservative in modelling EIM's market share at ~7% by 2015 as we believe that there will be stiff competition from both existing and new players going ahead. However, even at this market share, EIM would report a robust volume CAGR of 29% over CY11-15E.

High barriers to entry; Indian HCV market a duopoly

CV industry is oligopolistic in nature, and is characterized by high barriers to entry - capital/technology intensive, needs large sales/service network, and long standing performance history (Brand). The Indian CV industry is a duopoly in most of the subsegments, with the exception of the LMD segment. Many players, including EIM, have failed in their attempt to pierce this duopoly during the past decade. But off late, EIM has been successful in capturing >4% of HCV market, on back of its JV with Volvo and significant investments in the business.

JV with Volvo - A win-win proposition for both

EIM entered into a JV with Volvo in 2008, joining hands to fructify its long-standing dream of entering the HCV market. Volvo, having a presence in over 140 countries is the 2nd largest heavy-duty truck manufacturer, globally. It brings a lot to the table for EIM, on back of its expertise in the HCV industry (>95% vehicles produced being >16T). And the association has already started bearing fruits, leading to a re-entry into the Indian HCV space with >4% market share

Outsourcing is another huge opportunity for VECV as Volvo plans to locate most of its production of medium duty engines to VECV's plant in Pithampur. VECV is already working on a new global medium-duty engine plant at Pithampur. The investment gives the Volvo Group a complete facility in India for processing and assembling the new medium-duty engine, which will be introduced in the Group's trucks and buses worldwide in the next few years. The investment in Pithampur will result in an annual production capacity of an additional 85,000 new medium duty base engines.

2W business - Thundering the roads

EIM has invested the last decade in developing engines for its 'Royal Enfield' bikes to meet customer/regulator demands. It has embarked on a major capex plan to increase capacity by 2x to 150k units/year, alongwith a provision to further expand to 350k units/year. We expect the company to sell >150k units in 2015, based on present demand and market potential. Also, EIM has entered into a JV with Polaris Industries to design, develop, and manufacture a new range of personal vehicles for India and other emerging markets. The JV is expected to invest a total of Rs.2.5bn over next three years, with production to start in 2015E

Valuation & View: BUY

We believe that there are sufficient triggers for medium term revenue/profitability visibility and they should support the current valuations. Also, its ability to forge new JVs to extend existing capabilities - Polaris Industries, augurs well for long term growth.

We expect consolidated earnings to grow at 21% CAGR over CY11-14E to Rs.201/share, mainly driven by i) 2W earnings growth of 25% CAGR CY11-14E ii) engine business revenue contribution of ~Rs. 900 Mn at 12% EBITDA in CY14E iii) CV business earnings growth of 18%, on back of better revenue mix in CV business - higher share of HCV. We arrive at a two year target price of 3620/share, based on CY14 P/E of 18x, an upside of 50% from current levels.

Source : Equity Bulls

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