Eicher Motors - Royal Enfield does well, CVs dip again; Sell - Anand Rathi

Royal Enfield's performance steadfast. The operating performance at Royal Enfield (RE) is expected to be strong, helped by robust sales and operating leverage. Following ~70% yoy volume growth, we expect income to grow ~76% yoy, to Rs. 5.2bn. EBITDA margin is expected to be 18%, up 750bps yoy. As a result, we expect Eicher Motors' standalone profits to be Rs. 705m, up 2x yoy.

Lower CV sales to hit VE Commercial Vehicles' performance. For the subsidiaries, we expect ~14% decline in revenues and 39% yoy decline in EBITDA. We expect EBITDA margin to be 4.4% (lower 120bps qoq, and 180bps yoy). Due to higher depreciation, profit is expected to decline 70% yoy to Rs. 114m.

Consolidated profits to be led by RE. Consolidated revenues would be impacted due to the current slump in M&H CV sales, but strong standalone performance is likely to undo a lot of the damage. We expect revenues to grow 2.1% yoy in the consolidated results. On weaker CV sales, we expect EBITDA margin to come at 8.6% (down 70bps qoq). We expect the adjusted net profit to be Rs. 819m, up 12.6% yoy.

Our take. Royal Enfield continues to be robust due to greater capacity and sustained demand. The M&H CV slide, however, is expected to result in a lower growth rate for VECV. The recent run-up in the stock price has rendered valuations rich. While we are optimistic from a long-term perspective, we downgrade the stock to a Sell to reflect the premium valuations. Our target price is Rs. 4,220. At the ruling price, the stock trades at a PE of 29.6x CY14e. Risks. Upside: Sequential improvement in operating performance, recovery in the CV cycle in CY15, and quicker revenue accretion from the engine plant.

Source : Equity Bulls

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