Eicher Motors - In a league of its own! - Antique

Royal Enfield - The cash cow!

Royal Enfield (one of the few "cult" brands in India) is the biggest beneficiary of an emerging leisure biking trend in the country. The loyalists swear by the brand and this brand loyalty is now becoming infectious (evident from the ~6 month waiting period, despite a 2x ramp-up in production). Based on current demand/supply, Eicher should sell as many Royal Enfields as they can make, for at least the next 2 years. Also, there are enough levers to improve margins, as and when the company decides to capitalize on its strong pricing power. We continue to let these margin levers be an upside risk to our estimates.

Fortunately, this division has high economic interest for an Eicher shareholder - Enfield accounts for only ~15% of consol revenues, but since its profits aren't shared with Volvo, it accounts for ~50% of consol PAT, and >70% of steady-state consol FCF (function of 2W businesses being relatively asset light).

Volvo~Eicher alliance (VECV) - A great marriage!

VECV has multiple synergies for both partners. For Volvo, it gives them a strong foot-print in India (high priority market for any OEM). For Eicher, Volvo's support is bearing fruits in Eicher's re-entry into the relatively HD segment (>12T). Efforts here are channeled towards reducing overall cost of ownership (focus on fuel efficiency, superior technology, easier access to spares, in a bid to ultimately improve resale).

The management expects their HD truck market share to increase from the current 4% to 15% in CY15e. While there are surely some low hanging fruits (in terms of untapped geographies/segments), this target seems a little too aggressive to us, and hence, we have not assumed it in our volume estimates.

Engine division - Entering the big league!

The engine business (5-8 litres/Euro 3-6 compliant) makes VECV a part of Volvo's global supply chain and provides Eicher a huge technological leap on their own CVs.

More importantly, of the ~ INR15bn cash hoard (~25% of market cap), INR5bn gets deployed into a high RoCE business like engines (reckon >40% on full operations).

Bike will tow the truck... BUY!

We acknowledge the near-term cycle headwinds for VECV and reiterate our BUY recommendation backed by our high conviction on Royal Enfield.

Our SOTP based target price of INR2,575, values Royal Enfield at INR1,114 (10x CY13e EV/ EBITDA), VECV at INR1,237 (7x CY13e EV/EBITDA) and the engine business at INR224 (NPV).

Source : Equity Bulls

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