Continues to ride high! Accumulate November 14, 2017 Saksham Kaushal sakshamkaushal@plindia.com +91 22 66322235 Poorvi Banka poorvibanka@plindia.com +91 22 66322426 Rating Accumulate Price Rs30,083 Target Price Rs33,465 Implied Upside 11.2% Sensex 32,942 Nifty 10,187 (Prices as on November 14, 2017) Trading data Market Cap. (Rs bn) 817.1 Shares o/s (m) 27.2 3M Avg. Daily value (Rs m) 1125.5 Major shareholders Promoters 50.58% Foreign 32.09% Domestic Inst. 4.49% Public & Other 12.84% Stock Performance (%) 1M 6M 12M Absolute (4.1) 3.1 38.3 Relative (5.7) (6.0) 15.5 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2019 943.9 1,022.6 (7.7) 2020 1,118.6 1,216.5 (8.1) Price Performance (RIC: EICH.BO, BB: EIM IN) (Rs) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Nov 16 Jan 17 Source: Bloomberg Mar 17 May 17 Jul 17 Sep 17 Nov 17 (EIM) Q2FY18 performance marginally missed our estimates, wherein revenue growth was at 23.5% YoY to Rs21.7bn (PLe: Rs22.1bn), and the EBITDA margin came in at 31.5% (PLe: 31.9%). With higher share of profit from its joint venture, consolidated net profit for the company grew ~25% YoY to Rs5.18bn (marginally below PLe). Eicher s standalone performance was decent with net profit growth of ~23% YoY to Rs4.9bn. Demand for RE remains healthy, with a 1.5 2 month waiting period for the Classic 350. Expansion of network by RE will help ramp up capacity utilisation on the upcoming facility in the current fiscal. New 650cc models, Interceptor 650cc and Continental GT 650, to be launched in Apr 18 should help boost exports for the company in FY19. While H1FY18 was somewhat weak for Volvo Eicher Commercial Vehicles (VECV), it had outperformed the CV industry in FY17 and improved CV demand is expected to provide additional positives for VECV in CY18, rendering overall long term outlook for EIM favourable. We maintain Accumulate, with a target price of Rs33,465 (previously Rs32,342). At current market price, the stock trades at 38x FY18E and 32x FY19E cons EPS. Standalone performance: Volume growth was healthy at 21.5% YoY to ~202.9K units, up 10.3% QoQ (highest quarterly volumes for Royal Enfield). Total income grew 22.9% YoY to Rs21.6bn, with realisations inching up 1% YoY and a 4% YoY decline in other operating income (PLe: Rs22.2bn). EBITDA margin came in at 31.9%, up 60bps YoY and 50bps QoQ (PLe: 32%). Gross margins dipped 10bps YoY (up 90bps QoQ), staff costs as a % of sales were higher 60bps YoY while other expenses as a % of sales were lower 130bps YoY. EBITDA grew ~25% YoY to Rs6.9bn (PLe: Rs7.1bn). Despite depreciation provision being higher YoY, net profit for the quarter stood at Rs4.9bn, up 22.8% YoY (PLe: Rs5.2bn). Contd...2 Key financials (Y/e March) 2017 2018E 2019E 2020E Revenues (Rs m) 70,334 86,427 102,274 120,030 Growth (%) 0.9 22.9 18.3 17.4 EBITDA (Rs m) 21,740 26,812 32,297 38,253 PAT (Rs m) 16,671 21,345 25,636 30,382 EPS (Rs) 613.8 785.9 943.9 1,118.6 Growth (%) (21.9) 28.0 20.1 18.5 Net DPS (Rs) 100.0 120.1 144.1 172.9 Profitability & Valuation 2017 2018E 2019E 2020E EBITDA margin (%) 30.9 31.0 31.6 31.9 RoE (%) 37.1 34.9 32.9 31.1 RoCE (%) 36.8 34.7 32.7 31.0 EV / sales (x) 11.6 9.4 7.9 6.7 EV / EBITDA (x) 37.6 30.4 25.1 21.0 PE (x) 49.0 38.3 31.9 26.9 P / BV (x) 15.3 11.9 9.4 7.5 Net dividend yield (%) 0.3 0.4 0.5 0.6 Source: Company Data; PL Research Q2FY18 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Consolidated performance: Consolidated income grew 23.5% YoY to Rs21.7bn (PLe: Rs22.2bn) in Q2FY18. EBITDA growth was 26% YoY to Rs6.8bn (PLe: Rs7.1bn), with operating margins at 31.5% (PLe: 31.9%). Owing to lower than expected non operating income, higher depreciation provision and higher tax rate, PAT for the quarter came in at Rs4.8bn (PLe: Rs5.1bn). However, higher share of profit from VECV for Q2FY18 at Rs403m (against Rs252mn in Q2FY17 and Rs250mn in Q1FY18) lead to consolidated net profit to grow 25.4% YoY to Rs5.18bn (marginally below PLe). Conference Call highlights: Oder booking for RE remains strong. For the Classic 350, the waiting period is still in the range of 1.5 2 months. VECV market share declined to 13% in Q2FY18 from 13.6% in Q2FY17. The company had taken an average 1% price hike for VECVs in Sep 17 despite heavy discounting in the industry. For Royal Enfield, the Company has reiterated its production target of ~825K units in the current fiscal. With the ongoing capacity ramp up, realisable capacity is expected to reach ~900K units by FY19. RE s new 650cc motorcycles Interceptor 650 and Continental GT 650 are expected to be commercially launched by April 18 in the international markets. The management expects these models to become the highest selling RE models in international markets. RE started production at the third plant in Aug 17. Currently, less than 10% of monthly sales are produced at this plant while it is expected to be ramped up to ~25K units per month by Q1FY19. The company is consistently expanding its network for Royal Enfield. Currently, RE has ~7,500 touchpoints in India. Also, the company has ~30 exclusive RE dealers in the international markets. November 14, 2017 2
Exhibit 1: Q2FY18 Result Overview Consolidated (Rs m) Y/e March Q2FY18 Q2FY17 YoY gr. (%) Q1FY18 H1FY18 H1FY17 YoY gr. (%) Net Revenues 21,673 17,549 23.5 20,006 41,679 33,105 25.9 Raw Materials 11,285 9,116 23.8 10,573 21,858 17,429 25.4 % of Net Sales 52.1 51.9 52.8 52.4 52.6 Personnel 1,355 1,000 35.5 1,206 2,561 1,906 34.4 % of Net Sales 6.3 5.7 6.0 6.1 5.8 Manufacturing & Other Exp 2,208 2,011 9.8 2,021 4,229 3,647 15.9 % of Net Sales 10.2 11.5 10.1 10.1 11.0 Total Expenditure 14,848 12,127 22.4 13,799 28,647 22,982 24.7 EBITDA 6,825 5,422 25.9 6,207 13,032 10,124 28.7 EBITDA Margin (%) 31.5 30.9 31.0 31.3 30.6 Depreciation 492 359 37.2 452 944 753 25.4 EBIT 6,334 5,063 25.1 5,755 12,089 9,371 29.0 Interest Expenses 13 8 57.3 11 24 15 59.6 Non operating income 699 665 5.2 777 1,477 1,133 30.4 PBT 7,020 5,720 22.7 6,521 13,541 10,489 29.1 Tax Total 2,243 1,840 21.9 2,175 4,418 3,314 33.3 Tax Rate (%) Total 32.0 32.2 33.4 32.6 31.6 Reported PAT 4,777 3,879 23.1 4,346 9,123 7,175 27.1 Share of Profit 403 252 250 654 719 Profit after MI 5,180 4,132 25.4 4,596 9,776 7,895 23.8 Adj. PAT 5,180 4,132 25.4 4,596 9,776 7,895 23.8 Source: Company Data, PL Research November 14, 2017 3
Exhibit 2: Q1FY18 Result Overview Standalone (Rs m) Y/e March Q2FY18 Q2FY17 YoY gr. (%) Q1FY18 H1FY18 H1FY17 YoY gr. (%) Net Revenues 21,636 17,625 22.8 19,999 41,635 33,200 25.4 Raw Materials 11,270 9,161 23.0 10,591 21,861 17,467 25.2 % of Net Sales 52.1 52.0 53.0 52.5 52.6 Personnel 1,302 956 36.1 1,160 2,462 1,822 35.2 % of Net Sales 6.0 5.4 5.8 5.9 5.5 Manufacturing & Other Exp 2,164 1,984 9.1 1,971 4,135 3,589 15.2 % of Net Sales 10.0 11.3 9.9 9.9 10.8 Total Expenditure 14,736 12,101 21.8 13,722 28,457 22,878 24.4 EBITDA 6,901 5,524 24.9 6,278 13,178 10,322 27.7 EBITDA Margin (%) 31.9 31.3 31.4 31.7 31.1 Depreciation 490 358 36.9 450 940 751 25.1 EBIT 6,411 5,166 24.1 5,827 12,238 9,571 27.9 Interest Expenses 7 8 4.0 7 14 14 1.4 Non operating income 699 665 5.2 1,294 1,994 1,133 76.0 PBT 7,103 5,823 22.0 7,115 14,218 10,690 33.0 Tax Total 2,239 1,862 20.2 2,172 4,410 3,357 31.4 Tax Rate (%) Total 31.5 32.0 30.5 31.0 31.4 Reported PAT 4,864 3,962 22.8 4,943 9,808 7,333 33.8 Adj. PAT 4,864 3,962 22.8 4,943 9,808 7,333 33.8 Source: Company Data, PL Research Note: FY16 is for 15 months Exhibit 3: Operating Metrics Standalone (Rs m) Y/e March Q2FY18 Q2FY17 YoY gr. (%) Q1FY18 H1FY18 H1FY17 YoY gr. (%) Sales Volume (nos) 202,867 166,941 21.5 183,998 386,865 314,424 23.0 Net Realisation/Vehicle 106,651 105,576 1.0 108,691 107,622 105,589 1.9 Material cost / vehicle 55,553 54,874 1.2 57,559 56,507 55,554 1.7 Gross Profit / vehicle 51,098 50,701 0.8 51,132 51,114 50,035 2.2 Employee cost /vehicle 6,418 5,729 12.0 6,303 6,363 5,793 9.8 Other expenses / vehicle 10,665 11,883 (10.3) 10,712 10,687 11,414 (6.4) EBITDA/vehicle 34,015 33,089 2.8 34,117 34,064 32,828 3.8 Net Profit/vehicle 23,978 23,731 1.0 26,866 25,352 23,321 8.7 Source: Company Data, PL Research November 14, 2017 4
Income Statement (Rs m) Net Revenue 70,334 86,427 102,274 120,030 Raw Material Expenses 37,045 46,022 55,200 64,826 Gross Profit 33,289 40,405 47,075 55,204 Employee Cost 4,024 4,813 5,525 6,344 Other Expenses 7,526 8,780 9,253 10,608 EBITDA 21,740 26,812 32,297 38,253 Depr. & Amortization 1,538 1,921 2,401 3,001 Net Interest 36 33 33 33 Other Income 2,273 3,182 3,501 3,851 Profit before Tax 22,439 28,040 33,363 39,070 Total Tax 7,203 8,847 10,525 12,324 Profit after Tax 15,236 19,193 22,838 26,745 Ex Od items / Min. Int. 1,435 2,152 2,798 3,637 Adj. PAT 16,671 21,345 25,636 30,382 Avg. Shares O/S (m) 27.2 27.2 27.2 27.2 EPS (Rs.) 613.8 785.9 943.9 1,118.6 Cash Flow Abstract (Rs m) C/F from Operations 23,896 22,057 26,166 30,795 C/F from Investing (21,152) (17,262) (16,000) (16,000) C/F from Financing (2,985) (3,835) (4,595) (5,508) Inc. / Dec. in Cash (241) 960 5,570 9,287 Opening Cash 492 251 1,210 6,781 Closing Cash 251 1,210 6,781 16,068 FCFF 17,625 14,176 23,930 29,398 FCFE 17,843 14,176 23,930 29,398 Key Financial Metrics Growth Revenue (%) 0.9 22.9 18.3 17.4 EBITDA (%) (12.6) 23.3 20.5 18.4 PAT (%) (21.9) 28.0 20.1 18.5 EPS (%) (21.9) 28.0 20.1 18.5 Profitability EBITDA Margin (%) 30.9 31.0 31.6 31.9 PAT Margin (%) 23.7 24.7 25.1 25.3 RoCE (%) 36.8 34.7 32.7 31.0 RoE (%) 37.1 34.9 32.9 31.1 Balance Sheet Net Debt : Equity (0.1) (0.1) Net Wrkng Cap. (days) (46) (46) (45) (45) Valuation PER (x) 49.0 38.3 31.9 26.9 P / B (x) 15.3 11.9 9.4 7.5 EV / EBITDA (x) 37.6 30.4 25.1 21.0 EV / Sales (x) 11.6 9.4 7.9 6.7 Earnings Quality Eff. Tax Rate 32.1 31.6 31.5 31.5 Other Inc / PBT 10.1 11.3 10.5 9.9 Eff. Depr. Rate (%) 7.7 6.4 6.9 7.5 FCFE / PAT 107.0 66.4 93.3 96.8 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 53,450 68,842 87,118 108,389 Total Debt 444 444 444 444 Other Liabilities 778 778 778 778 Total Liabilities 54,672 70,063 88,339 109,611 Net Fixed Assets 12,466 16,807 19,406 21,405 Goodwill Investments 49,871 60,871 71,871 82,871 Net Current Assets (7,665) (7,614) (2,937) 5,335 Cash & Equivalents 251 1,210 6,781 16,068 Other Current Assets 7,319 8,604 9,875 11,251 Current Liabilities 15,235 17,429 19,593 21,984 Other Assets Total Assets 54,672 70,063 88,339 109,611 Quarterly Financials (Rs m) Y/e March Q3FY17 Q4FY17 Q1FY18 Q2FY18 Net Revenue 18,348 18,881 20,006 21,673 EBITDA 5,770 5,848 6,207 6,825 % of revenue 31.4 31.0 31.0 31.5 Depr. & Amortization 356 432 452 492 Net Interest 10 11 11 13 Other Income 590 551 777 699 Profit before Tax 5,995 5,956 6,521 7,020 Total Tax 2,000 1,890 2,175 2,243 Profit after Tax 4,182 4,594 4,596 5,180 Adj. PAT 4,182 4,594 4,596 5,180 Key Operating Metrics Royal Enfield volumes (units) 666,490 814,451 936,618 1,072,428 Passenger M&HCV Sales (units) 6,883 7,743 8,711 9,800 Goods M&HCV Sales (units) 33,642 37,847 43,524 50,053 Passenger LCV sales (units) 6,645 7,310 8,406 9,667 Goods LCV sales (units) 9,961 11,206 12,607 14,183 Total CV sales (units) 57,131 64,106 73,248 83,703 Total volumes (units) 723,621 878,557 1,009,867 1,156,131 Standalone realisation per vehicle (Rs) 105,142 105,792 108,875 111,607 Standalone gross margin per vehicle (Rs) 49,984 49,637 50,287 51,503 Standalone EBITDA per vehicle (Rs) 33,096 33,343 34,887 36,060 Standalone EBITDA margin (%) 31 31 32 32 Standalone profit per vehicle (Rs) 23,407 23,881 24,685 25,230 Consolidated realisation per vehicle (Rs) 96,777 97,985 100,895 111,520 Consolidated gross margin per vehicle (Rs) 46,003 45,990 46,615 51,476 Consolidated EBITDA per vehicle (Rs) 30,043 30,518 31,981 35,671 Consolidated profit per vehicle (Rs) 23,038 24,296 25,385 28,331 Source: Company Data, PL Research. November 14, 2017 5
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