Good show continues; In line quarter! Accumulate May 09, 2018 Saksham Kaushal sakshamkaushal@plindia.com +91 22 66322235 Poorvi Banka poorvibanka@plindia.com +91 22 66322426 Rating Accumulate Price Rs30,305 Target Price Rs33,516 Implied Upside 10.6% Sensex 35,319 Nifty 10,742 (Prices as on May 09, 2018) Trading data Market Cap. (Rs bn) 823.1 Shares o/s (m) 27.2 3M Avg. Daily value (Rs m) 1248.3 Major shareholders Promoters 50.52% Foreign 30.97% Domestic Inst. 5.90% Public & Other 12.61% Stock Performance (%) 1M 6M 12M Absolute 1.5 (1.7) 11.8 Relative (3.0) (7.9) (6.2) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2019 994.5 994.4 0.0 2020 1143.4 1200.6 4.8 Price Performance (RIC: EICH.BO, BB: EIM IN) (Rs) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 May 17 Jul 17 Source: Bloomberg Sep 17 Nov 17 Jan 18 Mar 18 May 18 (EIM) Q4FY18 consolidated operating performance was on expected lines, wherein revenue growth was at ~34% YoY to Rs25.3bn (PLe: Rs25.5bn) and EBITDA margin came in at 31.5% (PLe: 31.6%). With non operating income higher ~54% YoY as well as share of profit from its VECV joint venture growing ~53% YoY at Rs963mn, consolidated net profit for the company over Q4FY18 surged ~38% YoY to Rs6.5bn, marginally ahead of our expectations at Rs6.3bn. Demand for RE remains healthy, with continued waiting period for the Classic 350. Expansion of network for RE, especially in the underpenetrated smaller markets which the company is now focusing on, will further augment volumes for the company. The Vallam Vadagam facility for RE is expected to reach peak capacity at 9.5L units per annum by the end of the current fiscal. New 650cc twins, Interceptor 650cc and Continental GT 650, which have been received very well will also be launched in the markets in the current fiscal and are expected to help boost exports for the company over FY20. The company is increasingly emphasising on expanding its presence in the international markets, with developing markets like Thailand and Indonesia expected to deliver results in the near term. Investments in Latin America too have started and expected to start contributing over the next 2 3 years. While H1FY18 was somewhat weak for Volvo Eicher Commercial Vehicles (VECV), it has registered robust growth over H2FY18 and with the surge in CV demand expected to continue, FY19 should see additional positives for VECV, rendering overall long term outlook for EIM favourable. Introduction of premium variants in the 350cc segment, coupled with increase in spare part revenue would increase profitability and boost margins. We increase our EBITDA margin estimates by 120/130bps for FY19/20E and maintain Accumulate with a target price of Rs33,516. At CMP, the stock trades at 30.5x FY19E and 26.5x FY20E consol EPS. Contd...2 Key financials (Y/e March) 2017 2018 2019E 2020E Revenues (Rs m) 70,334 89,650 108,419 123,906 Growth (%) 0.9 27.5 20.9 14.3 EBITDA (Rs m) 21,740 28,076 35,136 40,505 PAT (Rs m) 17,131 21,797 27,111 31,169 EPS (Rs) 630.7 799.6 994.5 1,143.4 Growth (%) (19.8) 26.8 24.4 15.0 Net DPS (Rs) 100.0 109.8 131.8 158.1 Profitability & Valuation 2017 2018 2019E 2020E EBITDA margin (%) 30.9 31.3 32.4 32.7 RoE (%) 38.1 35.2 33.8 30.9 RoCE (%) 37.8 34.7 33.3 30.5 EV / sales (x) 11.7 9.1 7.4 6.4 EV / EBITDA (x) 37.9 29.0 22.9 19.6 PE (x) 48.0 37.9 30.5 26.5 P / BV (x) 15.4 11.8 9.2 7.4 Net dividend yield (%) 0.3 0.4 0.4 0.5 Source: Company Data; PL Research Q4FY18 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 revenues were up ~34% YoY to Rs25.3bn (PLe: Rs25.5bn), with volumes growing ~29% YoY (of which, RE volumes were higher 27.4% YoY and VECV volumes grew a strong 41.9% YoY). EBITDA grew ~36% YoY (~13% QoQ) to Rs7.97bn, with margin coming in at 31.5% (PLe: 31.6%), higher 50bps YoY and 30bps QoQ. This was mainly on account of gross margins improving 110bps YoY (down 40bps QoQ), while staff costs as a % of sales rose 50bps YoY (lower 40bps QoQ) and other expenses as a % of sales inched up 10bps YoY (down 40bps QoQ). With higher non operating income (up ~54% YoY), net profit for the quarter stood at Rs5.5bn, up ~36% YoY (in line with PLe: Rs5.45bn). However, higher share of profit from VECV for Q4FY18 at Rs963mn (up ~53% YoY and 33% QoQ) led to consolidated net profit growth at 38% YoY to Rs6.4bn (PLe: Rs6.33bn). Standalone performance: Volume growth was healthy at 27.4% YoY to ~227K units, up ~10% QoQ (highest quarterly volumes for Royal Enfield). Total income grew 34.2% YoY to Rs25.3bn, with realisations improving 5.6% YoY, while other operating income was lower ~7% YoY (slightly ahead of PLe: Rs24.5bn). EBITDA margin came in at 32.3%, higher 90bps YoY and 60bps QoQ (PLe: 31.9%). Gross margins rose 130bps YoY (down 30bps QoQ), staff costs as a % of sales were higher 30bps YoY, while other expenses as a % of sales were stable YoY. EBITDA grew ~38% YoY to Rs8.2bn (PLe: Rs7.8bn). On account of significantly higher tax rate (at 50.5% v/s 31.7% in Q4FY17 & 32.7% in Q3FY18), net profit for the quarter adjusting for a one off of Rs3.1bn (towards impairment loss on account of winding of Eicher Polaris), stood at Rs5.25bn, up 27.6% YoY (PLe: Rs5.4bn). Conference Call highlights: RE s new 650cc motorcycles, Interceptor 650 and Continental GT 650, which were showcased at few international events and received very well, will be commercially launched in the current fiscal As for international markets, the company is increasingly focusing on the markets of Thailand and Indonesia over the next 2 3 years. RE currently has ~36 exclusive stores in the international markets For Royal Enfield, the company will incur a capex of ~Rs5bn over FY19 which will lead to overall capacity of 9.5L units by Mar 19 RE s Thunderbird as well as Himalayan series have started to pick up well. Waiting period for its Classic 350 remains ~1 1.5 months Over Q4FY18, the markets of Maharashtra and Karnataka saw significant growth QoQ for Royal Enfield RE dealers are expected to continue to increase by ~100 per year The company has opened up 10 new stores for Pre owned Vintage Royal Enfield bikes, which will benefit RE through spare part sales. More such stores are expected to be opened in FY19 May 09, 2018 2
Exhibit 1: Q4FY18 Result Overview Consolidated (Rs m) Y/e March Q4FY18 Q4FY17 YoY gr. (%) Q3FY18 FY18 FY17 YoY gr. (%) Net Revenues 25,280 18,881 33.9 22,690 89,650 70,334 27.5 Raw Materials 13,001 9,925 31.0 11,576 46,435 37,045 25.3 % of Net Sales 51.4 52.6 51.0 51.8 52.7 Personnel 1,540 1,060 45.3 1,469 5,569 4,024 38.4 % of Net Sales 6.1 5.6 6.5 6.2 5.7 Manufacturing & Other Exp 2,767 2,048 35.1 2,573 9,569 7,524 27.2 % of Net Sales 10.9 10.8 11.3 10.7 10.7 Total Expenditure 17,308 13,033 32.8 15,618 61,573 48,592 26.7 EBITDA 7,972 5,848 36.3 7,072 28,076 21,742 29.1 EBITDA Margin (%) 31.5 31.0 31.2 31.3 30.9 Depreciation 640 432 48.1 649 2,233 1,540 45.0 EBIT 7,332 5,416 35.4 6,423 25,843 20,201 27.9 Interest Expenses 14 11 23.9 16 53 36 50.0 Non operating income 850 551 54.3 475 2,801 2,273 23.2 PBT 8,168 5,956 37.1 6,882 28,591 22,439 27.4 Tax Total 2,645 1,890 40.0 2,296 9,359 7,203 29.9 Tax Rate (%) Total 32.4 31.7 33.4 32.7 32.1 Reported PAT 5,523 4,066 35.8 4,586 19,232 15,236 26.2 Share of Profit 963 630 52.9 723 2,339 1,536 Profit after MI 6,486 4,696 38.1 5,309 21,571 16,772 28.6 Adj. PAT 6,486 4,696 38.1 5,309 21,571 16,772 28.6 Source: Company Data, PL Research May 09, 2018 3
Exhibit 2: Q4FY18 Result Overview Standalone (Rs m) Y/e March Q4FY18 Q4FY17 YoY gr. (%) Q3FY18 FY18 FY17 YoY gr. (%) Net Revenues 25,298 18,844 34.2 22,642 89,575 70,380 27.3 Raw Materials 12,989 9,908 31.1 11,542 46,391 37,066 25.2 % of Net Sales 51.3 52.6 51.0 51.8 52.7 Personnel 1,436 1,014 41.7 1,413 5,311 3,851 37.9 % of Net Sales 5.7 5.4 6.2 5.9 5.5 Manufacturing & Other Exp 2,703 2,012 34.3 2,504 9,341 7,403 26.2 % of Net Sales 10.7 10.7 11.1 10.4 10.5 Total Expenditure 17,128 12,934 32.4 15,458 61,043 48,319 26.3 EBITDA 8,170 5,910 38.2 7,184 28,532 22,060 29.3 EBITDA Margin (%) 32.3 31.4 31.7 31.9 31.3 Depreciation 637 430 48.2 647 2,223 1,536 44.8 EBIT 7,533 5,481 37.5 6,537 26,309 20,525 28.2 Interest Expenses 7 7 5.9 9 30 28 9.0 Non operating income 848 550 54.1 482 3,324 2,273 46.2 PBT 5,255 6,024 (12.8) 7,010 29,603 22,770 30.0 Tax Total 2,653 1,909 39.0 2,290 9,354 7,170 30.5 Tax Rate (%) Total 50.5 31.7 32.7 31.6 31.5 Reported PAT 2,601 4,116 (36.8) 4,720 20,249 15,600 29.8 Adj. PAT 5,253 4,116 27.6 4,720 20,249 15,600 29.8 Source: Company Data, PL Research Exhibit 3: Operating Metrics Standalone (Rs m) Y/e March Q4FY18 Q4FY17 YoY gr. (%) Q3FY18 FY18 FY17 YoY gr. (%) Sales Volume (nos) 227,042 178,228 27.4 206,586 820,493 666,490 23.1 Net Realisation/Vehicle 111,423 105,731 5.4 109,603 109,172 105,598 3.4 Material cost / vehicle 57,208 55,592 2.9 55,868 56,540 55,613 1.7 Gross Profit / vehicle 54,215 50,139 8.1 53,735 52,632 49,984 5.3 Employee cost /vehicle 6,326 5,687 11.2 6,840 6,473 5,777 12.0 Other expenses / vehicle 11,904 11,290 5.4 12,119 11,385 11,108 2.5 EBITDA/vehicle 35,985 33,161 8.5 34,775 34,774 33,099 5.1 Net Profit/vehicle 23,137 23,092 0.2 22,848 24,679 23,407 5.4 Source: Company Data, PL Research May 09, 2018 4
Income Statement (Rs m) Net Revenue 70,334 89,650 108,419 123,906 Raw Material Expenses 37,045 46,435 57,679 66,026 Gross Profit 33,289 43,215 50,740 57,879 Employee Cost 4,263 5,737 6,183 6,802 Other Expenses 7,287 9,402 9,420 10,573 EBITDA 21,740 28,076 35,136 40,505 Depr. & Amortization 1,538 2,233 3,007 3,878 Net Interest 36 53 35 35 Other Income 2,273 2,801 3,424 3,493 Profit before Tax 22,439 28,591 35,518 40,084 Total Tax 7,203 9,359 11,743 13,251 Profit after Tax 15,236 19,232 23,776 26,833 Ex Od items / Min. Int. 1,895 2,566 3,335 4,336 Adj. PAT 17,131 21,797 27,111 31,169 Avg. Shares O/S (m) 27.2 27.3 27.3 27.3 EPS (Rs.) 630.7 799.6 994.5 1,143.4 Cash Flow Abstract (Rs m) C/F from Operations 23,893 28,399 28,190 31,858 C/F from Investing (21,152) (14,054) (12,668) (16,000) C/F from Financing (2,985) (2,478) (4,223) (5,061) Inc. / Dec. in Cash (244) 11,867 11,299 10,797 Opening Cash 492 251 12,120 23,420 Closing Cash 248 12,118 23,419 34,217 FCFF 18,085 20,640 26,491 31,158 FCFE 18,303 21,705 26,491 31,158 Key Financial Metrics Growth Revenue (%) 0.9 27.5 20.9 14.3 EBITDA (%) (12.6) 29.1 25.1 15.3 PAT (%) (19.8) 27.2 24.4 15.0 EPS (%) (19.8) 26.8 24.4 15.0 Profitability EBITDA Margin (%) 30.9 31.3 32.4 32.7 PAT Margin (%) 24.4 24.3 25.0 25.2 RoCE (%) 37.8 34.7 33.3 30.5 RoE (%) 38.1 35.2 33.8 30.9 Balance Sheet Net Debt : Equity (0.2) (0.2) (0.3) Net Wrkng Cap. (days) (46) (58) (57) (57) Valuation PER (x) 48.0 37.9 30.5 26.5 P / B (x) 15.4 11.8 9.2 7.4 EV / EBITDA (x) 37.9 29.0 22.9 19.6 EV / Sales (x) 11.7 9.1 7.4 6.4 Earnings Quality Eff. Tax Rate 32.1 32.7 33.1 33.1 Other Inc / PBT 10.1 9.8 9.6 8.7 Eff. Depr. Rate (%) 7.7 7.9 9.0 10.1 FCFE / PAT 106.8 99.6 97.7 100.0 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 53,450 70,301 89,889 111,697 Total Debt 444 1,508 1,508 1,508 Other Liabilities 778 1,421 1,421 1,421 Total Liabilities 54,672 73,230 92,818 114,627 Net Fixed Assets 12,466 18,349 17,010 18,133 Goodwill Investments 49,871 55,808 66,808 77,808 Net Current Assets (7,665) (928) 8,999 18,686 Cash & Equivalents 251 12,120 23,420 34,217 Other Current Assets 7,319 8,945 10,315 11,515 Current Liabilities 15,235 21,992 24,736 27,047 Other Assets Total Assets 54,672 73,230 92,818 114,627 Quarterly Financials (Rs m) Y/e March Q1FY18 Q2FY18 Q3FY18 Q4FY18 Net Revenue 20,006 21,673 22,690 25,280 EBITDA 6,207 6,825 7,072 7,972 % of revenue 31.0 31.5 31.2 31.5 Depr. & Amortization 452 492 649 640 Net Interest 11 13 16 14 Other Income 777 699 475 850 Profit before Tax 6,521 7,020 6,882 8,168 Total Tax 2,175 2,243 2,296 2,645 Profit after Tax 4,596 5,180 5,309 6,486 Adj. PAT 4,596 5,180 5,309 6,486 Key Operating Metrics Royal Enfield volumes (units) 666,490 820,493 968,182 1,084,364 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 13,028 14,656 16,488 Total CV sales (units) 57,131 65,928 75,298 86,008 Total volumes (units) 723,621 886,421 1,043,480 1,170,372 Standalone realisation per vehicle (Rs) 105,142 108,635 111,557 113,837 Standalone gross margin per vehicle (Rs) 49,984 52,632 52,433 53,402 Standalone EBITDA per vehicle (Rs) 33,096 34,774 36,683 37,739 Standalone EBITDA margin (%) 31 32 33 33 Standalone profit per vehicle (Rs) 23,407 24,679 24,849 25,032 Consolidated realisation per vehicle (Rs) 96,777 100,639 103,426 113,751 Consolidated gross margin per vehicle (Rs) 46,003 48,752 48,625 53,377 Consolidated EBITDA per vehicle (Rs) 30,043 31,674 33,672 37,354 Consolidated profit per vehicle (Rs) 23,674 24,590 25,982 28,745 Source: Company Data, PL Research. May 09, 2018 5
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