Hold Eicher Motors, target Rs 16,000: Yes Securities

Yes Securities has given a 'hold' recommendation on Eicher Motors with a target price of Rs 16,000.

Shares of Eicher Motors traded at Rs 17,025 around 12:45 pm on 2 August, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.

Brokerage's rationale behind the 'hold' call:


Weaker than expected performance
Eicher Motors reported a weaker than expected performance with Ebidta margins for the standalone entity at 25.9 per cent against the brokerage's expectations of 26.3 per cent.

Ebidta Margins declined by 641bps year-on-year (YoY) and 187bps quarter-on-quarter (QoQ).

Decline in margins was on the back of a complete pass through of costs pertaining to implementation of ABS on RE bikes and an impact of operating deleverage as volumes declined by 18.5 per cent YoY and 6.4 per cent QoQ.

Higher depreciation led by capitalization of Vallam Vadagal second phase and Rs 7 crore impact pertaining to adoption of IndAS 116. VECV revenues were ahead of estimates on the back of higher than expected realisations.

However, Ebidta margins at 5.5 per cent was lower than expectations of 7.5 per cent. "With weakness in both businesses, consolidated PAT at Rs 450 crore was lower than our estimates of Rs 470 crore," said the brokerage.

Volume growth concerns priced in
Demand for two-wheeler has been weak for the past several months. For RE, the twins and launch of the new studio format stores (widening the reach) will enable it to arrest the decline to some extent.

However, the brokerage still anticipates a 3 per cent fall in volumes in FY20E and a modest 5 per cent growth in FY21E.

Margins are expected to be under pressure due to operating deleverage, rising customer acquisition costs and pass through of BS VI costs.

"For VECV, we expect the demand to be weak considering fleet operators are under severe stress led by economic slowdown, lower freight rates, higher fuel prices and NBFC crisis," the brokerage said.

With historical high discounting and pass through of BS VI related costs, margins will take a knock. "We expect FY21E PAT to be lower than FY19. FY21E P/E of 20.4 times adequately factors in the risks," the brokerage added.