Expect better traction July onwards– Eicher Motors

Update on the Indian Equity Market:

On Tuesday, NIFTY ended marginally lower at 15818 (-0.1%) as it could not sustain the higher level from previous day close. Among the sectoral indices, BANK (+1.0%), FINANCIAL SERVICES (+1.0%), and PRIVATE BANK (+0.9%) ended higher while AUTO (-1.7%), PSU BANK (-1.3%), and IT (-1%) led the losers. Among the stocks, ULTRACEMCO (+3.2%), SHREECEM (+3.0%), and HDFCBANK (+2.4%) led the gainers while TATAMOTORS (-8.5%), TECHM (-2.3%), and COALINDIA (-1.5%) led the losers.

Excerpts of an interview with Mr. Vinod Aggarwal, MD and CEO-VECV of Eicher Motors (EICHERMOT) published with CNBC TV18 on 5^th July 2021:

• CV sales of Eicher Motors in June ’21 were 2,438 units, which were 99% more than the CV sales in May ’21 of 1,223 units. Yet, the sales were much lesser than the average pre-pandemic levels of 5,500 to 6,000 units.
• The steel prices have fallen by 7% in the 1^st week of July and there has been some softening of prices due to an increase in production of steel in China. Yet, Eicher Motors hasn’t experienced any decrease in the raw material prices as there is a lot of pressure from steel mills to increase prices.
• Though the freight rates have gone up, the prices are required to increase further so as to reduce the pressure on margins caused due to an increase in fuel prices.
• Speaking on demand, Eicher Motors is facing an issue in South India due to a severe lockdown. East is also not doing so well, but the demand in North and West has returned to normal. As the construction sector is doing well, more demand can be seen coming from the infrastructure/construction trucks.
• The margin pressure has also been due to an increase in price related to BS-VI norm, steel price, tyre prices. Eicher Motors has better margins in FY21 due to better cost and price management, and it will be required to do the same in FY22 so as maintain or improve margins further.

Asset Multiplier Comments

• With the prices in steel falling in the 1^st week of July, we expect a reduction in the cost of raw materials for the auto manufacturers like Eicher Motors.
• As the oil prices rise further with the talks of OPEC+ nations being called off, we look forward to oil price related global cues to understand its effect of the auto industry. High petrol prices will likely reduce the demand for 2 wheelers.

Consensus Estimate: (Source: market screener website)

• The closing price of EICHERMOT was ₹ 2,713/- as on 06-July-2021. It traded at 33x/ 26x the consensus earnings estimate of ₹ 81/105 for FY22E/FY23E respectively.
• The consensus target price of ₹ 2,702/- implies a PE multiple of 26x on FY23E EPS of ₹ 105/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”