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Shares of Eicher Motors Ltd rose to a 52-week high of 3,265.95 on the NSE on Thursday. A combination of favourable factors is driving investors’ sentiment towards this stock. The company reported steady performance in the June quarter. Among the key highlights was its Ebitda per vehicle hitting a multi-quarter high of 42,104.

Investors are also excited about the recent launch of Royal Enfield Hunter 350. Priced at 150,000 ex-showroom, this model is around 20% cheaper than the entry level variants of Classic 350cc. This model is expected to help the company bridge the affordability gap in its portfolio and help Eicher expand its customer base, thus boosting market share.

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Further, the introduction of a new and lighter model would aid overall Royal Enfield volumes, which grew by a mere 0.8% sequentially in Q1. Hunter’s launch coincides with the pre-festive season. Considering this and easing supply chain issues, analysts at ICICI Securities are building in average volume of about 75,000 units per month for Royal Enfield for the rest of FY23. This compares with an average monthly run rate of 62,400 units in Q1.

Hopes are riding high on this launch, but analysts caution about some downside risks. First, there is a looming threat of cannibalization of Bullet, Classic, and Meteor vehicles. Second, Hunter could be a lower gross margin generator, which means a higher mix of this product could dilute Eicher’s overall margin profile. Also, a potential increase in advertising costs to launch its new vehicles could erode operating margin.

In Q1, the company’s Ebitda margin expanded by 64 basis points (bps) to 24.3% on the back of lower expenses and price hikes of Rs3,000-5,000 per unit. One basis point is 0.01%. The operating margin of its peers either remained flat (TVS Motor Co.) or declined (Bajaj Auto) sequentially in Q1. So, while Eicher is enjoying an edge over peers on this parameter, if the aforementioned risks play out, it could be a sentiment dampener.

Even so, there are several tailwinds such as softening of commodity costs and increasing share of high-margin exports segment, which can keep margins in good stead.

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Enquiries for its products have been good, but conversions have been weak in the past few weeks, the management told analysts. However, the company is relatively well-placed. “Royal Enfield is a key beneficiary of the K-shaped recovery that the economy is seeing currently. Further, its strong portfolio of cruiser and roadster bikes is an added advantage," said Kumar Rakesh, an automobile and technology analyst at BNP Paribas Securities India.

That said, increasing competitive intensity is a key monitorable as its two-wheeler peers such as Bajaj Auto are launching vehicles in the premium segment.

Meanwhile, volumes of VE Commercial Vehicles Ltd (VECV), a joint venture between Eicher Motors and the Volvo group, are likely to benefit from the cyclical recovery seen in this segment. VECV is expanding its foothold in the electric vehicle (EV) segment. It delivered an all-electric Eicher bus to Chandigarh and currently has orders for 150 electric buses from Surat. However, Eicher Motors’ EV plans in the two-wheeler segment appear distant and it does not face any immediate risk from electrification.

Shares of Eicher Motors have increased by 22.6% in calendar year 2022 so far, beating Nifty Auto’s 18% returns. The rally in the stock is said to be driven by anticipation of launches. The product pipeline looks robust, but a meaningful upside in the stock hinges on new models adding to incremental volume growth for the company.

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