Expect demand to pick up strongly by festive season: Vinod Dasari

Update on the Indian Equity Market:

On Tuesday, Nifty closed 3% lower at 8,981 after crude futures prices fell into the negative territory for the first time. The top gainers for Nifty 50 were Dr Reddy (+4.4%), Infratel (+2.9%) and Bharti Airtel (+2.2%) while the losing stocks for the day were IndusInd Bank (-12.3%), Bajaj Finance (-9.1%) and ICICI Bank (-8.7%). Pharma (+2.5%) was the only gainer among the sectoral indices for the day. The worst performing sectors were Pvt Bank (-5.9%), Bank (-5.4%) and Auto (-5.3%).

Edited excerpts of an interview with Mr Vinod Dasari, CEO of Royal Enfield.; dated 16^th April 2020. The interview was published in The Economic Times.

• Starting OEM factories are much easier. But there will be some deal of confusion as to which industries can start. Now there are companies in which they might have two or three plants but sometimes the plants are interrelated. So if one area cannot start but the other area is allowed to start, it could be a concern. For example, Tamil Nadu opens up but Maharashtra does not open up, the company will face supply issue which is from Pune.
• There would be a little bit of a stuttered start but think within 10-15-day time, this will come to normal once the lockdowns are lifted.
• According to him, the demand side will actually come back stronger for two reasons – Pent up demand and a likelihood that people will not want to travel in public transport increasing demand for cars and motorcycles.
• April is a washout for the auto industry, May could see a good recovery month but at a slow pace. This quarter will have some impact because of the lockdown but after that, the recovery will be sharper than what people are saying.
• For dealers, all the money that the company had with them as advance, has been returned by the company. The company has given all the warranty claims, keeping very little stocks with the dealers. Dealers carry less than 10 days’ worth of stock.
• The company is not doing any retrenchment and pay cuts whether it is the temporary or permanent workforce. Thus, company is paying 100%.
• The company has more than doubled its network in the last year to reach outside urban areas. This has given them good results. Thus, a combination of both the accessibility of the product and network as well as the aspirational aspect of Royal Enfield bikes will bode well for them.
• Even in a downturn last year in their category, the company actually gained market share. For overall motorcycle, they still retained their market share despite a 15-20% downturn in the overall motorcycle market.

Consensus Estimate: (Source: market screener website)

• The closing price of Eicher Motors Ltd was ₹ 13,502/- as of 21-April-2020. It traded at 18.1x/ 18.4x/ 14.8x the consensus EPS estimate of ₹ 745/ 735/ 914 for FY20E/ FY21E/ FY22E respectively.
• The consensus target price of ₹ 18,679/- implies a PE multiple of 20.4x on FY22E EPS of ₹ 914/-.

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