eicher truck

 

With infrastructure projects in full swing, we are witnessing thousands of kilometre new roads built every year. Today, the average speed on Indian highways is 50KMPH (this is also if you are lucky not driving into new construction road zone), the government wants to convert them into world standards i.e. 120KMPH. So don’t get surprised to see any new highways being built near your surroundings that shows speed limit of 120KMPH!

These infrastructure development projects will help Indian automobile sector, as what time it takes now to reach from one point to another will halved! There are many businesses within this segment, two wheeler, three wheelers and four wheelers and there are few names within them who also possess a good competitive edge over others.

Eicher Motors stands out from this group and there are plenty of reasons to share with you. The total income from operations on consolidated basis for first quarter 2017 stand at Rs 1,556 crore, EBIDTA margin at 30.2% (Rs 470 crore) and PAT of Rs 374 crore. They sold 147,483 total motor cycles in the first quarter of 2017 compare to last year 106,613 total motor cycles in the first quarter, a growth of 38% in its motor cycle sales.

But Eicher Motors does not only sell motor cycles, Eicher light and medium truck (5 – 14 tonne) sales jumped up 21% and the company holds total market share of 34%. Eicher Heavy duty trucks were the star seller of the quarter, they sold 3,205 trucks which is jump of 85% compare to last year same quarter. The total market share of this product they own is only 6%, so there is a great room to capture the market share in this group for the company. The exports almost doubled to 2,312 units compare to 1,206 units of sales in the last year first quarter.

Overall, Eicher Motors had witnessed a growth of 42%, which is bigger than its motor cycle sales growth (38%), which points us that the portfolio of products of Eicher Motors are well balanced. The other good part about this business is that, with growth in sales numbers, margins had also improved resulting into more profitability. Consider this, if you buy anything from Eicher Motors for Rs 100, the company is making net profits of Rs 24 after all expenses and taxes!

But is there still a room for this company share prices to run up hill? Eicher Motors at Rs 22,000, doesn’t look valuations stretched? All the analysts who follow this business very closely are expecting its 2017 profits in range of Rs 1,475 – Rs 2,000 crore. Last year they reported profits of Rs 1,278 crore, and the growth what they are witnessing in their business is very strong. There is very less probability of Eicher Motor reporting its full year profits in the lower end of that spectrum.

Our probability analysis is pointing them to report profits in range of Rs 1,800 – Rs 2,100 crore and market is also expecting the profits in the same range and this is the reason it had stretched its price to Rs 22,000 per share.

If we calculate its intrinsic value on the basis of analyst’s 2018 earnings expectations, then its intrinsic value spectrum comes in range of Rs 12,112 – Rs 24,181 per share. We won’t be surprised to see its share price moving up to 25K but as mentioned earlier in the other posts, valuations of the business are not the indicator of where the share price will move in the short term. But if we see any weakness in this counter around 20K, we won’t hesitate to get into it provided fundamentals of the business are intact.

A short disclaimer, we do hold shares of Eicher Motors in our fund portfolio.

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we advise you to take professional advice before going ahead with our views.