India's Eicher Motors skids on worries about growth-over-profit strategy
Feb 11 (Reuters) - Shares of Eicher Motors (EICH.NS), opens new tab dropped nearly 7% on Tuesday as the Royal Enfield motorcycle maker's heavy spending on new launches hurt profit margins, with analysts expecting the company's focus on growth to keep the pressure on profitability.
The stock was set for its biggest one-day decline since July 2023 and was the biggest drag on auto stocks (.NIFTYAUTO), opens new tab. At least six of the 34 brokerages covering the company lowered their rating on the stock, according to LSEG data.
Eicher's core profit margins missed analysts' expectations on Monday due to higher sales of lower-margin motorcycles such as the 'Meteor 350', heavy spending on new models like the e-bike "Flying Flea", and increased costs, including on promotions in a quarter that included the major Diwali and Christmas festivals.
Elara Securities analyst Jay Kale said though vehicle sales hit an all-time high in the quarter, with growth beating those of rivals, the company's gross profit per vehicle was at a six-quarter low. Kale rates the stock "sell".
Morgan Stanley analyst Binay Singh, who rates the stock "underweight", doesn't expect margins to grow soon.
"Growth over margins is the right strategy, in our view. But with the stock pricing in high growth and high margins, achieving both will be tough."
Eicher's stock has outperformed those of its key rivals, Bajaj Auto (BAJA.NS), opens new tab and TVS Motor (TVSM.NS), opens new tab, over the past year. Its price-to-forward earnings ratio of 29.3 is sandwiched between TVS's 38 and Bajaj's 26.
However, while six analysts cut their price targets on Eicher's stock, at least 17, or half of all brokerages, raised their targets, factoring in higher core profit from the company's commercial vehicles joint venture with Volvo.
Analysts' median 12-month target is now 5,409.50 rupees on the stock, implying a 6% upside to the current price of about 5,102 rupees, per LSEG data.
Their average rating is "hold" on Eicher, while they rate both Bajaj and TVS "buy".
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