EIM’s Q3 EBITDA rose 35% q-o-q, but fell 13% y-o-y and was 13?low JEFe. RE volumes rose 37% q-o-q, but gross-profit-per-vehicle fell 8% q-o-q on lower share of exports. Ebitda-per-vehicle was up 5% q-o-q despite bunched-up marketing spend. We see multiple positives for RE: urban 2W recovery, industry premiumisation, export growth, limited competition and low risk of EVs. However, volume ramp-up will be key to near-term stock performance. We retain Buy.

Q-o-Q better but margin miss: EIM’s Q3 Ebitda and net profit grew 33-35% q-o-q, but fell 13-14% y-o-y (13-14?low JEFe). RE’s (Royal Enfield’s) Q3 volumes rose 37% q-o-q as chip shortages started to ease, but were still down 15% y-o-y. ASP declined 5% q-o-q, which EIM attributed to a weaker mix (lower share of exports in volumes). Gross margin contracted 1.2ppt q-o-q while gross-profit-per-vehicle was down 8% q-o-q. Q3 also included bunched-up marketing spend for the new Classic launch (~2% of sales). Ebitda margin still rose 2ppt q-o-q to 20.5% thanks to operating leverage; Ebitda/vehicle was up 5% q-o-q. VECV (commercial vehicles) volumes grew 25% y-o-y while Ebitda was up 5% y-o-y; Ebitda margin expanded 1.3ppt q-o-q to 6.7% (-1.9ppt y-o-y).

Volume ramp-up key: RE production has been severely impacted by chip shortages in recent quarters. Its wholesale volumes slipped from an average 68K units/month in Jan-Mar’21 to just 42K units/month in Jul-Oct. Volumes have started to pick up now as RE is expanding its vendors for chips. Its average wholesale in last 3m has improved to 61K units/month. EIM said that it expects a gradual improvement in production in coming months. We factor in average monthly volumes of 61K in Feb-Mar and of 63K/72K in FY23/FY24. RE also took ~1.5% price hike, which should aid margins.

Structural positives for RE: Notwithstanding the near-term challenges, we believe RE has multiple positives on a 1-2 year view. RE should be a key beneficiary of potential revival in Indian 2W demand, especially in urban markets. It is also well positioned to benefit from premiumisation in the Indian motorcycle market, given its strong franchise in higher-cc bikes. Its exports are up 130% y-o-y in YTD-FY22, contributing 14% of its total volumes versus just 2-6% over FY17-21. RE faces limited incremental competition in the near term with the Bajaj-Triumph launch likely around end-FY23. The cruiser motorcycle segment is also at low risk of electrification, in our view.

Retain Buy rating

We cut FY22-24e EPS by 1-5%, but still see EPS rising 23% y-o-y in FY22 and then doubling over FY22-24. We retain our Buy rating with a revised PT of 3,100 (from 3,250), valuing RE at 27x Sep-23E PE and the CV business at 6x Sep-23E PB.