UBS upgrades Eicher Motors to buy, sees 34% upside on ‘compelling’ risk-reward

Brokerage firm UBS has upgraded Eicher Motors Ltd., the manufacturer of Royal Enfield and other commercial vehicles to “buy” from its earlier rating of “neutral.”

UBS has also raised its price target on the stock to ₹5,000 from ₹4,300 earlier. The revised price target implies a potential upside of 34% from Tuesday’s closing levels for Eicher Motors. The stock has also been included in UBS’ “APAC Key Call” list.

Eicher Motors has been upgraded by UBS as the brokerage finds its risk-reward to be “compelling”, particularly since Royal Enfield remains insulated from the electrification risk.

The brokerage believes that Royal Enfield’s upcoming 450 cc platform launch to address competition and growth concerns. “We think the market is missing continued strength in Royal Enfield’s addressable market, lackluster response to competition, Royal Enfield’s strong customer connect and the start of a multi-year upgrade cycle among existing customers.

Eicher Motors’ Royal Enfield is likely to see its domestic volumes grow at a Compounded Annual Growth Rate (CAGR) of 10% between financial year 2024 – 2026, compared to the industry growth between 6% to 7%, according to UBS.

Shares of Eicher Motors are now trading at a 20% discount to Bajaj Auto’s one-year forward price-to-earnings multiple compared to a 50% premium over the last five years.

Currently, Eicher Motors is trading at a one-year forward price-to-earnings multiple of 23.11 times, compared to Bajaj Auto’s 28.64 times.

Eicher Motors’ Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) is likely to grow at a 18% CAGR, as per UBS. The brokerage’s bullish stance is also driven by domestic demand and a continued favourable backdrop for exports.

Shares of Eicher Motors ended 0.8% higher on Tuesday and have risen 27% over the last 12 months. In comparison, shares of Bajaj Auto have surged 127% during the same period, while those of Hero MotoCorp, have gained 93%.