Eicher Motors' stock fell nearly 2 percent on Friday and was one of the worst performing stocks on the NSE after Bank of America Merrill Lynch downgraded the stock to 'underperform' on near-term margin pressure.

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The brokerage also cut its target price to Rs 19,000 from Rs 26,000 per share.

Eicher Motors shares declined 27 percent in FY19 and were down 11 percent since the beginning of this year. Eicher Motors turnover stood at Rs 3,364 crore with 581 lakh shares trading on BSE.

Eicher has traditionally traded at a premium of 20-50 percent to mass-market peers, largely on faster earnings growth, higher margins on pricing ability, and lack of competition. However, the slower earnings trajectory and near-term risk to earnings are the main reasons behind the downgrade.

According to the brokerage, the dealer stress has risen for the first time for Royal Enfield (100% owned by Eicher) due to weak discretionary spend and recent price hikes.

"We estimate that in some cases, same-store sales have declined 20-30 percent vs 3 percent year-to-date (YTD) growth for Royal Enfield and expect margins to contract in the near-term on higher dealer margins and incentives," said the brokerage.

They have lowered the company's FY10 and FY21 earnings per share estimates by 11 percent and 13 percent, respectively. In their view, weaker earnings growth will likely weigh on the sentiment.

In the past 4-5 years, demand for Royal Enfield has outstripped supply, leading to a sharp expansion of the overall distribution network. Further, the weak consumer sentiment has impacted the company hardest within the two-wheeler segment. According to the brokerage, Royal Enfield will have to increase margins for dealers or stimulate demand to boost volumes.

"We lower our EBITDA margin to 27.8 percent for FY21 (vs 30.6 percent in FY19) with a downward bias near-term. That said, we still expect premium motorcycles to be one of the fastest growing segments in the long-term, driven by rising income levels," it added.

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First Published:Mar 29, 2019 11:42 AM IST