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Stronger margin and volumes
ahead
Strong earnings outlook
Q2 profit at Rs 548mn was lower than our est of Rs 661mn, mainly due to lower
than expected margins. Sales grew 43% to Rs16.2bn, slightly ahead of
expectations but EBITDA at Rs1.18bn was lower (est Rs1.28bn). We are
tweaking our forecasts (see table of Key Changes) as we expect lower margins to
be largely offset by stronger volumes. We have raised our PO slightly to Rs 90.00
from Rs87.50 in line with FY12E forecasts.
Sales expectations are higher
More than anticipated success of scooter Wego, positive outlook on mopeds and
new entry level bike Max-R (notwithstanding failure of Jive) drives our upgrade to
segmental volume assumptions. Post revision, we expect sales of 2.1mn in
FY11E (up 37% yoy) and 2.4mn in F12E (up 15%).
Margins expected to improve hereon
Q2 EBITDA margin was restricted to 6.7% (up 20bps qoq) due to higher emission
related costs and increased marketing/ad-spend on new launches. Salaries also
rose faster than expected with VRS charge. We expect margins to improve
hereon on the back of: (1) pricing action of 1-1.5% in Sept, and (2) higher
volumes. In FY12, we expect lower product amortisation costs to further boost
margins.
PO at Rs 90
We maintain a similar multiple of 7.5 EV/EBITDA for FY12E, which is equivalent
to 13.7x P/E. This represents a 25% discount to peers, given the relative scale of
business and some uncertainty over operations of its Indonesian subsidiary.
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