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TVS Motor – 3QFY2011 Result Update
Angel Broking recommends an Accumulate on TVS Motor with a Target Price of Rs. 71.
TVS Motor (TVSM) reported strong 3QFY2011 results, which came in marginally
ahead of our estimates on the top-line and bottom-line fronts. The performance
was led by sustained volume growth across all product segments and
improvement in average net realisation and partially on a low base. Going
forward, we broadly maintain our volume and earnings estimates for TVSM.
However, future valuation of the stock would be determined by consistent growth
in volumes, improvement in market share and an uptick in margins. Owing to the
Better-than-expected net sales and profit growth: For 3QFY2011, TVSM reported
a slightly better-than-expected 51.1% yoy jump (up 1.5% qoq) in net sales to
`1,647cr. The sales growth was primarily driven by a substantial 39.9% yoy
increase in total volumes and ~7.6% yoy jump in average net realisations. During
the quarter, TVSM’s OPM witnessed a marginal 15bp yoy contraction to 6.1%,
85bp below our estimates. Net profit grew by a strong 136.9% yoy to `55.8cr as
against our estimate of `51.6cr aided by a better operating performance, higher
other income and lower interest cost.
Outlook and valuation: We estimate TVSM to post 27.6% CAGR in top-line and
54.7% CAGR in net profit over FY2010–12, aided by ~21.9% CAGR in volume
and improving operating performance owing to the change in product mix and
better operating leverage. At `62, the stock is trading at 13.7x FY2011E and 11x
FY2012E earnings. We assign a multiple of 12.7x (15% discount to the average
multiple of the top-two industry players at 15x) FY2012E earnings to arrive at a
Target Price of `71. Owing to the recent correction, we recommend an
Accumulate on the stock.
Top-line growth slightly above estimates, volume growth at 39.9%: For
3QFY2011, TVSM reported a slightly better-than-expected 51.1% yoy jump in
top-line to `1,647cr. Growth was led by a strong 39.9% yoy increase in total
volumes and ~7.6% yoy increase in net average realisation. During the quarter,
TVSM’s motorcycle, scooter and moped sales grew by 38.1%, 63.6% and 25.6%
yoy, respectively. Higher sales registered by the three-wheeler segment at 10,108
units (3,225 units) also supported healthy revenue growth. Exports during the
quarter posted 17.6% yoy growth to 51,394 units (43,696). The new launches Jive
and Wego continued to drive sales in the motorcycle and scooters segments.
During the quarter, net average realisation of `30,781 (`30,285 in 2QFY2011
and `28,619 in 3QFY2010) was aided by the richer product mix and increase in
motorcycle and three-wheeler volumes.
Operating performance below expectation: For 3QFY2011, TVSM’s EBITDA
margin came in 85bp below our estimates at 6.1%, a fall of 54bp qoq and 15bp
yoy. The contraction in EBITDA margin was on account of the 318bp yoy and 91bp
qoq increase in raw material expenditure. Raw material cost accounted for 74.7%
(71.6%) of TVSM’s net sales during the quarter. However, ~200bp and ~47bp yoy
saving on other expenditure and employee costs helped the company to restrict
further fall at the EBITDA level.
Net profit ahead of estimates at `55.8cr: TVSM reported net profit growth of
136.9% yoy to `55.8cr (`23.5cr) on a low base, which was better than our
expectation of `51.6cr. Growth was largely aided by improved operating leverage,
higher-than-expected other income and lower-than-expected interest cost.
Key highlights
Management expects to exceed its volume guidance at 2mn units for FY2011.
Going forward, the company’s flagship brands such as Wego and Jive will
constitute over 15% of its total volumes, with Apache and Star City constituting
the balance.
TVSM’s three-wheeler models have received a positive response and its sales
continue to remain strong. Management expects three-wheeler export sales to
outpace domestic sales going forward.
In January 2011, TVSM took a price hike of up to 1.5% on various models,
which will reflect in 4QFY2011 results.
TVSM plans to launch two new variants in FY2012, one in the Apache clutch
and the other in the Scooty family.
Management expects the commodity prices to soften going forward helping
the company to protect its margins.
Investment arguments
Higher earnings growth on success of new launches: TVSM posted healthy
performance in FY2010, aided by overall volume recovery, improved product
mix and benefits of operating leverage. In FY2011, new launches of Jive,
Wego and Max4R would help TVSM to register higher earnings growth. We
expect the new launches to enable TVSM to ramp up its monthly run rate of
two-wheelers and post annual volumes of 2mn and 2.3mn units in FY2011E
and FY2012E respectively, from 1.5mn units in FY2010. Overall, we expect
domestic two-wheeler volumes to register a 21.6% CAGR over FY2010–12.
Improved product mix and three-wheeler support to increase margins: Higher
contribution of three-wheelers to total volumes would help the company
expand its margins during FY2010–12, implying higher earnings CAGR over
the period. However, we believe the overall scenario will remain challenging
for the company in terms of intensifying competition.
Consolidated earnings back in black: TVSM’s consolidated performance was
impacted by poor performance of its Indonesian subsidiary. The facility in
Indonesia was started in FY2007 with an initial investment of ~`200cr. On a
cumulative basis, TVSM invested around `270cr until FY2010. After the facility
started, the economic meltdown extended the gestation period for TVSM in the
Indonesian market. However, the recent recovery in the overseas market
helped the company to improve its consolidated performance. TVSM recorded
a 21.3% yoy jump in consolidated net sales to `4,544cr (`3,747cr) for
FY2010 and net profit of `33.5cr as against a loss of `63.2cr for FY2009.
Outlook and valuation
Going ahead, TVSM will have to counter intensive competitive pressures,
particularly from Bajaj Auto, Hero Honda and HMSI, which are launching new
bikes and reducing prices in their bid to boost volumes. However, launch of the
125cc Flame, Jive, Wego, Max4R and three-wheelers would provide some respite
to TVSM on the margin front going ahead, which was also seen in the company’s
FY2010 performance. Hence, we broadly maintain our estimates for the company.
We estimate TVSM to post a 27.6% CAGR in top-line and ~54.7% CAGR in net
profit over FY2010-12, aided by ~21.9% CAGR in volume and improving
operating performance owing to the change in product mix and better operating
leverage. Thus, we expect TVSM to register EPS of `4.5 in FY2011 and `5.6 in
FY2012. At `62, the stock is trading at 13.7x FY2011E and 11x FY2012E
earnings. We assign a multiple of 12.7x (15% discount to the average multiple of
the top-two industry players at 15x) FY2012E earnings to arrive at a Target Price of
`71. Owing to the recent correction, we recommend an Accumulate on the stock.
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