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TVS Motor
Reuters: TVSM.BO Bloomberg: TVSL IN Exchange: BSE Ticker: TVSM
Robust results underline our investment thesis; Buy
Strong revenue momentum continues; maintaining Buy (target price Rs 92)
TVS’ 3QFY11 results are robust (in line with our estimates) and management
guidance on three-wheelers (3W) is positive. This echoes our investment thesis for
the company – rising revenue share of higher margin three-wheelers should drive
profits. We believe the recent underperformance (12% vs. Sensex in the last three
months) and inexpensive valuations (P/E of 10x FY12E) provide an attractive entry
point for investors. We are cutting our target price by 8% to factor in the delay in
the turnaround of the Indonesian operations. We maintain Buy
3QFY11: good numbers, recent price hike should offset input cost pressures
Volumes: 524,171 (40% yoy); revenue: Rs 16.5bn (51% yoy, 2% above estimate);
EBITDA: Rs 1bn (48% yoy, 5% below estimate); EBITDA margin: 6.1% (-60bps
qoq); PAT: Rs 558m (133% yoy, 6.5% above estimate). Revenue traction
continues to be ahead of volumes due to favourable sales mix and price increases.
Margins fell qoq on an increase in raw material costs, which should be addressed
by the price rise that was announced (1-1.5%) at the beginning of January.
Three-wheeler ramp-up remains key; management guidance encouraging
We forecast TVS’ revenues to move in favour of higher margin 3Ws (8% in FY13E
vs. 5% in FY11E). This would require 3W volumes to increase from the current
monthly run-rate of 3,500 to 4,500 by FY12E and 6,000 by FY13E. Management
believes it can achieve a run-rate of 5,000/month in FY12 driven largely by exports
(38% of volumes). The shift in sales mix would result in EBITDA margins
expanding from 6.4% in FY11E to 7.4% in FY13E.
Reducing target price by 8% to factor in losses in Indonesian operations
We derive our Rs 92 target price for TVS by deducting a negative equity value of
Rs 8/share (for Indonesian operations) from a DCF-based value of Rs 100/share for
the Indian business. Our assumptions are: RFR 6.4%, ERP 7.2, Kd 9%, beta 1.02,
WACC 12.9% and terminal growth rate of 4%. Our target price implies a P/E of
15.5x FY12E EPS. Risks include a slower-than-expected ramp-up of three-wheeler
volumes and higher-than-expected losses for the Indonesian subsidiary.
We forecast TVS’ three-wheeler volumes to be 38,000 in FY11 and 55,000 in FY12. This
concurs with management’s expectation of achieving a monthly run-rate of 5,000 3Ws in
FY12E. We note that the ramp-up in three-wheeler volumes is central to our investment
thesis. We expect the revenue share of 3Ws to increase from 5% in FY11E to 8% in FY13E,
which should result in an improvement in EBITDA margins (7.4% in FY13E vs. 6.4% in
FY11E).
Key takeaways from our discussion with management
„ The increase in raw material costs (100bps qoq) was on account of higher prices of the
major commodities – steel, aluminium and rubber. However, management guided that
these should be offset in 4Q due to the price hike made at the beginning of January
2011.
„ Management has guided for a monthly run-rate of 5,000 three-wheelers in FY12 (vs.
3,500 currently) and expects growth to be driven by exports. The company believes
exports should outpace domestic volumes in FY12.
„ Capex and investment guidance: The company expects to incur capex of Rs 1.3bn/1.5bn
in FY11/FY12. In addition, the company expects to invest Rs 900m and Rs 1.3bn in its
Indonesian subsidiary and its credit services company, respectively, over the same
period.
„ The company has recently repaid Rs 2bn of debt, which should reduce its interest cost
burden.
Delayed turnaround in Indonesia impacts our target price
TVS invested around Rs 3bn in its Indonesian subsidiary, PT TVS Motor Company, by the end
of FY10 and plans to invest an additional Rs 900m in FY11-12. The company guided earlier
that this subsidiary should achieve cash break-even by the end of FY11 and would be PAT
neutral in FY12. We were ascribing a zero equity value to these operations; however, TVS
now expects to reach a cash break-even only in FY12. We believe the company needs to
achieve a monthly run-rate of 5,000 vehicles (vs. 1,600 currently) in Indonesia to turn EBITDA
positive. The continued weakness in the Indonesian operations remains a concern and we
factor it into our target price calculation by ascribing a negative equity value of Rs 8/share.
This should equal the investments TVS is likely to make in Indonesia (Rs 3.9bn) by the end of
FY12.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
TVS Motor
Reuters: TVSM.BO Bloomberg: TVSL IN Exchange: BSE Ticker: TVSM
Robust results underline our investment thesis; Buy
Strong revenue momentum continues; maintaining Buy (target price Rs 92)
TVS’ 3QFY11 results are robust (in line with our estimates) and management
guidance on three-wheelers (3W) is positive. This echoes our investment thesis for
the company – rising revenue share of higher margin three-wheelers should drive
profits. We believe the recent underperformance (12% vs. Sensex in the last three
months) and inexpensive valuations (P/E of 10x FY12E) provide an attractive entry
point for investors. We are cutting our target price by 8% to factor in the delay in
the turnaround of the Indonesian operations. We maintain Buy
3QFY11: good numbers, recent price hike should offset input cost pressures
Volumes: 524,171 (40% yoy); revenue: Rs 16.5bn (51% yoy, 2% above estimate);
EBITDA: Rs 1bn (48% yoy, 5% below estimate); EBITDA margin: 6.1% (-60bps
qoq); PAT: Rs 558m (133% yoy, 6.5% above estimate). Revenue traction
continues to be ahead of volumes due to favourable sales mix and price increases.
Margins fell qoq on an increase in raw material costs, which should be addressed
by the price rise that was announced (1-1.5%) at the beginning of January.
Three-wheeler ramp-up remains key; management guidance encouraging
We forecast TVS’ revenues to move in favour of higher margin 3Ws (8% in FY13E
vs. 5% in FY11E). This would require 3W volumes to increase from the current
monthly run-rate of 3,500 to 4,500 by FY12E and 6,000 by FY13E. Management
believes it can achieve a run-rate of 5,000/month in FY12 driven largely by exports
(38% of volumes). The shift in sales mix would result in EBITDA margins
expanding from 6.4% in FY11E to 7.4% in FY13E.
Reducing target price by 8% to factor in losses in Indonesian operations
We derive our Rs 92 target price for TVS by deducting a negative equity value of
Rs 8/share (for Indonesian operations) from a DCF-based value of Rs 100/share for
the Indian business. Our assumptions are: RFR 6.4%, ERP 7.2, Kd 9%, beta 1.02,
WACC 12.9% and terminal growth rate of 4%. Our target price implies a P/E of
15.5x FY12E EPS. Risks include a slower-than-expected ramp-up of three-wheeler
volumes and higher-than-expected losses for the Indonesian subsidiary.
We forecast TVS’ three-wheeler volumes to be 38,000 in FY11 and 55,000 in FY12. This
concurs with management’s expectation of achieving a monthly run-rate of 5,000 3Ws in
FY12E. We note that the ramp-up in three-wheeler volumes is central to our investment
thesis. We expect the revenue share of 3Ws to increase from 5% in FY11E to 8% in FY13E,
which should result in an improvement in EBITDA margins (7.4% in FY13E vs. 6.4% in
FY11E).
Key takeaways from our discussion with management
„ The increase in raw material costs (100bps qoq) was on account of higher prices of the
major commodities – steel, aluminium and rubber. However, management guided that
these should be offset in 4Q due to the price hike made at the beginning of January
„ Management has guided for a monthly run-rate of 5,000 three-wheelers in FY12 (vs.
3,500 currently) and expects growth to be driven by exports. The company believes
exports should outpace domestic volumes in FY12.
„ Capex and investment guidance: The company expects to incur capex of Rs 1.3bn/1.5bn
in FY11/FY12. In addition, the company expects to invest Rs 900m and Rs 1.3bn in its
Indonesian subsidiary and its credit services company, respectively, over the same
period.
„ The company has recently repaid Rs 2bn of debt, which should reduce its interest cost
burden.
Delayed turnaround in Indonesia impacts our target price
TVS invested around Rs 3bn in its Indonesian subsidiary, PT TVS Motor Company, by the end
of FY10 and plans to invest an additional Rs 900m in FY11-12. The company guided earlier
that this subsidiary should achieve cash break-even by the end of FY11 and would be PAT
neutral in FY12. We were ascribing a zero equity value to these operations; however, TVS
now expects to reach a cash break-even only in FY12. We believe the company needs to
achieve a monthly run-rate of 5,000 vehicles (vs. 1,600 currently) in Indonesia to turn EBITDA
positive. The continued weakness in the Indonesian operations remains a concern and we
factor it into our target price calculation by ascribing a negative equity value of Rs 8/share.
This should equal the investments TVS is likely to make in Indonesia (Rs 3.9bn) by the end of
FY12.
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