TVS Motor- Weak Q4, Cut PO „Moderate forecasts and PO :: BofA Merrill Lynch

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TVS Motor
    
Weak Q4, Cut PO
„Moderate forecasts and PO
Q4 profit of Rs.417mn was well below expectations, while EBITDA at Rs 1.05bn
was 3% below our estimates. Consolidated results, which will likely include losses
from Indonesian subsidiary, will be reported later. We cut standalone EPS
forecasts by 3%-4% over FY12-13E and similarly our PO by 4% to Rs 63.

Profit suppressed by one-offs
Exceptional items included. (1) national calamity cess duty of Rs.100mn
pertaining to previous periods, adjusted against sales, (2) provision of Rs.40mn
towards slow moving stocks, (3) additional taxes of Rs 60mn pertaining to claims
likely to be reversed later. Adjusted for this, profit at Rs 617mn was slightly ahead
of our estimates.
Margins in line, but likely to be capped
EBITDA margins declined 10bps yoy, but up 10bps qoq at 6.4%, similar to our
estimate. EBITDA however was impacted by higher costs and lower realizations
(down 2.6% qoq). Despite lower product amortization charges, we expect forecast
margins to be restricted to below 7% due to rising competitive intensity.
Sales expected to slow, lag industry
TVS Motors’ 33% growth last fiscal was driven by new products and low
comparable base. We however expect sales over forecast period to lag industry,
given (1) renewed competition from Honda’s scooter business, following
commissioning of unit by Sept, and (2) weak franchise in bikes, also illustrated by
failure of Jive. Our 11%-10% sales growth assumption over FY12-13E is despite
success of scooter Wego, monopoly position in mopeds as well as strong exports.


Price objective basis & risk
TVS Motor (XFKMF)
Our PO of Rs 63 is based on sum of (1) standalone business valued at 10.5x
FY13E P/E, which is 25% discount to imputed multiple of peers, and (2) Nil value
for the Indonesian subsidiary, which is currently operating on losses. At our PO,
stock would trade at 10.5x consolidated FY13E P/E, the 25% discount also being
justified by lower margins and return ratios. Downside risks: Weak execution of
new launches, and rising competition, both of which would adversely impact
sales, as well as rising costs which would hurt margins. Upside risks: Faster than
expected turnaround in Indonesian subsidiary, success of new products.