TVS Motor Ltd– Results a tad higher than expectations, maintain BUY ::LKP

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TVS Motor Ltd– Results a tad higher than expectations, maintain BUY  TP-Rs79, BUY

Inline performance

On a consistent volume growth of 15%yoy and 13% qoq to 6.04 lakh units and 6.7 % realization growth on a yoy basis, TVS’s sales were up by 23% yoy and 14% qoq, which was slightly higher than our expectations. Two wheeler sales grew by 15.5%, while 3 W sales grew by 20%. Exports sales grew by 31% yoy on traction in most of the African, South Asian and Latin American markets. Lower raw material costs to sales ratio led by softening of commodity costs (75.46% v/s 76.4% qoq) and lower employee costs to sales (4.81% v/s 5.32% qoq) led to improved margin performance. EBITDA margins came at 7.5% v/s 7.3% qoq and 7.7% yoy. At the bottomline, constant tax rate of 24.2% led net profits to expand 40% yoy to Rs765 mn.  Management has guided tax rate to be at 25% due to tax benefit from the Himachal plant.

Capacity expansion, new launches and 15% volume growth on track

TVS is steadily increasing sales to more than 2 lakh units per month which was reported in September. In October, the company sold 1.85 mn units on maintenance shutdown at its plants for 7-8 days. The company has current capacity of 3mn 2W and 50,000 3W. The company is planning to expand its 3 W capacity from current levels of 6000 p.m. to 8,000 p.m. by April 2012.  TVS also plans to launch a new scooter and a new motorcycle in 4Q FY12/1Q FY13, which will be in the executive segment. Management had guided for 15% volume growth for FY 12E at the end of Q1 FY12 and has maintained its guidance, which we believe is achievable with 2 lakh units selling per month from November. YTD, the volumes of the company have grown by 15.3%. Management has estimated the 2 W industry to grow by 12-15% in FY 12, and the company to grow slightly higher than the industry.

Margins to improve on lower RM costs, increasing 3W sales

TVS’s margins are on an improving trajectory on lower input costs and growing 3W sales. Opening of permits in some of the states like West Bengal, Karnataka and Tamil Nadu will also lead to higher 3W sales. Improving product mix, better cost management and operating leverage will assist the company in improving margins. Withdrawal of DEPB benefit is getting compensated by other schemes and possible price hikes in the export markets without hurting margins. However, renewed competition from Honda in the African markets may lower demand for TVS’s products in Africa, which may impact margins. We expect 7.6%/8% standalone EBITDA margins in FY12/13E.

Outlook and valuation

On the back of better than expected Q2 numbers, expectations of consistent volume performance going forward, new launches, strong rural demand and improving margins, we are slightly increasing our estimates for both FY12/13E. At CMP of Rs66, the stock is trading at 10x times FY13E EPS of Rs6.55. We value the stock at 12x times, which is still at 20% and 15% discount to multiples of 15x and 14x assigned to value Bajaj Auto and Hero Motocorp respectively. We derive a TP of RS79, which is at a 19% upside from current levels.