TVS Motor - "Results above expectations, upgrade to BUY" ::LKP

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opline inline, margins surprise, bottomline excels

On a volume growth of 15% to 5.36 lakh units and ~ 9 % realization growth on a yoy basis, TVS’s sales were up by 24%, which was in-line with our expectations. However, prudent cost management and operating leverage led to trimming down of other expenses (13.2% of sales v/s 15.6% qoq and 14.8% yoy) which led margin expansion of 50bps qoq to 7.3%. This was also due to 2-2.2% of price hike taken in the quarter. Margins grew despite RM to sales surging to 76.4%. At the bottom-line, lower than expected depreciation and tax rate led to the outperformance. Management has guided for other expenses to stay in the same range, while tax rate to be at 25% due to tax benefit from the Himachal plant.

Capacity expansion, new launches, opening of 3W permits to aid volume growth of 15%

TVS is steadily expanding its capacity to sell more than 2 lakh units per month from the current levels of >1.85 units p.m. with limited capex over the near term. The company has current capacity of 3mn 2W and 90,000 3W. TVS also plans to launch a new scooter and a new motorcycle in 4Q FY12/1Q FY13, which will be in the executive segment. Wego has been driving scooter sales of the company and is punching 15,000 units p.m. while Jive sells only 5,000 units p.m. On the 3W side, opening of new permits in Karnataka, Tamil Nadu and West Bengal in the near future will help the company match its domestic 3W sales with the 3W exports (target to sell 5000-6000 3W in near term), which are finding great demand in Asian and African markets. On the back of this, we do not believe 15% volume growth guided by management for FY 12 will be difficult to achieve.

Margins to improve on operating leverage, product mix and expected softening of commodity prices

TVS has shown a sequential EBITDA margin growth after four quarters. This was due to operating leverage and prudent cost management despite RM costs soaring significantly in the quarter. The company is currently functioning at 70% capacity utilization on the 2W side, and 60% on the 3W side. With launch of two new 2W products by the end of this year and opening of 3W permits in three major states in India along with traction for 3W in the export markets, we believe operating leverage will strengthen. Higher 3W sales will lead to better margin performance along with management’s expectations of commodity prices softening. Management has also mentioned that any loss due to withdrawal of DEPB will be compensated by an alternate duty drawback scheme or else it will be passed on, which may result in slight moderation of sales.

Outlook and valuation

On the back of continuous strong sales on a sequential basis, launch of new products in the latter half of the year, expectation of better operating performance, opening of new permits for 3W, strong export sales and higher than expected Q1 profits, we are raising our earnings estimates by 2%/4% for FY12E/13E and our target price by 5% to Rs.66 (on FY 13E consolidated EPS of Rs.6.32 at 10.5x times which is at a 25% discount to Bajaj Auto’s assigned multiple).