TVS Motor Company Ltd.| Q3FY15 Result Update | Operating margin below estimates | maintain SELL rating on the stock with target price of Rs. 158 :: IndiaNivesh

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 TVS Motors reported Q3FY15 operating margin was below our estimates. Revenue increased by 29% YoY (down 1% QoQ) to Rs 26.5bn (slightly ahead of our expectation of Rs. 24.9 bn) due to 4% increase in average realization on the back of better product mix. Reported PAT stood at Rs. 902, below our expectation of Rs. 929 mn due to lower operating margin.  Total volume increased by 23% YoY to Rs 0.65 mn unit on the back of 36% increase in 3W sales, 20% increase in Motorcycle sales, and 51% growth in Scooter sales. Export volume jumped by 36% YoY and domestic volume increased by 21% YoY. Recently the company strengthened its scooter portfolio with the launch of TVS Scooty Zest 110. TVS Jupiter and TVS StaR City + launched earlier continued its upward trend. The company plans to achieve a market-share of 14.5% in 2W segment during the current fiscal. During Q3FY15, TVS domestic market share in 2W increased to 13.2% v/s 11.7% in Q3FY14. TVS Motor is planning to launch two new motorcycles in second half of FY16.  EBITDA margin remained flat YoY/QoQ to 6%, below our expectation of 6.4% due to higher RM expenses partially offset by decline in other expenditure and employee cost. Other expenditure (as % of sales) was down 187 bps YoY to 15.3% while RM cost (as % of sales) was up 233 bps YoY to 74.2%. Reported PAT stood at Rs. 902, below our expectation of Rs. 929 mn due to lower operating margin. The company has declared an interim dividend of Re. 0.75 for shareholders.  TVS has done exceedingly well on its business front in both domestic as well as export market. The company has been aggressively pursuing for higher domestic market share through new launches. However despite strong volume growth the company is not able to expand its margin by taking benefit of operating leverage, which is a major concern. At CMP of Rs. 286, stock is trading at 27xFY16E; which looks quite expensive. Among its peers like Bajaj Auto and Hero Motocorp maintains EBITDA margin in the range of 14-19% compared to 6% margin of TVS Motors, thus we value TVS Motors 15x FY16E EPS(20 to 30% discount from its peers). We maintain SELL rating on the stock with target price of Rs. 158 (valuing at 15xFY16E earnings)

EBITDA margin remained flat YoY/QoQ to 6%, below our expectation of 6.4% due to higher RM expenses partially offset by decline in other expenditure and employee cost. Other expenditure (as % of sales) was down 187 bps YoY to 15.3% while RM cost (as % of sales) was up 233 bps YoY to 74.2%. Reported PAT stood at Rs. 902, below our expectation of Rs. 929 mn due to lower operating margin Valuation TVS has done exceedingly well on its business front both in both domestic as well as export market. The company has been aggressively pursuing for higher domestic market share through new launches. However despite strong volume growth the company is not able to expand its margin by taking benefit of operating leverage, which is a major concern. At CMP of Rs. 286, stock is trading at 27xFY16E; which looks quite expensive. Among its peers like Bajaj Auto and Hero Motocorp maintains EBITDA margin in the range of 14-19% compared to 6% margin of TVS Motors, thus we value TVS Motors 15x FY16E EPS(20 to 30% discount from its peers). We maintain SELL rating on the stock with target price of Rs. 158 (valuing at 15xFY16E earnings).

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