TVS Motor - "Most vulnerable to competition" - LKP Research

Below par performance

TVS reported 7.4% yoy growth in net sales, while on qoq basis, it declined by 11.2% to Rs17.33 mn. This was due to a 1% yoy growth on volumes to 5.27 lakh units, which was a decline of 12.7% qoq. Volumes for the company in the months of November and December were on a decline. Softness in two wheeler industry impacted TVS as monthly volumes saw ~5% qoq declines in the last two months. RM to sales as a % of sales came in at 73.4% v/s 75.5% qoq as commodity prices are cooling off. However, this benefit was taken away by 170 bps sequential increase in other expenses due to higher promotional expenses and 41 bps increase in employee costs at 16% and 5.22% respectively. Due to this, EBITDA margins declined 40 bps qoq and 20 bps yoy to 7.1%. The price hike taken in Q3 was reflected as net realizations moved up by 1.6% qoq. PAT came in at Rs566 mn which was just 1.4% up yoy while it was down 26% qoq.

Market share loss intensifies, competition to hurt further

Absence of significant launches over the past few quarters, and an aged product portfolio, TVS lost market share in each of its segments of operation. In December 2011, TVS's market share in the motorcycle segment stood at 4.8% v/s 7.6% at the end of September 2011, which signifies that competitive brands were preferred to TVS' bikes which are strong only in South India. In the scooter segment, TVS lost 360 bps of market share in the same period to 19.34% on aggressive capacity expansion from its closest rival Honda Activa. While on the 3W side, the company has seen demand reducing for its much hyped 3W King as its sales have gone down from levels of +4500 to ~2500. Even the strategy of 3W production getting ramped up from 6000 to 8000 shortly will not help the company as demand itself is weakening for 3 wheelers. Opening of government permits in various states is pending since a long time but there is no clarity on the same.

With intentions of players such as Honda, Yamaha, Hero and Suzuki to launch new scooters getting clear in the auto expo, we believe that a single scooter launch for TVS in FY 13 will not be sufficient for it to combat with rising competition and arrest a further market share fall. On the motorcycle side as well, a variant of Apache and a similar motorcycle launch (probably Victor 110cc) in FY 13 will not be able to take the aggressive launches from Honda head on. As a result we expect TVS volumes to grow at 9.5%/7% in FY 12E/13E v/s our auto industry growth expectations of 12.3%/10.6% respectively.

Margin performance weakens

In line with rising promotional expenses and employee costs to sales, margins have weakened to 7.1%. We expect margins to remain in between 7-7.2% in the coming quarters with weakening demand on 3W side coupled with lower utilization rates leading to lower operating leverage. Volume weakening on 2W side in the wake of competition also may lead to margins getting weakened. Higher ad spend stemming from prevention of market share decline may also hurt the margin performance. Softening of commodity prices may give some relief in FY 13. We cut our margin estimates for TVS from 7.6%/8.1% to 7.1%/7.7% in FY 12E/13E respectively.

Outlook and valuation

Given the weakening operational performance and difficult competitive environment, we are turning negative on the stock. We have cut our earnings estimates in the wake of expectations of domestic underperformance and faltering performance in Indonesia, which we believe may not breakeven even in FY 14 given the competition from Honda, Yamaha and Bajaj Auto and significantly low scale of operations of TVS. Strong exports (14% of volumes) may not be able to undermine the domestic weakness. Hence, we are cutting our target price from Rs 60 to Rs 55, valued at 10x times (30% discount to Hero) FY 13E consol EPS of Rs 5.5 and downgrading the stock from BUY to Underperformer.

Source : Equity Bulls

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