TVS Motor - New scooter launches & three wheelers to aid growth; maintain Add - BRICS

TVS' results were impacted by an exceptional item, excluding which, the numbers surpassed our estimates. Revenue at Rs17.5bn was up 7% yoy, as a decline of 4% yoy in volume was offset by a growth of 11% yoy in realisation to Rs34,334 per unit. EBIDTA margin declined to 5.4%. Adjusted PAT remained flat yoy, though an exceptional item of Rs916.3mn - provision made for the closure of TVS Motor Co. (Europe) BV - resulted in net loss of Rs327mn. We believe TVS' tie up with BMW's motorcycle division is a positive development for its motorcycle segment. We expect the overall economy and 2W industry to pick up in H2FY14 and maintain our target multiple at 9x FY14E, but lower our earnings estimate (by 12% for FY14E and 18% for FY15E), due to delay in revival of the industry. Revise target price to Rs41 (Rs47 earlier). Maintain Add.

Higher realisation offsets decline in volume: Revenue came in at Rs17.5bn, up 7% yoy. Total volume declined 4% yoy, as 2W volume fell 5% yoy, while 3W volume (high realisation product) grew 85% yoy to 14,295 units. This helped overall realisation improve by 11% yoy to Rs34,334 per unit. TVS' volume has been under pressure, due to weak consumer sentiments and aggressive competition. To counter the competition, TVS will launch a scooter, motorcycle and diesel 3W in FY14. The company has also entered into a technological tie-up with BMW at an investment of $20mn, with the first output from the collaboration likely to be a <500cc bike in 2015. We estimate a sales growth of 6% for FY14, led by a growth of 18% in 3Ws.

3W margins vs. other expense: Despite softening in raw material costs and favourable shift in product mix (volume contribution of higher margin 3W to total volume doubled yoy), EBITDA declined 5% yoy to Rs938, as other expenses increased (to 18.3% of net sales), likely on account of brand building expenses, including post-launch phase of Phoenix 125cc. This resulted in EBIDTA margin declining 68bps yoy to 5.4%. To counter the increase in other expenses, freight rates, etc., TVS plans to raise prices in May 2013. The company expects to maintain consolidated margin of 6% in FY14 (5.9% in FY13).

Reported net loss of Rs327mn: Other income was up 16% yoy and 110% qoq, while PBT from ordinary activities before exceptional items stood at Rs631mn. With a tax provision of Rs50mn, or 7.95%, adjusted PAT came in at Rs581mn. Of the one-time items reported by the company, one was an extraordinary item of Rs7.9mn received as insurance claim and the other an exceptional item of Rs916.3mn, which was a provision made for the closure of TVS Motor Company (Europe) BV, a wholly owned subsidiary of TVSM Europe. These items together pulled PBT down to a net loss of Rs327mn in Q4FY13. Consolidated reported net profit for FY13 was up 50%, mainly due to extraordinary gains amounting to Rs927.8mn from the sale of land at Rs1,983mn.

TVS' tie-up with BMW Motorrad - an extremely positive step; beneficial in the long term

TVS has entered into a long term agreement with BMW Motorrad to jointly develop sub 500cc motorcycles. TVS will invest Euro20mn (Rs1.4mn) in the JV and the first product is expected to be launched in 2015. TVS has been steadily losing market share to its peers, especially Honda Motors & Scooters India. TVS' collaboration with BMW will ensure that it enjoys a technological advantage, though the branding is most likely to remain independent - an area that the company will need to focus on. BMW Motorrad has been re-aligning its business to suit urban and electric transport and in the process, it has shed its off-road motorbiking units (Husqvarna to Pierer Industrie AG, the holding company of KTM). These measures also mark a step towards making BMW Motorrad profitable. BMW hopes to leverage TVS' expertise in small displacement engines. We expect TVS to benefit from this deal, as the tie-up with BMW Motorrad will help strengthen its presence in the premium motorcycle segment, where it is currently weak. TVS could also benefit from the tie-up if it opts to export new motorcycles to the international markets.

Lowering FY14E volume and earnings estimates

We expect the overall economy and the two wheeler market to begin picking up in H2FY14E. Hence, we lower our FY14E volume estimate by 9% and earnings estimate by 12% to Rs4.6 and our FY15E volume and earnings estimates by 10% and 18% to Rs6.3. We expect TVS to benefit from the launch of scooters and new motorcycle models in the next 12 months. Following its tie-up with BMW, TVS' two wheeler division is likely to launch a new motorcycle in the premium segment in FY15E. Moreover, with the increase in TVS' overall volume as well as three wheeler volume, we expect the company's margins to improve to 6.3% in FY15.

Maintain Add rating

We believe TVS is likely to record a higher growth once the demand for two wheelers increases (driven by a decline in interest rates and rise in urban income). We expect the industry to once again witness a pick-up in demand in H2FY14 and estimate TVS to record a growth of 6% for the year.

TVS aims to increase its market share through the launch of new scooters. The company also plans to improve its margins by driving volume and sales of three wheelers higher. We maintain our multiple of 9x assigned to the stock, as the expected revival and TVS' tie up with BMW will benefit the company and widen its footprint in the premium vehicles space. At the current market price, the stock trades at 8.4x FY14E and 6.1x FY15E, which we find attractive. We expect an increase in TVS Indonesia's revenue and profits. We value TVS at 9x FY14E earnings, but lower target price to Rs41 (Rs47 earlier). Maintain Add.

Source : Equity Bulls

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