TVS Motor Company - Better times ahead - Elara Capital

Operationally weak quarter on sticky other opex; results in-line

TVS reported weak operational performance for Q1FY14, with EBITDA performance below par on high opex burden, but adjusted PAT higher than estimates on lower depreciation and interest costs. While net sales came slightly better on improving realizations, EBITDA fell below estimates as other opex continued to remain sticky (up 9% v/s volume decline of 5% YoY). Though operating profits were below par, lower depreciation and interest costs brought earnings in-line with estimates, posting a 2% YoY growth. We note that against a high base, the earnings growth was satisfactory and indicates improved momentum for coming quarters, as base falls rapidly.

Performance improvement on the cards; expect better FY14E

TVS has seen the worst among 2W players in the current demand slow down, with volumes (down ~7% YoY) and earnings (down 17% YoY) coming under severe pressure in FY13. However, stable QoQ volumes and earnings performance indicates volume growth recovery from low base and led by launches in both bike and scooter segments scale up in Phoenix 125 volumes and stability in exports business. We believe that TVS's volumes are likely to rebound to single digit growth in FY14E, starting from Q2FY14E onwards. Low base and tight cost controls should provide the much needed stability in margin structure, which along with falling interest costs on paring down debt, should result in double digit earnings growth over FY14E-FY15E.

Valuations - adequate discount at inexpensive valuations

TVS stock came under heavy pressure recently, as volumes suffered the most among 2-wheeler majors. Even on modest volume growth assumptions of ~7% for next two years and factoring in margin crunch, the stock trades at an inexpensive ~6x FY15E earnings, adequately pricing in impact of slowdown and market share loss over the next two years. Maintain positive stance and upgrade to Buy on recent sharp fall, with unchanged target price of INR43, at 10x FY15E consolidated earnings.

Source : Equity Bulls

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