TVS Motor Co : HOLD

Margins Under Pressure on Rising Costs

TVS Motor’s (TVS) Q4FY11 operating performance was a tad below our expectations, with PBDIT margin of 6.2% (45bps QoQ, 127bps YoY)– due to rising raw material costs (up 397 bps YoY).

Key highlights

• Overall volumes for Q4 were at 0.52 mn up 25% YoY (flat QoQ), primarily driven by a  50% YoY increase in scooter volumes. TVS reported revenue of Rs 16 bn (up 35% YoY & flat QoQ), EBITDA of Rs 715 mn (up14% YoY, up 6% QoQ) and adj PAT of Rs 507 mn (22% YoY & 9% QoQ) in Q4FY11.
• During the qtr, TVS provided for: a) Rs 90 mn towards provisioning of additional tax in Uttaranchal; & b) higher tax outgo (by Rs 70 mn) due to tax credit for previous years. While we have adjusted the net sales upwards by Rs 90 mn, we retain the impact of higher tax. As a result, our adjusted PBDIT is higher at Rs 1 bn with a 6.2% margin (vs. 5.7% unadjusted).
• Additionally, due to bottlenecks at Chennai port, ~10,000 units (2% of volumes for the qtr) have not been cleared. As a result, these revenues have not been recognized in Q4.
• FY11 included Rs 635 mn towards amortization charges (expensed in our EBITDA calc) for moulds/dies and product launch expenses. We understand that ~Rs 400 mn will not recur in FY12E, resulting in a higher EBITDA margin.
• TVS is expected to launch a new scooter (>100cc) and one new motorcycle (Executive seg) in H2FY12. Additionally, the co. is expanding capacities from 2.2 mn units p.a. to 2.6 mn units p.a. in FY12E. A bulk of this expansion is expected in scooters.

Maintain estimates for FY12E. Retain HOLD rating

We expect TVS’ volumes to grow by 15% in FY12E on the back of strong demand for scooters and new launches. As a result, we expect PBDIT margins to improve to 7.3% (vs. 6.7% in FY11). We retain our FY12E EPS est of Rs 6 (standalone) and Rs 4.8 (conso). Maintain HOLD rating with a TP of Rs 63 (13x FY12E conso EPS of Rs 4.8)