Jan 24, 2011, 10.57 AM | Source: Moneycontrol.com

Buy TVS Motor Company; target of Rs 86: LKP

LKP is bullish on TVS Motor Company and has recommended buy rating on the stock with a target of Rs 86 in its January 21, 2011 research report.

LKP is bullish on TVS Motor Company and has recommended buy rating on the stock with a target of Rs 86 in its January 21, 2011 research report.

“TVS Motor Company’s Q3 FY 11 numbers were in-line with our expectations. Net sales increased by 50% yoy to Rs 16,134 million, on a 40% yoy growth in volumes and an 8% yoy growth in realizations. As far as segmental volumes are concerned, Motorcycle sales increased by 38% yoy, scooter sales grew by 64% yoy and mopeds grew by 26% yoy. The new launches Jive and Wego provided a fillip to the motorcycle and scooter sales respectively. Three wheeler sales crossed the 10,000 mark in the quarter for the first time.”

“EBITDA margins were down by 50 bps yoy and 40 bps qoq at 7.3% due to hike in input costs, as RM costs as a % of sales were at 74.7% as against 71.6% in Q3 FY10. However, margins got support from the reduced employee costs (5.38% v/s 5.85% yoy) and other expenses (14.8% v/s16.3%) as a % of sales. Net profits were up 136% yoy to Rs 558 million on a low base driven by higher other income and lower interest expenses. Lower interest expenses were driven by repayment of debt of ~2bn during the quarter. On a qoq basis, the growth was flattish. The company’s Indonesian operations sold 14,809 units in the nine month period ending December 2010, a growth of 42% v/s 10,448 units yoy. The company has declared an interim dividend at Rs 0.5 per share on the enhanced capital thus absorbing a sum of Rs 277 million, including dividend distribution tax.”

“The company’s Indonesian operations is in a moderate growth phase with volumes at ~15,000 till date in FY11E. Dealer expansion and launch of two upgraded models of TVS Apache and TVS RockZ may push the volumes to the 20,000 mark in FY 11E. Going forward, we expect 30,000 and 40,000 units to be sold in FY 12E and FY 13E respectively on dealer network expansion. Management believes the EBITDA breakeven for these operations to come at 72,000 units by FY 12E, which we believe is unlikely to happen even by FY13E with competition from the 2 wheeler giants Honda and Yamaha intensifying and TVS finding it difficult to expand their volumes. Hence, we believe that the Indonesian operations will pull down the consolidated earnings performance within our investment horizon.”

“However, with domestic scooter market share improving, moped sales growing at a decent pace, motorcycle sales getting a boost from new launches and 3 wheeler getting a good response in the states where it is launched, we are positive on the domestic business. Opening of permits may have an additional positive impact on 3 wheeler sales which the management expects to move up to 5000 per month by FY12E, which we believe is quite possible. Margins are expected to improve hereon with operating leverage coming in and product mix tilting towards 3 wheelers and scooters. As far as competition in the domestic markets is concerned, Honda will be a threat with solo launches, but TVS with its new launches and good response to Wego will manage to arrest a steep decline in its market share. We are maintaining our FY11E and FY12E estimates, while introducing FY13E estimates and rolling over our target price to FY13. Based on an EV/EBITDA multiple of 5.5x on FY13E EBITDA, we value the stock at Rs 86 per share, which is an upside of 39% from current levels. We upgrade the stock post the recent correction from Hold to Buy for a target price of Rs 86,” says LKP research report.

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