We downgrade TVS Motor to ‘hold’ (earlier ‘buy’) with a revised target price of R150 per share, valuing the company at 12x average FY16-17 EPS. We believe the sharp ytd rally in TVS share price (up 116% versus 29% in auto index, 22% in Hero MotoCorp) fairly captures earnings growth of over next two years as TVS’ valuation gap with larger peers shrinks from 33% to sub 10% (FY16 PER). Any negative surprise on volume growth or margins front could result in further downside to earnings forecast. Domestic 2-wheeler demand slowdown, pricing pressure and export momentum loss are key downside risks to the stock.
We tweak FY15 estimates to factor in Q1FY15 results, ytd volume momentum, and increasing competitiveness. While we increase our FY15-16 volume estimate by 13%/19%, we largely maintain our margin estimates. We introduce FY17 estimates with revenue growth/ebitda margin/EPS at 13%/8.4%/ R14.
TVS’ net profit at R72.3 crore (up 39% y-o-y and 12% q-o-q) came in 20% below JMFe (R90.6 crore), impacted by lower-than-estimated ebitda margins. Despite significant improvement in volumes in the quarter, ebitda margin at 5.7% (down 120 bps q-o-q/ flat y-o-y) was c.130 bps below JMFe. Consequently, ebitda for the quarter stood at R130 crore, c.20% below JMFe. Reported other operating income included forex gain of c.R9.4 crore related to export/import operations of the company.
JM Financial Institutional Securities