Earnings Beat; Maintain REDUCE on Higher Competitive Intensity & Pricey Valuation
Aided by better gross margin, TVS Motor (TVSL) has delivered higher-than-expected earnings performance in 2QFY20. Surpassing our estimate by 46%, its adj PAT (Adjusted for exceptional gain of Rs0.76bn on reversal of provision) declined by only 9% YoY (+35% QoQ) to Rs1.92bn aided by tax adjustment pertaining to lower ETR. Its EBIDTA margin expanded 21bps YoY and 82bps QoQ to 8.8% vs. our estimate of 7.2%, mainly due to lower RM/Sales expenses. However, its revenue and EBIDTA declined by 13% YoY (-3% QoQ) and 11% YoY (+7% QoQ) to Rs43.5bn and Rs3.8bn, respectively. While volume declined by 19% YoY (-4% QoQ) to 8,85,832 units, average realisation grew by 7% YoY due to price hike, higher export contribution and better productmix. Its RM/sales decreased by 242bps YoY and 178bps QoQ to 73.4%, while other expenses/ sales rose by 173bps YoY (115bps QoQ) to 12.5%. New accounting standards resulted into higher depreciation and interest expenses due to new lease accounting. Looking ahead, we expect adverse impact of price hike due to BS-VI implementation and higher competitive intensity to impact TVSL’s profitability. As at current valuation of 19x FY22E earnings appears to be expensive, we reiterate our REDUCE recommendation on the stock with a revised Target Price of Rs415 (from Rs351 earlier), as we roll forward to FY22E.
Volume Growth Likely after 3-4 Quarters; BS-VI to Restrict Margin Expansion
Whilst we expect the two-wheeler industry to witness sequential improvement due to better monsoon and improved consumer sentiment, the Management expects the industry to witness growth only after 3-4 quarters due to continued weakness in rural economy. Despite likely outperformance on volume front due to new products, the volume growth would be in singledigit on higher YoY base and higher competitive intensity. For BS-VI, the price increase is seen around 10% for 2W segment, which we believe is rather difficult to pass on amid tough demand scenario. We expect its EBIDTA margin to be lower than the current level in FY21E and would recover to 9% in FY22E. Looking ahead, the Management expects to sustain higher volume and margin owing to success of new products and improving brand equity. However, it guided for decline in the 2W industry in 2HFY20E, despite low base primarily due to inventory destocking for change in emission norm. We expect cost inflation due to BS-VI implementation and competitive promotional expenses to impact TVSL’s profitability negatively and restrict margin expansion, going forward.
Outlook & Valuation
In view of higher-than-expected slowdown in domestic 2W market and inventory de-stocking, we reduce TVSL’s volume and revenue estimates by 7%/10% for FY20E/FY21E. While factoring in better margin, we increase our EBIDTA margin estimate by 58bps/79bps for FY20E/FY21E and broadly maintain our EBIDTA estimates. However, factoring in revised tax rate, we increase our EPS estimates by 12%/7% for FY20E/FY21E. We introduce our FY22 estimates and roll forward our valuation to FY22E. In light of competitive intensity in domestic and overseas markets, imminent industry headwinds in the medium-term and expensive valuation, we reiterate our REDUCE recommendation on the stock with a revised Target Price of Rs415 (Earlier Rs351), valuing it at 18xFY22E EPS.
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