TVS Motor With Target Of Rs 64

TVS Motor With Target Of Rs 64TVS Motor’s (TVSL) Q4FY11 results were disappointing on all counts - topline, margin and bottomline. Realisations inexplicably dropped 2.6% QoQ to Rs30.6k/unit as against our estimate of Rs32k/unit. Drop in realisations led to a 120bps contraction in margins to 5.6%. An increase in tax rate further added to the woes as the company reported a profit of Rs417mn as against our estimate of Rs600mn.

Impressive volumes but realisations tumble: TVSL volumes at 534k units was the best ever quarterly performance for the company. On a sequential basis contribution of motorcycles increased 120bps to 41% at the expense of moped segment. The incremental volumes were derived from the economy segment i. e. Star. However, the quantum of drop in realisations is still inexplicable. Realisations dropped 2.6% QoQ to Rs30.6k/unit. As a result revenues were 5% lower than our expectation at Rs16.3bn.

Margins continue to slide: The effect of drop in realisations was clearly evident on margins. EBITDA margin slid 120bps YoY (50bps QoQ) to 5.6% and were well below our estimate of 6.3%. Tax rate for the quarter rose 11 percentage points to 32.3%. Net profits at Rs417mn were significantly lower than our expectation of Rs601mn.

Indonesia subsidiary still under stress: The management had guided for the Indonesian subsidiary to cash breakeven in H2FY11. However, volumes in Indonesia have grown by a modest 30% to 20k units in FY11 and we expect significant loss still from Indonesia.

Outlook: Volume growth has not been a concern for TVSL in FY11. However, with Honda increasing capacity for scooters, relative free run for TVS Wego may come to an end. We maintain our volume estimate of 2.3mn units in FY12. Considering the below par margin performance and absense of any levers, we have reduced our margin estimate by 120bps to 6%. Our earnings estimate for FY12 is lowered by 24% to Rs4.4. We introduce FY13 earnings estimate of Rs5.3.