TVS Motor Company's Q1FY19 results (Underperformer) - Subdued margins; rising competition

Q1FY19 results

• PAT below est; Operating performance weak on higher costs: TVS Motor Q1FY19 PAT at Rs1.46bn (+13% yoy on a reported numbers; flat on an adjusted basis) was 12% below estimates. The variance was on lower other income, a higher tax rate and lower EBITDA margins.
• Revenues in line; EBITDA margins disappoint: Revenues at Rs42.4bn grew by ~24% yoy led by a 16% yoy volume growth. EBITDA margins adjusted for an accounting policy change was at 7.2% (est 7.5%; up 20bp qoq). Raw material costs increased by 80bp qoq despite a better product mix (higher share of 3W/Exports) reflecting the stronger commodity cycle. This was offset by lower other expenses (down 90bp qoq) on lower advertisement expenses in absence of new product launches and operating leverage benefits. Other income declined 70% yoy likely reflecting the lower income from revaluation of TVS’ stake in the TVS Credit Services/ TVS Motor Services (which are now subsidiaries).

Concall highlights: (a) While the management has guided for EBITDA growth and margin expansion for FY19, however it did not comment on time line on achieving double digit margins (b). The company would not respond to price cuts by competitors as it could impact the longer term brand equity of its vehicles.  (c) RM costs to continue to harden in 2QFY19. (d) 2W industry likely to grow by 8-10% in FY19. (e) Capex for FY19 is expected to be Rs 7bn. (f) Tax rate is expected to remain at the current 31% as R&D benefits have been reduced and tax holiday for HP plant expired.

Key positives: Lower other expenses

Key negatives: Commodity cost pressures; higher tax rate  

Change in estimates: We maintain our estimates

Valuations & view

In the past three years, TVS Motors has gained marketshare by establishing its 2W brands (notably the Apache). However, we continue to remain perplexed with the lack of a margin improvement despite potential operating leverage benefits (inspite of a 36% increase in revenues between FY15-18, the EBITDA margins have remained flat). Given its thin margins and relatively small size TVS could potentially be the most impacted by the heightened competitive intensity in the 2W space. We maintain an Underperformer rating with a target price of Rs 490 (20xFY20E EPS + Rs50 for the BMW joint venture).