TVS Motor Company's Q3FY19 results (Underperformer) - Realisations surprise a bit; concerns persist

Q3FY19 results

• PAT ahead of expectations: TVS Motor Q2FY19 PAT at Rs1.7bn (+16% yoy) was ~8% ahead of consensus estimates. The variance was largely on higher realisations and consequent operating leverage benefits.
• Revenues surprise positively: Revenues at Rs46.6bn (+24% yoy) was driven by volume growth(+20% yoy) and realizations were up ~3% qoq on account of favourable currency movements (USD INR realisations at Rs71.5), price hikes (average increase of 0.6% in Q3) and a better product mix. EBITDA margins at 8.1% (flat yoy after accounting for the accounting policy change) was a shade above estimates (est: 7.7%). The surprise reflects operating leverage benefits from higher realisations and stricter cost controls. The stronger EBITDA performance was partly offset by lower other income and higher taxation.
• Concall highlights: (a) The company expects Q4 volumes to be stronger than Q3 partially on an easing of liquidity. (b) Commodity costs are likely to remain stable or decline in FY20. Pressure though could persist in Q4 (c) The capex is expected to be Rs 7bn for FY19 with another Rs2bn on account of an investment in subsidiaries. (e) While scooter demand has been weak YTD, the company expects scooter demand to grow faster than the overall 2W market over the long run. (f) The realized USD rate was Rs71.5 in the quarter (versus Rs69.5 in Q2FY19).

Key positives: Strong realization growth

Key negatives: Lower other income/higher tax rate

Change in estimates: We cut our estimates for FY19/20 by 6%/10% respectively. Higher volume growth is offset by lower other income, lower margins and a higher tax rate.

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 86% increase in revenues between FY15-19E, the EBITDA margins have remained largely flat). Given its thin margins and relatively small size TVS could potentially be the most impacted by increasing cost pressures (ABS) amidst rising competitive intensity in the 2W space. We maintain an Underperformer rating with a target price of Rs 490 (20xSept20E EPS + Rs50 for the BMW joint venture).