TVS Motor Company's Q4FY18 results (Underperformer) - Poor quarter; management rescinds margin guidance

Q4FY18 results

• PAT below est; Operating performance weak on higher costs: TVS Motor Q4FY18 adj PAT at Rs1.6bn (flat yoy) was sharply below estimates. The variance was on weaker than expected margin, lower other income (-62% yoy) and a higher depreciation.
• Revenues in line ; Adj EBITDA margins disappoint: Revenues at Rs39.9bn grew by ~40% yoy (+8% qoq) led by a 32% yoy volume growth and supported by 1% qoq(+7% yoy) realization growth. EBITDA margins at 7% (est 9.2%) declined 80 bps qoq (-50bps yoy Adj) mainly due to higher RM costs (+110 bps qoq) as commodity costs pressures were felt. Higher marketing costs on account of product launches/auto expo (impact of 50 bps) and staff costs (increase in minimum wages in Tamil Nadu; impact 30 bps) further added to cost pressures.
• Concall highlights: (a) It has guided for EBITDA growth and margin expansion for FY19, however the management did not comment on time line on achieving double digit margins (b). The company has taken a price hike of 40 bps in 4QFY18, however this price increase was absorbed by dealer margin expansion therefore not leading to increase in realization. It has taken a price hike of 50 bps in 1QFY19. (c) It expects RM costs to continue to harden in 1HFY19. (d) It has guided for a 8-10% volume growth for the 2W industry in FY19. (e) Capex for FY19 is expected to be Rs 7bn. (f) Tax rate is expected to go up in FY19 as R&D benefits go down and tax holiday for HP plant expired. 

Key positives: Lower than expected tax rate

Key negatives: Higher raw material costs

Change in estimates: We cut our estimates for FY19/20 by ~15%. Lower margins, higher depreciation and higher tax rates are only partially offset by higher revenue growth.

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). We note with concern that the management has refrained from offering any margin guidance.  Further, the valuations (~32xFY19E EPS) seem to build in a high degree of optimism on future market share gains/earnings growth. We maintain an Underperformer rating with a target price of Rs 510 (21xFY20E EPS + Rs50 for the BMW joint venture).