TVS Motor Company's Q4FY19 results (Underperformer) - Tepid margins; weak outlook

Q4FY19 results

• Weak operating performance: TVS Motor Q4FY19 PAT at Rs1.34bn (-19% yoy) was broadly inline with estimates. A weaker than expected operating performance was offset by a lower tax rate.
• Margins remain tepid: Revenues at Rs43.8bn grew +9% yoy despite weak volumes (+2% yoy) as realizations rose ~3% qoq largely on account safety norm linked price hikes.  EBITDA margins at 7% (down 40bps yoy after taking into account the policy change) was below estimates (est: 7.5%). The EBITDA margins were impacted by higher than expected raw material cost pressures with gross margins declining ~80bps sequentially on a negative product mix/strong commodity cycle. This was compounded by negative operating leverage (other expenses increased by 60 bps qoq). Surprisingly, staff costs declined by 14% qoq.  Absolute EBITDA at Rs3.1bn (up 4% yoy) was ~5% below expectations. PAT declined by 19% yoy on a decline in other income (TVS Credit was previously revalued on a quarterly basis) and a tax writeback in Q4FY18.
• Concall highlights: (a) The company expects the 2W industry to register flat to low single digit volume growth in FY20. TVS will likely grow at a faster rate than the industry (b) Commodity costs are likely to remain stable or decline in FY20. (c) The capex is expected to be Rs 6.5bn for FY20 and investments of Rs2.5bn (d) While scooter demand has been weak YTD, the company expects scooter demand to grow faster than the overall 2W market over the long run. (e) The company expects volumes to be weak in Q1, strong in Q2&Q3 whilst Q4 could be volatile due to the BSVI transition. (f) While the company expects to improve margins on cost cutting measures, it does not have a specific margin guidance.

Key positives: Strong realization growth, lower employee costs

Key negatives: Lower gross margins

Change in estimates: We cut our estimates for FY20/21 by 10%/16% respectively on weak volume growth/margins

Valuations & view

The two wheeler market will likely continue to be stressed as rising cost pressures (ABS, BSVI) coincide with increasing competitive intensity and a weakness in demand. TVS Motors with its wafer thin margins could be most impacted in such a scenario. Valuations at 21XFY21 remain extremely high. We maintain an Underperformer rating with a target price of Rs 440 (18xFY21E EPS + Rs50 for the BMW joint venture).