TVS Motor Company's Q3FY18 results (Underperformer) - Operating performance in-line; Valuations high

Q3FY18 results

• PAT marginally below est; Operating performance broadly in-line: TVS Motor Q3FY18 PAT at Rs1.5bn (+16% yoy) was below estimates (consensus: Rs1.7bn) on account of lower other income/higher tax rate. Operating performance though was on expected lines with EBITDA at Rs 2.8bn (+31% yoy)
• Revenues surprise on higher realizations: Revenues at Rs36.8bn grew by ~24% yoy (-9% qoq) led by a 16% yoy volume growth with realizations growing by 4% qoq on the back of higher share of exports and 3Ws. EBITDA margins at 7.8% (IDFC est 7.4%, consensus : 8%) declined 80 bps qoq(+50bps yoy). Higher than expected negative operating leverage and elevated marketing (on the back of new launches/logistic costs (higher export volumes) offset improvements in gross margins (up 70bp qoq).
• Concall highlights: (a) Management expects RM costs to rise on the back of hardening commodity costs. b) It has taken a price hike in Nov-17 to partially offset increasing RM costs. c) The management continued to maintain guidance for a double digit exit EBITDA margin in 4QFY18 and FY19. It expects improving product mix coupled with cost control measures and operating leverage benefits to drive double digit margin target. e) TVS will launch a motorcycle and scooter in the coming 2 months (launch of 1 product next week). f) Indonesian subsidiary is expected to break even for 4QFY18 and FY19. g) The management expects momentum in 2Ws to continue in FY19, with rural market gradually picking up due to better monsoons in 2HFY18. (h) Guided for a capex of Rs5bn in FY19.

Key positives: Higher than expected realisations

Key negatives: Lower other income

Change in estimates: We cut our estimates for FY18 by 3% on account of lower other income. Maintain FY19/20 estimates

Valuations & view

While we recognise that TVS Motors has been able to gain marketshare in the premium motorcycle space with the success of the Apache, however, we believe that its pricing power in the other segments is limited. While the management sounds confident of double digit margins in Q4FY18, we believe that there could be challenges given  A&P spends should rise with new product launches at a time when  commodity cycle is strengthening. Further, we believe that the valuations (~32xFY19E EPS) seem to build in a high degree of optimism on future market share gains (YTD TVS 2W market share is flat)/earnings growth. Maintain Underperformer with a target price of Rs575 (21XFY19E EPS and Rs50 for the BMW JV).