MOSL: TVS MOTOR (Buy)-Higher RM, GST and BS3 compensation impact margins
​TVS Motor: Higher RM, GST and BS3 compensation impact margins
(TVSL IN, Mkt Cap USD4.3b, CMP INR536, TP INR612, 14% Upside, Buy)
- RM cost inflation hurts margins, but recurring margins at 7.1%: Overall volumes grew 12.2% YoY (+19.1% QoQ) to 802.1k units. Realizations rose 5.2% YoY (+0.4% QoQ) to INR42.4k. Net sales grew 18% YoY (+19.5% QoQ) to INR33.9b (est. of INR34.6b). Reported EBITDA margin contracted 80bp YoY (+50bp QoQ) to 6.2% (est. of 7.6%), led by one-time GST compensation of INR165m (50bp impact) and pending discounts of BS3 (INR60m). Also, exhaustion of excise exemption at the Himachal plant had an impact of ~0.5% in 1QFY18. Including state government grant, recurring margins were still lower at 7.1%. PAT grew 6% YoY (+2% QoQ) to INR1.29b (est. of INR1.56b).
- Earnings call highlights: a) TVSL targeting 1-1.5pp market share gain in FY18. b) Maintains double-digit margin target by 4QFY18. c) BMW Alliance supplies at ~2k/month in 1QFY18 (v/s 4.7k units in FY17). d) Taken price hike of INR500-1,000/unit in 1QFY18; plans to take another 1% in 2H to fully pass cost inflation. e) Monsoon has been weak in south India. Normalization of monsoon critical for revival of 2W demand, especially for mopeds. f) Targeting Victor volumes of 20k/month (v/s average of 7.5k in 1QFY18). g) For 2nd year in row, TVS topped JD Power Customer Satisfaction Index.
- Valuation and view: We have cut our EPS estimates for FY18 and FY19 by 12.1% and 8.7%, respectively, as we factor in RM inflation and higher tax rates. The stock trades at 37.2x/22.6x FY18E/FY19E EPS. We maintain Buy with a TP of INR612 (~20x Sep-19E EPS + INR68/share for value in NBFC investment post 20% HoldCo discount).
TVS Motor Company Limited. TVS Motor Company Limited is engaged in the manufacturing of motorcycles, scooters, mopeds, three wheelers, parts and accessories. The Company's motorcycles include Apache Series RTR, Phoenix 125, Victor, StaR City+, Sport and Max4R. Its scooters include Jupiter, Wego, Scooty Zest 110, Scooty Streak and Scooty Pep +. Its mopeds include XL 100, XL Super and XL Super Heavy Duty. Its three wheelers include TVS King. It has approximately four manufacturing plants, approximately three located in India (Hosur, Tamil Nadu; Mysore, Karnataka, and Nalagarh, Himachal Pradesh) and one in Indonesia (Karawang). The Company's TVSM Service(Beta) mobile application features include service schedules, service booking, and news and updates, among others. Its subsidiaries include PT. TVS Motor Company Indonesia, TVS Motor Company (Europe) B.V., TVS Motor (Singapore) Pte. Limited, Sundaram Business Development Consulting (Shanghai) Company Limited and Sundaram Holding USA Inc., among others.
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