MOSL: TVS MOTOR (Downgrade to Neutral)-In-line results-decadal-high EBITDA margins-Valuations rich

​TVS Motor: In-line results; decadal-high EBITDA margins; Valuations rich

(TVSL IN, Mkt Cap USD5.2b, CMP INR709, TP INR764, 8% Upside, Downgrade to Neutral)

• In-line EBITDA margins, as benefit of lower RM cost of offset by higher other expenses: Volumes grew 16.3% YoY (+18.3% QoQ) to 849.4k units. Realizations increased 1.7% YoY (+0.8% QoQ to INR42.7k). Net sales grew 18.3% YoY (+19.2% QoQ) to INR40.5b (in-line). Gross margins was better than estimated at 36.6% (+120bp QoQ), due to cost cutting initiatives. However, EBITDA margin was in-line at 8.6% (+60bp YoY, +240bp QoQ), as other expenses were higher than estimated. EBITDA grew 26.6% YoY, but higher tax rate restricted PAT growth to 20% YoY (+64.6% QoQ) to INR2.1b (est. of INR2.2b).
• Earnings call highlights: a) Management maintains double-digit margin target by 4QFY18. b) Taken price hike of INR250/unit in Sep-17; further price increase expected in future to pass cost inflation. c) New launches in motorcycle and scooter segments in 2HFY18 (incl. electric scooter). d) Growth momentum in exports to continue. e) Post acquiring 100% stake in TVS Motor Services, it has 85% stake in TVS Credit Services (NBFC arm). f) Proposed interim dividend of ~INR2/share (v/s FY17 dividend of INR2.5/sh).
• Valuation view: We upgrade EPS for FY19/20E by 5%/3%, driven by upgrade in volumes to factor in visibility on new product launches. Our EPS estimates are highest on the street and higher by ~28/~43% than the Bloomberg consensus. However, valuations at 27x/20.3x FY19E/FY20E EPS are already reflecting large part of earnings drivers, leaving no margin of safety. Hence, we downgrade stock to Neutral from Buy. Our TP is INR764 (~20x Mar-20E EPS + INR67/sh for stake in NBFC arm post 20% HoldCo discount).