MOSL: TVS MOTOR COMPANY (Neutral)-Above estimates-cost-cutting efforts drive sharp margin improvement
TVS MOTOR COMPANY: Above estimates; cost-cutting efforts drive sharp margin improvement
(TVSL IN, Mkt Cap USD2.9b, CMP INR437, TP INR434, 1% Downside, Neutral)
- Better product mix, cost cutting drive profitability: Volumes declined ~19% YoY (-4% QoQ) to 885.8k units in 2QFY20. Realizations increased ~7% YoY (+1.4% QoQ) to INR49.1k (our estimate: INR48.6k), driven by an improved mix and price increases. Revenues were down ~13% YoY to INR43.5b. Gross margin improved ~240bp YoY (+170bp QoQ) to 26.6% (our estimate: 25%), driven by cost-cutting initiatives (120bp QoQ) and mix (40bp QoQ). EBITDA margin improved 20bp YoY (+80bp QoQ) to 8.8% (our estimate: 7.8%). Low tax boosted adj. PAT to ~INR1.8b (our estimate: ~INR1.5b), a decline of ~15% YoY. For 1HFY20, revenue/EBITDA/PAT were down ~4%/2%/6% YoY.
- Earnings call highlights: (a) Heavy rain during Navratras in the central/east region and Maharashtra resulted in much lower retails. However, retails have started picking up since the last few days due to receding rains. Diwali retails are expected to be good for TVSL. (b) Rural economy will likely improve either in 4QFY20 or 1QFY21 as sentiment is turning positive. (c) The strong focus on cost reduction is leading to a continuous improvement in margins. (d) TVSL expects further commodity cost benefit in 2HFY20. (e) Inventory is stable at five weeks. (f) 1HFY20 capex stood at ~INR3.3b and investments in subs at ~INR2.4b. FY20 capex pegged at ~INR6b.
- Valuation and view: We upgrade our EPS estimates by ~21%/7% for FY20/21, led by better margins and lower tax (deferred tax revaluation). Valuations at 30.7x/23.9x FY20/21E EPS already reflect a large part of the earnings drivers, leaving no margin of safety for execution risk and change in competitive intensity. Maintain Neutral with a target price of INR434 (18x Sep'21E EPS + INR44/share for value in NBFC).
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.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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