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MOSL: TVS MOTOR COMPANY (Neutral)-In-line-guides for decline in FY20 industry volumes; EV launch in FY20

TVS MOTOR COMPANY: In-line; guides for decline in FY20 industry volumes; EV launch in FY20

(TVSL IN, Mkt Cap USD2.6b, CMP INR380, TP INR425, 12% Upside, Neutral)

 

• Margins beat offset by higher depreciation: Volume declined 0.5% YoY (+1.7% QoQ) in 1QFY20. Realizations grew ~8% YoY (flat QoQ) to INR48.4k (in-line), driven by mix and price increases. Revenue increased ~7% YoY to INR44.7b (in-line). Gross margin improved 80bp YoY (+150bp QoQ) to 24.9%, driven by lower commodity cost and cost-cutting initiatives. EBITDA grew ~10% YoY to INR3.6b (our estimate: ~INR3.2b), implying an EBITDA margin of 8% (our estimate: 7.2%; +20bp YoY, +90bp QoQ). However, higher depreciation, interest and tax led to in-line adj. PAT of INR1.4b (-5% YoY).
• Earnings call highlights: (a) TVSL expects industry volumes to decline in FY20 (v/s earlier guidance of marginal growth). Strong product portfolio and exports are likely to contribute to the company's growth. (b) Ind-AS 116 (lease accounting) impact negligible at ~INR18m - positive at EBITDA and negative at PBT level. (c) It expects further commodity cost benefit in 2QFY20. This, coupled with a high focus on cost reduction, will reduce material cost. (d) It maintained timeline for EV launch in FY20. (e) Inventory stable at five weeks. (f) TVSL invested ~INR690m in non-NBFC subsidiaries.
• Valuation and view: Domestic 2W industry has been facing headwinds from cost inflation, rural stress, NBFC issues and intensifying competition. While there could be a near-term recovery led by pre-buying ahead of BS6 transition, volumes are likely to remain subdued in 1HCY20 due to 8-12% cost inflation for BS6 compliance, in our view. Further, electrification of 2Ws could threaten TVSL's competitive positioning in scooters, as we expect it to be cannibalized by e-scooters. Valuations at 23x/18.8x FY20/21E EPS are already reflecting large part of the earnings drivers, leaving no margin of safety for execution risk and change in competitive intensity. Maintain Neutral with TP of INR425 (18x Jun-21 EPS + INR42/share for value in NBFC).