Sell TVS Motor Company Ltd.(TATA Securities Ltd.)

CM Price: Rs 49.90                                                                      Target Price: Rs 33

Margins below expectation; maintain Sell

TVS Motor’s (TVS) 1QFY10 standalone results at operating levels were below our expectations. The EBITDA margins for 1QFY10 stood at 5% compared to our estimate of 6.1%.

Key highlights (standalone)

• Revenues registered a YoY growth of 7.1% at Rs 9.7bn driven by volume growth of 5% and realisation growth of 2%.

• EBITDA margins stood at 5% (up 161bps YoY and up 162bps QoQ). EBITDA margins came lower than our expectations due to lower thanexpected RMC benefit.

• Reported PAT stood at Rs 181mn (up 158% YoY and up 38% QoQ). Effective tax rate for 1QFY10 stood at 10% compared to 30% for 1QFY09. The management indicated that for FY10E it will remain under MAT and has guided for effective tax rate of ~18% for FY10E.

• Revision in earnings: We have revised our FY10E standalone earnings estimates to factor in:1.) Lower-than-expected benefit from raw material prices reduction.2.) Lower tax rate at 18% compared to our earlier estimate of 25%3.) Re-alignment of depreciation amount to the current quarterly run rate.

Thus, we are revising our standalone EPS estimates upwards by 10% for FY10E to Rs 3.7 from our earlier estimate of Rs 3.4.

Valuations

At CMP of Rs 59, the stock currently trades at 36.7x FY10E consolidated EPS of Rs 1.6, and 20.0x FY11E consolidated EPS of Rs 3.0. We reiterate our Sell rating on the stock with a target price of Rs 33 (based on 11x FY11E consolidated EPS). We also believe that the Indonesian venture will continue to be a drag on TVS’ profitability for the next couple of years.

Revision in earnings: We have revised our FY10E earnings estimates to factor in: 1) Lower-than-expected benefit from raw material reduction, 2) Lower tax rate at 18% (as guided by the management) compared to our earlier estimate of 25%, and 3) Realignment of depreciation amount to the current run rate. Thus, we are revising our EPS estimates upwards by 10% for FY10E to Rs 3.7 from our earlier estimate of Rs 3.4 for FY10E.

Other highlights

Production from Himachal Pradesh: Currently, TVS is producing 15,000 units/month from Himachal Pradesh.

New product launches: TVS plans to launch a bigger scooter and a new model in the Executive segment in 2HFY10.

Capex: TVS has guided for capex of Rs 500mn each for FY10E and FY11E.

Report card

Attribute	Value	Date
PE ratio	37.48	11/08/09
EPS (Rs)	1.31	Mar, 09
Sales (Rs crore)	988.70	Jun, 09
Face Value (Rs)	1
Net profit margin (%)	0.82	Mar, 09
Last dividend (%)	70	11/06/09
Return on average equity	4.21	Mar, 09