TVS Motors (Q1 FY15)

• Net sales surge 31% yoy owing to 18.1% yoy growth in volumes and 10.9% jump in realizations, Sales were in line with our expectations

• OPM at 5.7% was way below our and street expectations, OPM was higher by 10bps yoy but fell by 74bps qoq

• APAT was at Rs723mn was lower than estimates

• Growth in volumes was on account of sharp jump of 53% yoy in scooters and 44% yoy jump in three-wheeler volumes 

• We downgrade our rating on the stock to Accumulate with a revised price target of Rs173 as valuations seem expensive at current levels

Net sales growth of 31% yoy, in line expectations

TVS Motors reported revenues of Rs23bn for Q1 FY15 in line with our expectations. It represented a growth of 31% yoy led by 18.1% jump in volumes and 10.9% yoy increase in realizations. Growth in volumes was led by 53% yoy jump in scooters and 44% jump in three-wheelers. Motorcycles too saw a strong growth of 20.9%, while mopeds saw a muted growth of 3.5%. In terms of geographic breakup while domestic volumes were higher by 19.3% yoy, export volumes jumped by 38.2% yoy. Realizations were higher on the back of 1) increase in scooters share in total volumes from 21% in Q1 FY14 to 26% in Q1 FY15, 2) increase in three-wheeler share in total volumes from 3.5% in Q1 FY14 to 4.1% in Q1 FY15 and 3) increase in exports share in total volumes from 14.3% in Q1 FY14 to 16.2% in Q1 FY15 along with steep rupee depreciation.

OPM substantially below our and street expectations driven high raw material costs

During Q1 FY15, OPM for TVS Motors came in 5.7% v/s our expectations of 6.6%. While operating profit surged 33.3% yoy it was lower by 5.4% qoq. OPM was higher 10bps yoy but declined 74bps qoq. Below expected performance was owing to fall in gross margins by 161bps yoy and 109bps qoq. Benefits of operating leverage were visible as personnel costs were lower by 34bps yoy and overheads witnessed a fall of 137bps qoq. Sequentially as the company implemented wage hikes staff costs as a percentage of sales were higher by 42bps.

PAT at Rs723mn was below estimates

The company reported a PAT of Rs723mn which was lower than our expectations of Rs856mn. Weak operating profit was the prime reason. While other income rose 3.3% yoy and interest costs reduced by 8.9% yoy, depreciation was higher by 6.8% yoy. In spite of this PBT growth was Rs1bn a growth of 45.6% yoy but flat sequentially. With tax rate increasing by 3ppts yoy and 7.5ppts qoq net profit growth was restricted to 39.4% yoy.

Downgrade to Accumulate with a revised price target of Rs173

We Downgrade our rating from BUY to Accumulate for TVS Motors on the back of expensive valuations as we trim our earning estimates for FY15 and FY16 owing to weaker than expected performance in Q1 FY15. Volume growth will continue to be strong as the company is well poised to serve the rising demand for scooters in the domestic market. Its profitability we are more concerned about given that Q1 FY15 saw sharp volume growth but commensurate benefits were not reflected in operating margins. We cut our target price to Rs173.