• Net sales surge 23.3% yoy owing to 10.7% yoy growth in volumes and 11.4% jump in realizations, Sales were in line with our expectations

• OPM at 6.4% was better than our expectations of 6.2% and was at highest level since Q3 FY12, OPM was higher by 107bps yoy and 43bps qoq

• APAT was at Rs822mn which was better than estimates and was higher by 41.4% yoy

• Growth in volumes was on account of sharp jump of 38% yoy in scooters and 54.7% yoy jump in three-wheeler volumes 

• We upgrade our rating on the stock to BUY with a revised price target of Rs105 as we believe penetration of scooters will continue to rise where TVS has a firm footing and also it has been gaining market share in the lucrative 3-W export market

Net sales growth of 23.3% yoy, in line expectations

TVS Motors reported revenues of Rs21.6bn for Q4 FY14 in line with our expectations. It represented a growth of 23.3% yoy led by 10.7% jump in volumes and 11.4% increase in realizations. Growth in volumes was led by 38% yoy jump in scooters and 54.7% jump in three-wheelers. Motorcycles too saw a decent growth of 4.8%. In terms of geographic breakup while domestic volumes were higher by 6.8% yoy, export volumes jumped by 32.8% yoy. Realizations were higher on the back of 1) increase in scooters share in total volumes from 19.2% in Q4 FY13 to 24.1% in Q4 FY14, 2) increase in three-wheeler share in total volumes from 2.8% in Q4 FY13 to 3.9% in Q4 FY14 and 3) increase in exports share in total volumes from 13% in Q4 FY13 to 15.6% in Q4 FY14 along with steep rupee depreciation.

OPM better than expectations driven by operating leverage and cost controls

During Q4 FY14, OPM for TVS Motors came in 6.4% v/s our expectations of 6.2%. While operating profit surged 47.9% yoy it was higher by 12.4% qoq. OPM increased 107bps yoy while it rose by 43bps qoq. Better than expected performance was owing to benefits of operating leverage, favorable product mix and favorable geographic mix. Total material costs (RM + purchases) were up by 60bps yoy as a percentage of sales. Personnel costs were also higher by 35bps on a yoy basis. Overheads were down 202bps yoy and 71bps qoq reflecting substantial benefits of operating leverage and cost cutting initiatives taken by the company.

Adjusted PAT at Rs822mn growth of 41.4% yoy

The company reported a PAT of Rs822bn which was ahead of our expectations of Rs763mn. Strong operating profit was the prime reason. While other income fell 31.3% yoy, depreciation and interest costs rose 4% and 50% yoy respectively. In spite of this PBT was at Rs1bn a growth of 59.8%. With tax rate increasing by 10ppts net profit growth was restricted to 41.4% yoy. The company provided for Rs300mn with regards to diminution in value of investments in Europe as the Netherlands subsidiary was wound down. Post this extraordinary item profit was at Rs521mn.

We upgrade our rating from Market Performer to BUY for TVS Motors as we believe the company is well poised to serve the rising demand for scooters in the domestic market. Furthermore, we expect improvement in motorcycle market share with the launch of the new Star City in the near future and new Victor in H2 FY15. Launch of BMW bikes in H2 FY15 will provide additional triggers. Gaining strength in three-wheeler export market will also put the company in good stead. With improvement in volumes the margins should improve further for the company owing to benefits of operating leverage. Performance of Indonesia subsidiary is also expected to improve in the near term with the company focusing on increasing exports from the country. For the standalone company, we expect 12.6% revenue CAGR and 19.1% PAT CAGR during FY14-16E.