TVS riding strong on foray into 3-wheelers

Our buy rating on TVS is premised on two key drivers: 1) expanding addressable market size due to entry into three-wheeler market, launch a new scooter and increasing revenue share of higher margin three-wheeler should boost profitability.

Domestic demand for two-wheeler is expected to remain reasonable and we forecast a CGR(FY11-13E) of 12.5%. We believe TVS's rising market share in the scooter and three-wheeler segments should support a revenue CAGR (FY11-13E) of 17%. We are initiating with buy and a target price of Rs 100.

TVS has managed to garner a market share of 5% in the domestic three-wheeler (3W) market within two years of launch versus a 15% share in the two-wheeler segment where it has been operating for more than three decades.

We expect TVS to continue to increase it's footprint in the higher-margin 3W segment due to lower competitive intensity.

The firm recently launched a two-wheeler in the high-end segment. TVS's entry into new segments has expanded its addressable market and should enable it to grow faster than its peers.

Between FY04-09, TVS's margins deteriorated significantly due to a shift in revenues from motorcycles to lower priced scooters. Over FY10-13E, we expect revenues to move in favour of higher-margin 3Ws (8% in FY13E versus in FY10). This would result in Ebitda margins expanding from 4.7%in Fy10 to 6.3%in FY13E versus margin of 9.7% in FY03.

Our FY12E EPS is in line with concensus, whereas FY13E EPS and target price are above concensus. We value TVS at Rs 100 per share based on discounted cash flow (DCF).

Our target price implies a P/E multiple of 17xFY12E EPS. Risks that our projections face include a slower-than-expected ramp-up of three-wheeler volumes. More importantly, TVS has a loss making Indonesian subsidiary, which the management says will break even in FY12E.

A delay in the same could pose a risk to our rating.