TVS Motors price cut to Rs 53

Following 15% profit miss in the October-December quarter, we cut TVS Motors' standalone EPS forecasts by 23%-28% over FY13-14E, driven by (1) revision to volumes due to weak franchise in bikes and structural downturn in three wheelers, and (2) lowered margins due to worsening sales mix and rising promotional spends. Consequently, lower price objective (PO) to R53 and downgrade rating to underperform from neutral. At our price objective, stock would trade at 11.2x consolidated P/E FY13E, slightly ahead of historic averages.

TVS Motors' Q3 net profit at R56.5 crore, up 1.4% was well below our and the Street estimates due to margins restricted at 6.5%compared to our estimate of over 7%.

As a result, Ebitda grew 14.6% to R115 crore (estimated at R130 crore), despite in line sales. This has been the worst quarter this year, dragging down YTD profit growth to 27%.

TVS Motors' YTD aggregate volume growth of 10% is below industry average in key segments (bikes, scooters, three wheelers). We believe that sales will remain subdued as (1) re-launch prospects of 110cc Victor bike in the commuter segment will be restricted by weak franchise, (2) scooters will see slew of competing products e.g. Hero Motocorp, Yamaha, and (3) three wheelers are set for structural downturn. Post revision, we expect volumes to register 6% CAGR over next 2 years, from earlier 9% CAGR.

We expect margins to remain subdued over forecast period, driven by (1) lower volumes, (2) adverse sales mix, due to slippage in three wheelers, and (3) sustained rise in marketing expenses to support new product initiatives. We, therefore, cut margins by ~80bps/year to 6.4%, both in FY13-14E.

Our price objective of R 53 is based on sum of stand-alone business valued at 10x FY13E P/E (earlier 10.5x), which is 30% discount to imputed multiple of peers, on lower margins and return ratios, and nil value for the Indonesian subsidiary, which is currently operating on losses. At our PO, the stock would trade at 11.2x consolidated FY13E P/E, still slightly ahead of historic averages.