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Spark Capital - TVS Motors 1QFY14: Awaiting new products to drive growth; Upgrade to Add.




Spark Capital Advisors(India) Private Limited


14 Aug 2013





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Awaiting new products to drive growth; Upgrade to Add. TVS Motors reported a revenue growth of 11% yoy driven by an increasing share of three wheelers. EBITDA margins improved 20bps qoq. PAT was flat yoy at Rs 520mn. In our view volume momentum will remain muted with growth expectations hinging on the success of a new executive segment motorcycle. We upgrade the stock to Add given the price correction. We continue to remain negative on the prospects for growth in the company’s current product portfolio and believe success of new launches will be key to drive growth. Market share in scooters segment has declined to 12.6% (Apr-Jul ’13) vs. 15.6% last year. The company is expected to launch a new Scooter in September to revive growth in the segment. We understand this product is likely to be positioned above the Scooty range (which in our view has a market niche given the substantially lighter weight) and compete with other established products in the market. An upgrade to Scooty is expected by December 2013. We factor in flat volumes for Scooters in FY14 and a 9% growth in FY15. In the motorcycle segment, the Phoenix which was expected to re-establish TVS’s position in the executive segment has tapered down to volumes of ~5,300 units in June. The company is working on both a new motorcycle in the executive segment (which may be branded a Victor) and an upgrade to the existing Star. One of these is expected to be launched by March 2013. We factor in a volume growth of 3% and 9% respectively for FY14 and FY15. Moped volumes were weak during the quarter due to sluggish demand (~75% from South India) and we expect volumes to remain flat in FY14 and an 8% growth in FY15. Management indicated that the company has completed test marketing for the diesel three wheelers and expects to commence sales shortly. The opening of new permits are also expected aid sales and we expect a strong 39% growth in FY14 and a 10% growth in FY15. Estimates and Valuation: We expect revenue CAGR of 11% from FY13-15 and an EBITDA CAGR of 14% over the same period. We expect an earnings (adjusted for Indonesia write-down) CAGR of 17% due to lower interest expense. We expect EBITDA margins to expand 30bps driven primarily by gross margin expansion and an increase in the proportion of three wheelers. However, in our view continued marketing spends for new launches will keep margins under pressure. We value the standalone business at 6x FY15E EPS of Rs 6.0 (Indonesian business at zero) at a TP of Rs 36 and upgrade the stock to Add given the price correction. Other Takeaways: (1) Capex of Rs 1.75bn in FY14 towards three wheelers and new products

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