Buy TVS Motor, Target Price Rs. 345: Goldman Sachs

TVS Motor up 1%; Goldman Sachs retains buy, target Rs 345

TVS Motor Company gained more than 1 percent intraday Thursday. Brokerage house Goldman Sachs reiterated its conviction list-buy with target price of Rs 345, implying 34 percent upside after Tamil Nadu government has withdrawn the input VAT credit reversal on inter-state sales of goods.

On March 25, the Tamil Nadu government announced in its budget the withdrawal of the input VAT credit reversal of 3 percent on inter-state sales of goods, which it had introduced in November 2013. Pending this clarification, TVS Motor has been providing a provision for this credit reversal in its P&L, with an amount of Rs 16 crore in Q3FY15 which impacted EBITDA margins by 60 basis points.

Goldman Sachs believes this state government budget clarification will help remove some of the investor concerns around TVS's EBITDA margins remaining low at 5.9 percent during 9MFY15 (against 5.8 percent in 9MFY14) despite strong volumes (27 percent Y-o-Y) and revenue (32 percent Y-o-Y) growth.

Adjusting for the 3 percent input tax credit would imply effective normalised EBITDA margins for 9MFY15 at 6.5 percent (70 bps expansion Y-o-Y) assuming a provision of Rs 42 crore as clarified by company management during its Q3FY15 earnings call, said the brokerage in its note.

Goldman estimates normalised EBITDA margins to expand by 100 bps in Q1FY16 over Q3FY15 assuming 30-40 bps benefit from its tax efficient plant at Nalagarh in Himachal Pradesh post the hike in excise duty from January 1 2015 and 60 bps expansion from the reversal of the input tax credit.

"We view this announcement as a key event in supporting assumption of TVS Motor’s EBITDA margin expanding to 10.1 percent by FY18E from 6 percent in FY14 driven by strong volume growth with multiple product launches, market share gains and exposure to fast growing scooters; and operating leverage and mix improvement," further said the brokerage. According to the report, key risks are weakening demand, price wars and failure of launches. At 09:52 hours IST, the scrip of TVS Motor Company was quoting at Rs 262, up Rs 2.90, or 1.12 percent on the BSE. Posted by Sunil Shankar Matkar

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