We retain ‘sell’ rating on TVS Motor and earnings estimates but marginally increase our SOTP-based target price to R248 (earlier R245 per share), implying 14x October 2017 earnings for the core standalone business. The stock currently trades at 17.7x FY17e net earnings. Significant benefits from BMW tie-up (not factored in our estimates).
TVS Motor’s Q2FY16 results were ahead of our expectations, driven by stronger-than-expected Ebitda margin for the quarter. Revenues (including other operating income) increased 7% y-o-y, 10% q-o-q and were 3% ahead of our estimates (due to higher-than-expected realisation per vehicle). Raw material costs as a percentage of sales declined by 71 bps q-o-q and were 48 bps lower than our expectations. As a result, gross profit and gross margin were 5% and 48 bps higher than our expectations.
Two-wheeler demand remains subdued mainly in rural areas due to the weaker than expected monsoon. This has particularly impacted the demand for mopeds and motorcycles. Any expectation of demand improvement going forward is dependent on how the north-east monsoon pans out. The company continues to witness healthy demand for its scooters (primarily Jupiter) including during the recent Dussehra festival. It continues to target market share expansion of 15% in domestic two-wheelers (its market share in H1FY16 was 13.1%) on the back of new launches in motorcycles and sustained strong demand for its scooter Jupiter.
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