>TVS MOTOR (EMKAY)

Mixed bag, maintain REDUCE rating

The performance of TVS Motor (TVS) in 4QFY09 was mixed bag. Net sales at Rs 9.1 bn (YoY growth of 21.3%), was ahead of expectation of Rs 8.5 bn. EBITDA at Rs 482 mn (YoY change of 103%) was below our expectation of Rs 568 mn. However, a 279% YoY increase in interest expenses to Rs 139 mn and 63% decline in other income to Rs 11 mn, resulted in company reporting a adjusted net profit of Rs 164 mn, which was below expectation of Rs 233 mn. We have derived 4QFY09 performance by subtracting the 9MFY09 performance from FY09 performance.

At consolidated level, TVS reported an EBIDTA of Rs 1.2 bn vs standalone EBIDTA of Rs 1.8 bn for FY09, indicating the investment phase of the Indonesian venture. Also, higher depreciation and interest expense resulted in TVS reporting a recurring loss of Rs 548 mn.

At CMP of 45, the stock trades at PER of 14.9x and 11.4x and EV/EBIDTA of 8.3x and 6.9x our FY10 and FY11 estimates respectively. We maintain our REDUCE rating on the stock.

Net sales ahead of expectations
TVS motor reported YoY 5.5% growth in volumes to 322,578 units in 4QFY09. Exports grew by YoY 21.2% to 46,923 units, where domestic sales declined by YoY 20.3% to 275,607 units. Net sales increased by YOY 21.3% to Rs 9.1 bn against our expectation of 8.5 bn.

Higher raw material cost puts pressure on EBIDTA
TVS motor reported adj EBITDA of Rs 482 mn was below our expectation of Rs 568 mn primarily on account of, higher than expected raw material cost. Despite a strong increase in average realizations, RM to sales ratio increased by 20 bps YoY to 74.4%.

Increase in interest and depreciation charge restricts profits
Interest expense grew by 279% YoY to Rs 139 mn. Similarly, other income registered a 62% YoY decline to Rs 11 mn. As result TVS reported net profits of Rs 164 mn, which was below expectation.

Consolidated performance reflects the pressure of Indonesian venture
FY09 consolidated EBIDTA is at Rs 1.2 bn vs stand alone EBIDTA of Rs 1.8 bn, reflects the investment phase at the Indonesian venture. Also higher depreciation change of Rs 1.3 bn (against standalone charge of Rs 1 bn) and interest expenses of Rs 745 mn (against standalone charge of Rs 550 mn), resulted in TVs reporting a recurring net loss of Rs 548 mn (against standalone net profit of Rs 329 mn).

Valuation and View
We are not concerned about the domestic business as we expect company to show strong profit growth in FY10. However, there is clear pressure on the Indonesian business, where company has invested USD 50 mn in creating physical assets and expects a recurring brand expenditure of around 5 mn. At CMP of 45, the stock trades at PER of 14.9x and 11.4x and EV/EBIDTA of 8.3x and 6.9x our FY10 and FY11 estimates respectively. Considering the pressure on the profitability and return ratios at consolidated level, we maintain our REDUCE rating on the stock.

To see full report: TVS MOTOR