Analyst Corner: Volume growth a challenge for TVS, sell with TP of Rs 439

Published: January 25, 2019 12:15 AM

New products continue to give confidence regarding TVS’ volume growth. We, however, expect slower volume growth due to the well- penetrated scooter market in the top 15 cities coupled with higher vehicle prices on the implementation of BS VI emission.

Analyst Corner: Volume growth a challenge for TVS, sell with TP of Rs 439

By Anandrathi

New products continue to give confidence regarding TVS’ volume growth. We, however, expect slower volume growth due to the well- penetrated scooter market in the top 15 cities coupled with higher vehicle prices on the implementation of BS VI emission. We maintain a sell at a TP of Rs 438. While the new models are well accepted in the market, we however, believe that volume growth would be lower relatively on account of: 1) Well penetrated scooter market in the top-15 cities, 2) The impact of BS VI on pricing, though we do not expect a complete pass-through. Thus, we expect motorcycles/scooters to grow 10%/12% in FY20, and 7%/9% in FY21.

We believe that the company cannot pass on the entire cost relating to emission and, thus, expect profitability to be affected. The scope of margin expansion lies in the company’s efforts to reduce the import content (not 15%, relative to peers at 2-5%). However, this in our view would take beyond FY20 and any margin expansion would be undone by the partial pass-through of emission-related costs.

We expect revenue to clock a 10% CAGR over FY19-21 to `226bn, with an FY21e margin of 7.7%. Accordingly, we expect earnings to register a 13% CAGR over FY19-21 to `9bn, leading to an EPS of `19. We maintain a sell, at a lower target price of `438 (23x FY20e). Risk: More-than-expected margin expansion.

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