Dolat Capital is bearish on TVS Motors Company has recommended sell rating on the stock with a target price of Rs 355 in its research report dated July 08, 2020.
Dolat Capital's research report on TVS Motors Company
TVS Motors (TVSL) Management has acknowledged the near term pain in the domestic and export business owing to the impact of COVID-19 pandemic but remains hopeful of recovery in the 2W segment led by increased preference for personal mobility and improvement in rural sentiment. Management expects the economic impact of COVID-19 to be more pronounced in the markets of LATAM, whereas the African countries seem to be less impacted, and the core demand may return sooner. In 2W segment, the company has lost market share by ~100 bps to 13.8% led by strong competition in entry level by incumbents in motorcycles and weak demand in mopeds. However, we believe TVSL’s extensive product portfolio, strong dealer network in rural areas to help the company to capitalize the rural recovery. The company ROCE (post-tax) declined further to 16% in FY20 (from 22.7% in FY19) as volume and margin weakened led by multiple factors (increase in 2W price led by BS-VI transition insurance cost and mandatory safety regulations). Investment in subsidiaries and associate increased by Rs 13.83bn in FY20 led by further investment in its financing arm TVS credit services and TVS Motor (Singapore) Pte. Ltd. Net Profit from subsidiaries and associate reduced slightly to Rs 338 mn vs Rs. 370mn in FY19. Standalone net Debt increased to Rs 16.95bn (vs Rs 13.6bn in FY19) with an increase in net Debt/Equity to 0.5x in FY20 from 0.4x in FY19. However, company has managed it working capital cycle efficiently and Cash conversion cycle improved -13 days in FY20 against -7 days in FY19. Standalone operating cash flow increased by 27% YoY to Rs. 13.96bn in FY20 and free cash flow has improved to Rs. 6.85bn in FY20 from Rs. 3.69bn in FY19. Recent acquisition of Norton Motorcycles (all-cash transaction for a consideration of GBP 16mn) will help TVS to widen its product line-up and launch more premium products in the future. Despite a positive outlook for 2W, we continue to remain cautious on TVSL given (1) its relatively weaker margin structure (2) contracting market share in the bike segment (3) higher marketing spend with new model launches and competition.
Outlook
At CMP, the stock is trading at 26x on FY22E earnings, which appears expensive compared to its peers. We roll forward our valuation from FY22E to FY23E, and raise our target price to Rs 355 (based on 18x of FY23E EPS+ value of TVS Credit Services at Rs.17/share).
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