TVS Motor (TVSL) reported a weak set of operating results for 4QFY2012, led by a decline in its net average realization due to adverse product mix (higher sales of mopeds). The company’s bottom line came in slightly better than our expectations, as it benefitted from higher other income (at Rs.8cr against nil in 4QFY2011) and lower tax rate (8% as against 26.7% in 4QFY2011). Performance of the Indonesian subsidiary continues to remain under pressure; and during 4QFY2012, its volumes declined by 16.6% yoy. We marginally tweak our volume and earnings estimates downwards for FY2013/14 to factor in the slowdown in the two-wheeler sector and rising competition. Post the recent correction in the stock price (~25% in the past three months), TVSL is trading at attractive valuations and, therefore, we maintain our Buy rating on the stock.

Weak operating performance: TVSL reported a 0.5% yoy (7.6% qoq) decline in its top line to Rs.1,627cr primarily on account of a 2% yoy (7.5% qoq) decline (down 11.5% qoq) in its net average realization led by adverse product mix. The company’s EBITDA margin declined by 47bp sequentially to 6.1% due to increased raw-material costs and higher employee expenses. Net profit, however, was slightly better than our expectations, benefiting from higher other income and lower tax rate. On the consolidated front, TVSL reported PAT of Rs.132cr (53% of standalone PAT), largely on account of huge loss at the Indonesian subsidiary (~Rs.87cr loss at PBT level).

Outlook and valuation: We revise downwards our revenue and earnings estimates for TVSL to account for rising competition in the two-wheeler sector amidst subdued demand environment. Further, due to reduced earnings visibility and continuous losses at its Indonesian subsidiary, we lower our target multiple to 8x from 10x earlier. Nonetheless, at Rs.33, TVSL is trading at attractive valuations of 6x FY2014E earnings. We maintain our Buy recommendation on the stock with a target price of Rs.43.

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