TVS Srichakra (TVSSL) reported a good set of numbers for 3QFY2016. The
top-line grew by 4.0% yoy to `509cr. The EBITDA margin expanded by 313bp yoy
to 15.7%, mainly due to a 689bp yoy decline in raw material cost as a
percentage of sales as domestic rubber prices declined by ~10.0% on a yoy basis
and ~8.0% on a qoq basis. As a result, the EBITDA grew by 29.3% yoy to `81cr.
The company has reduced its debt in the current fiscal. Lower debt level (~`37cr
as on 1HFY2016 excluding current maturities) has resulted in interest expense
declining by 57.7% yoy to `3cr for 3QFY2016. Owing to a better operational
performance and lower interest outgo, the net profit nearly doubled to `48cr from
`26cr in the same quarter of the previous year.
Leadership position in 2W OEM segment and growing share in aftermarket
segment: TVSSL is the largest 2W/3W tyre manufacturer with a leadership
position in the 2W OEM segment. It is currently the third largest player in the
aftermarket segment. Although motorcycle sales have declined in recent times
owing to poor rural economy, scooter sales remain strong thus resulting in lower
decline for overall 2W segment. TVSSL’s key clients who have a higher share in
the scooter segment, namely, Honda Motorcycle and Scooter India (HMSI) and
TVS Motor are faring better than completion, thus aiding growth for the company.
Going forward, the outlook on the overall 2W industry remains positive and given
the capacity addition by HMSI, we expect TVSSL to maintain its performance on
the top-line front. As for the aftermarket segment, the company is continuously
increasing its presence in the space which has enabled it in reporting a top-line
growth and in improving its profitability.
Outlook and valuation: We expect TVSSL’s top-line to grow at a CAGR of 9.0%
over FY2015-17E to `2,252cr. We expect the operating margin to be at 15.3% in
FY2017E on the back of lower rubber prices and improvement in market share in
the aftermarket segment. Consequently, the net profit is expected to be at `205cr in
FY2017E. At the current market price, the stock is trading at a PE of 9.4x its FY2017E
earnings. We have a Buy rating on the stock with a revised target price of `3,217
based on a target PE of 12.0x its FY2017E earnings.

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