TVS Srichakra (TVSSl) reported a good set of numbers for 2QFY2016. The
top-line grew by 6.5% yoy to Rs522cr. The EBITDA margin expanded by 539bp yoy
to 15.7%, mainly due to a 997bp yoy decline in raw material cost (owing to
rubber prices declining by ~6% qoq). The company has reduced the debt
significantly (from Rs176cr to Rs37cr) in 1HFY2016 and as a result its interest
expense has declined by 57.0% yoy to Rs4cr. Owing to better operational
performance and lower interest outgo, the net profit nearly doubled to Rs49cr from
Rs26cr in the same quarter of the previous year.
Steady two-wheeler (2W) sales and capacity expansion by top clients to
aid top-line growth: TVSSL’s key client Honda Motorcycle & Scooter India
(HMSI) continues to be the steady performer in comparison to its peers. HMSI has
set out aggressive plans to scale up its business in India with a view to become the
largest subsidiary of its parent. HMSI has mentioned that capacity constraints had
resulted in the company not being able to grow at a faster pace and has lined up
aggressive capex plans for the future. We expect capacity addition by major
clients to result in good revenue visibility for TVSSL as it is a market leader in the
2W OEM segment. Additionally, the company (TVSSL) wants to garner a larger
share in the high margin replacement market segment where it holds the number
three position. The strong growth experienced in 2W sales in the past year will
result in better performance for the aftermarket segment of the company.
Outlook and valuation: We expect TVSSL’s top-line to grow at a CAGR of 11.0%
over FY2015-17E to Rs2,338cr. We expect the operating margin to be at 15.0% 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 Rs207cr in
FY2017E. At the current market price, the stock is trading at a PE of 10.4x its FY2017E
earnings. We have a Buy rating on the stock with a revised target price of Rs3,240
based on a target PE of 12.0x for FY2017E earnings.

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