TVS Srichakra (TVSSL) reported a good set of numbers for 4QFY2016. Its
top-line grew by 13.0% yoy to Rs525cr. On the operating front, the raw material
cost came down significantly, ie by 805bp yoy to 48.1% of sales. Still, the EBITDA
margin expanded by a marginal 68bp yoy to 14.5% as raw material cost savings
were offset by higher employee and other expenses. The depreciation expense
declined by 36.1% on a yoy basis owing to higher depreciation in 4QFY2015
(adjustments in accounting policy in the previous year). The other income increased to
Rs18cr (against Rs3cr in 4QFY2015) which we believe was owing to profits from sale of its
subsidiary. Adjusting for the higher other income, the profit grew by 28.2% yoy to Rs44cr.
Leadership position in 2W OEM segment and growing share in aftermarket
segment: TVSSL has been able to maintain its leadership position in the 2W OEM
segment and grow further in the aftermarket space which has enabled it to post
good growth in the past year despite of fall in realizations. Going forward, we
believe the company will be able to maintain growth on the top-line front given
the encouraging outlook for the 2W industry. The company continues to invest in
brand building and promotions to compete better in the aftermarket space.
Outlook and valuation: TVVSL has been outperforming the tyre industry over the
past two years which has resulted in it posting good growth on the top-line front
despite of declining realizations. While rubber prices have surged recently, we
believe that TVVSL will be able to pass on the increase in RM cost in the OEM
segment. Additionally, the outlook on the 2W industry is favorable which augurs
well for the company as it is predominantly a 2W tyre manufacturer. We expect
the company to post revenue CAGR of 12.6% over FY2016-18E to Rs2,614cr. With
higher RM prices, we expect margins to contract by 182bp over FY2016-18E to
13.8%. The company has increased its capacity and plans to invest in further
capacity expansion which will increase the depreciation expense going forward.

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