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TVS Motors + Ashok Leyland – Lackluster

January 28, 2008

TVS Motors:Q3 results were predictably very poor, with net profit declining 49% YoY, and EBITDA declining 49% YoY and 24% QoQ. We are again revising down forecasts. With no change in fundamentals, we maintain our Sell rating on the stock. Q3 margins contracted to another low of 1.7% (down 145bps QoQ), compared to our estimate of 2.6%. We see continuation of muted trends, given the squeeze from competition, and delays in upcoming launches which could improve sales mix i.e. 125cc bike Flame.

Valuations still look expensive for TVS Motors. We had put a SELL recommendation 6 months ago and now we don’t recommend investors to take any fresh positions.

Ashok Leyland:
Q3 net profit at Rs 1.2bn (13% YoY) beat our estimates, but only due to gains from sale of shares in group concern. EBITDA declined 10% to Rs 1.7bn (in line with expectations), despite higher than estimated sales. Over the medium term, expect profits to be restricted by significantly higher fixed costs.

Margins at 9.2% were lower than estimates of 10%, illustrating the tough business environment. With competition intensifying, margins will remain muted. EPS estimates for FY08 and FY09 are largely unaltered, based on view that company’s vehicle volumes will be flat this year, and rise 13% in FY09.

Ashok Leyland is expected to report an EPS of Rs 3.27 and Rs 3.61 for FY08 and FY09 respectively. Avoid this stock for the time being. Any upside maybe considered as an opportunity to Book Profits.

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