TVS Motor Company
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs210
Current market price: Rs140
The Apache war cry
Key points
- TVS Motor Company, one of the largest players in the two-wheeler segment in India, is a perfect play on the boom in the country's two-wheeler industry. The company has indigenously developed a number of products across the two-wheeler segment. It now has a strong presence in all the product categories: motorcycles, scooters and mopeds. The proposed foray into the three-wheeler market should further fuel the company's growth.
- Its recently launched motorcycle, Apache, has won huge accolades and is expected to capture a 13% share of the premium segment in FY2007. Apache has been launched in only select cities and the initial response to the model has been encouraging. A national roll-out is expected by April 2006.
- With a rise in its volumes, the cost-cutting measures undertaken, an improved product mix with more higher-end products and an entry into the three-wheeler segment, the margins of the company are set to improve. We expect the same to expand by 380 basis points to 11.2% by FY2008.
- The exports of the company are expected to rise with the setting up of a new plant in Indonesia. The new plant should also help TVS Motor to cater to the demand from the fast growing Asean and African markets.
- At the current market price of Rs140 the stock discounts its FY2008E earnings by 10.2x and FY2008E earnings before interest, depreciation, tax and amortisation (EBIDTA) by 5.5x. Considering the company's growth prospects, we believe that the stock's valuations are very attractive. Hence, we are initiating a Buy recommendation on the stock with a price target of Rs210.
STOCK UPDATE
Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,650
Current market price: Rs2,298
Powering ahead
BHEL came out with its full year's provisional numbers (PNs), and the same are above our expectations. The PNs indicate the following.
- The net profit for FY2006 rose 68% to Rs1,620 crore because of a higher order intake, which in turn brought the operating leverage into play.
- The revenue stood at Rs14,410 crore, up 51% year on year (yoy).
- The outstanding order backlog jumped to Rs37,500 crore, up 17% from Rs32,000 crore last year.
SECTOR UPDATE
Automobile
Strong growth continues
We had mentioned in our note Potential threat from rising interest rates dated March 23, 2006 that the tightening liquidity and the rising interest rates could act as a dampener, thereby affecting the growth in the passenger vehicles segment. However, over the last couple of days the liquidity has improved substantially with the Reserve Bank of India infusing liquidity through the reverse repo window. We believe that the high sales in the passenger vehicles segment for the month of March 2006 were driven primarily by two reasons. Firstly the year ending effect, as the dealers go aggressive during this month on selling and secondly the discounts offered by the manufacturers. However, we would like to closely monitor the interest rates and liquidity going forward for a couple of months.