TVS Motor (TVSL) performance for Q3FY11 fell short of our expectation with reported profit 7% lower than our expectation of Rs598mn. Increase in raw material cost led to a sequential decline in margins to 6.1%. However, lower interest cost and higher other income helped PAT more than double to Rs558mn.

Volume growth across segments: Overall volumes jumped 39.8% to 524k units with growth across all segments. Domestic motorcycle volumes were up 44% as against an industry growth of 15.6% gaining 170bps marketshare. Success of the Wego led to a 64% surge in scooter volumes. Inspite of the impressive growth in the segment marketshare gain was restricted to 100bps as the segment growth was 56%. Moped volumes were up 27%. Two- wheeler exports were up 17.6%. Three-wheeler sales crossed the 10k mark for the quarter.

Margins under pressure: A richer product mix due to higher contribution of motorcycles and three wheelers aided a 2% QoQ growth in realisations to Rs31.4k/unit. However, raw material cost per vehicle increased by 3% denting margins. Operating margins contracted 50bps sequentially to 6.1% and were lower than our estimate of 7%.

Lower interest costs boost profits: Reduction in working capital resulted in a 46.7% YoY decline in interest cost to Rs96mn. Consequently reported profits surged 137% to Rs558mn.

Outlook: We estimate TVSL to achieve volumes of 2mn and 2.3mn units during FY11 and FY12 respectively. We expect profitability to be maintained in the range of 7%. Our earnings estimate for FY11 and FY12 are unchanged at Rs4.5 and Rs5.9 respectively.

VALUATIONS AND RECOMMENDATION
The stock is currently trading at 10.6x FY12E standalone earnings. We maintain a `BUY' rating on the stock with a target price of Rs94 discounting FY12E earnings 16x.