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TVS Motor: Mopeds the unlikely winner - Views on News from Equitymaster

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TVS Motor: Mopeds the unlikely winner

Jan 20, 2010

Performance summary
  • Topline grows by 25% during the quarter led by 26% growth in volume sales, both on a YoY basis
  • Operating profits grow by an impressive 43% as margins expand by 100 basis points
  • Lower interest and benign depreciation charges further help company post a strong profit during the quarter as opposed to a small loss during same quarter last year
  • Bottomline for the nine month period grows more than fourfold on the back of a mere 14% growth in topline

(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 8,687 10,895 25.4% 28,273 32,080 13.5%
Expenditure 8,103 10,058 24.1% 26,442 29,687 12.3%
Operating profit (EBDITA) 584 837 43.3% 1,831 2,393 30.7%
EBDITA margin (%) 6.7% 7.7%   6.5% 7.5%  
Other income 3 9 227.8% 19 40 110.3%
Interest (net) 194 180 -7.1% 411 505 22.7%
Depreciation 392 408 4.0% 1,199 1,223 1.9%
Profit before tax 0.4 258 62106.5% 240 706 194.5%
Extraordinary income/(expense) - (4)   - (10)  
Tax 10 19 87.0% 75 34 -54.9%
Profit after tax/(loss) (10) 235   165 662 301.8%
Net profit margin (%) -0.1% 2.2%   0.6% 2.1%  
No. of shares (m) 237.5 237.5   237.5 237.5  
Diluted earnings per share (Rs)*         3.4  
Price to earnings ratio (x)*         22.9  
* on trailing twelve months earnings

What has driven performance in 3QFY10?
  • Overall volumes were higher by 26% YoY and grew at nearly the same rate as the topline. This indicates that there was no favorable shift that was witnessed in product mix. Motorcycles, a high value product for the company grew by 18% YoY in the domestic markets. While the growth is impressive, it has come in way below industry growth rate of 40%, indicating loss of market share. Growth in scooters however came in much higher at 42% YoY, beating the industry growth rate of 17% and buoyed by success of new launches. The surprise package though was the mopeds segment, which managed a growth of 49% YoY and contributed the most to overall growth. With competitors like Bajaj Auto and Hero Honda getting more aggressive in the motorcycles space, we expect the company to continue to face volume pressure in this segment whereas growth in other segments is likely to come in favorable in the near to medium term. While exports have begun to show signs of recovery, they nonetheless fell by 20% during the quarter on a YoY basis.

    sales break up
    Domestic 3QFY09 3QFY10 % change 9mFY09 9mFY10 % change
    Scooter/scooterette 50,788 72,260 42.3% 180,931 220,899 22.1%
    Motorcycles 94,844 112,307 18.4% 353,784 360,374 1.9%
    Mopeds 96,078 143,311 49.2% 317,740 417,982 31.5%
    Three-wheelers 956 2,891 202.4% 2,947 8,095 174.7%
    Total 242,666 330,769 36.3% 855,402 1,007,350 17.8%
    Scooter/scooterette 3,582 2,436 -32.0% 7,944 7,507 -5.5%
    Motorcycles 49,706 38,820 -21.9% 132,702 98,215 -26.0%
    Mopeds 1,566 2,440 55.8% 5,751 4,410 -23.3%
    Three-wheelers - 334 NA - 634 NA
    Total 54,854 44,030 -19.7% 146,397 110,766 -24.3%
    Grand total 297,520 374,799 26.0% 1,001,799 1,118,116 11.6%

  • The company’s high operating leverage has meant that even a 100 basis point improvement in operating margins has led to a 43% growth in operating profits. While raw material costs have come down significantly as a percentage of sales on account of lower commodity prices, higher other expenditure has taken some sheen off the same. Nevertheless, the company has still managed to eke out margin improvement.

  • Apart from higher operating margins, benign depreciation charges and lower interest costs has helped the company to propel its growth further and has resulted in a strong growth in net profits. Net profit for the nine month period has also witnessed similar buoyancy, coming in higher by 302% YoY.

What to expect?
At the current price of Rs 78, the stock trades at a multiple of 8x its expected FY12 cash flow per share. The company has done well of late not only in terms of improving its topline but also in containing costs. However, any further improvement on the margin front looks difficult to come by and the growth will have to be driven by growth in volumes. While the same has received an impetus on account of the company’s entry in the three-wheeler business, we expect TVS to continue to remain a distant third in the two-wheeler space. The company’s valuations at current levels warrant some degree of caution.

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