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TVS Motor: Interest costs throw a spanner
Jan 23, 2009

Performance summary
  • Weak domestic demand leads to a 2% YoY drop in company’s topline during the quarter
  • Strong operating leverage leads to a robust 54% growth in operating profits as margins expand by 1.8% during the quarter
  • Significantly higher interest costs and steep drop in other income more than nullify the growth in operating income and hence, bottomline suffers a marginal loss of Rs 10 m
  • Net profit for the nine month period falls 35% YoY despite a 12% growth in topline. Excluding extraordinary items, however, the PBT shows a strong 71% growth on a YoY basis.


Standalone financials
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 8,890 8,687 -2.3% 25,207 28,273 12.2%
Expenditure 8,600 8,242 -4.2% 24,278 26,878 10.7%
Operating profit (EBDITA) 290 445 53.5% 930 1,395 50.1%
EBDITA margin (%) 3.3% 5.1%   3.7% 4.9%  
Other income 71 3 -96.1% 183 19 -89.5%
Interest (net) 85 194 127.5% 253 411 62.3%
Depreciation 240 254 5.7% 719 763 6.2%
Profit before tax 36 0 -98.9% 140 240 71.3%
Extraordinary income/(expense) 36 -   210 -  
Tax 14 10 -28.1% 97 75 -23.0%
Profit after tax/(loss) 58 (10)   253 165 -34.9%
Net profit margin (%) 0.7% -0.1%   1.0% 0.6%  
No. of shares (m) 237.5 237.5   237.5 237.5  
Diluted earnings per share (Rs)*         1.0  
Price to earnings ratio (x)*         15.8  
( * on trailing twelve months earnings)

What has driven performance in 3QFY09?
  • The 2% drop in topline during the quarter does not look very bad when one considers the economic environment that prevailed during the period. The face saver was the stellar growth in exports, which at 53% YoY was able to offset a large part of the 18% and 12% decline in domestic motorcycles and scooter sales during the quarter. With the company having expanded its footprint to 54 countries, continued robustness on the exports front is likely to prevail going forward. The main challenge seems to be in the domestic markets as rivals with deeper pockets embark on a new product launching spree.

  • At lower single digits, company’s operating margins are quite sensitive to changes in its cost structure and thus, as inflation recedes, the company will be the foremost beneficiary of the same. This was quite evident in the company’s operating performance during the quarter where a 1.8% expansion in operating margins led to a 54% YoY growth in operating profits. The main contributors to this increase were the other expenses which fell a significant 14% YoY during the quarter. Staff costs however jumped by 10% YoY but its impact was offset by a fall in the other cost heads.

    cost break up
    (Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
    Raw materials 6,631 6,438 -2.9% 18,854 21,127 12.1%
    % sales 74.6% 74.1%   74.8% 74.7%  
    Staff cost 482 531 10.2% 1,429 1,618 13.2%
    % sales 5.4% 6.1%   5.7% 5.7%  
    Other expenditure 1,487 1,273 -14.4% 3,994 4,132 3.5%
    % sales 16.7% 14.7%   15.8% 14.6%  

  • Despite the strong jump in operating profits, TVS’ bottomline has suffered a loss of Rs 10 m. This has been mainly due to the huge jump in interest expenses and significantly lower other income. Although the company has not mentioned the reason behind the huge jump in interest expenses, we believe it could be a result of higher working capital on account of inventory pile up. However, despite the loss, PBT for the nine month period has come in higher by 71% YoY and this strong growth might enable the company to close the year with a growth in profit (excluding the extraordinary).

What to expect?
At the current price of Rs 15, the stock is trading at a multiple of 1.6 times our estimated FY11 cash flow per share. Despite the poor third quarter performance, we believe that the company is in a position to meet our FY09 projections. TVS Motor looks an attractive medium term story. The key to our projections though is the improvement in operating margins failing which it will continue to languish at lower levels. In essence, the stock looks a high risk-high reward proposition.

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