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- Jan 29, 2007 - TVS Motor: The agony piles on
TVS Motor: The agony piles on
Jan 29, 2007
Performance summary
TVS Motor, India’s third largest manufacturer of two-wheelers has continued to go downhill, as evident from its yet another disappointing performance during 3QFY07. Facing strong input costs pressure, the operating margins have fallen by 380 basis points whereas net profit margins have tumbled to as low as 1%. There has been no respite on the volumes front either, as it has managed a paltry 1% YoY growth. Performance on the volume and topline front has been much better for the nine month period but here too, there has been a severe pressure on margins.
| (Rs m) | 3QFY06 | 3QFY07 | Change | 9mFY06 | 9mFY07 | Change |
| Units sold | 358,559 | 363,675 | 1.4% | 991,514 | 1,159,201 | 16.9% |
| Net sales | 8,714 | 9,354 | 7.3% | 23,957 | 29,351 | 22.5% |
| Expenditure | 8,107 | 9,058 | 11.7% | 22,394 | 28,079 | 25.4% |
| Operating profit (EBDITA) | 607 | 296 | -51.2% | 1,563 | 1,272 | -18.6% |
| EBDITA margin (%) | 7.0% | 3.2% | 6.5% | 4.3% | ||
| Other income | 120 | 176 | 46.7% | 497 | 463 | -6.8% |
| Interest (net) | 35 | 86 | 149.1% | 86 | 208 | 142.6% |
| Depreciation | 242 | 245 | 1.2% | 700 | 722 | 3.2% |
| Profit before tax | 450 | 141 | -68.7% | 1,274 | 805 | -36.8% |
| Extraordinary income/(expense) | - | - | - | - | ||
| Tax | 140 | 27 | -81.0% | 395 | 230 | -41.9% |
| Profit after tax/(loss) | 311 | 115 | -63.1% | 879 | 576 | -34.5% |
| Net profit margin (%) | 3.6% | 1.2% | 3.7% | 2.0% | ||
| No. of shares (m) | 237.5 | 237.5 | 237.5 | 237.5 | ||
| Diluted earnings per share (Rs)* | 5.2 | 1.9 | 4.9 | 3.2 | ||
| Price to earnings ratio (x)** | 21.0 |
What is the company’s business?
TVS Motor is the third largest company in the Indian two-wheeler industry with a market share of 20% at the end of 2QFY07 (18% in FY06). It was promoted by the TVS Group of South India and Suzuki of Japan. Compared to its predominantly southern-market oriented growth in the past, it has been expanding presence in other regions. Despite Suzuki's exit in 2002, the company gained market share by developing an indigenous motorcycle, 'Victor' and currently its ‘StarCity’ and ‘Apache’ are also making waves in the domestic market. Apart from motorcycles, TVS also has presence in the moped and ungeared scooter segments. In mopeds, it has a commanding market share of more than 95%. The company hopes to grow volumes by focusing on international markets, especially South East Asia.
What has driven performance in 3QFY07?
| Domestic | 3QFY06 | 3QFY07 | % change | 9mFY06 | 9mFY07 | % change |
| Motorcycles | 210,679 | 201,870 | -4.2% | 546,322 | 650,596 | 19.1% |
| Scooter/scooterette | 60,332 | 59,798 | -0.9% | 184,929 | 191,465 | 3.5% |
| Mopeds | 69,343 | 80,069 | 15.5% | 198,943 | 237,701 | 19.5% |
| Total | 340,354 | 341,737 | 0.4% | 930,194 | 1,079,762 | 16.1% |
| Exports | ||||||
| Motorcycles | 11,630 | 18,093 | 55.6% | 40,767 | 61,516 | 50.9% |
| Scooter/scooterette | 2,149 | 1,445 | -32.8% | 8,928 | 6,734 | -24.6% |
| Mopeds | 4,426 | 2,400 | -45.8% | 11,625 | 11,189 | -3.8% |
| Total | 18,205 | 21,938 | 20.5% | 61,320 | 79,439 | 29.5% |
| Grand total | 358,559 | 363,675 | 1.4% | 991,514 | 1,159,201 | 16.9% |
Motorcycles – Disappointing 3QFY07: Motorcycles, which constitute nearly 60% of TVS’ total volumes, fell by 4% YoY during the quarter and this impacted the company’s overall volumes in a big way. The decline stems from the fact that while its more accomplished rivals offered discounts to cash in on the festive season, TVS Motor refrained from doing the same in order to prevent significant erosion in market share. Further, its balance sheet is also not strong enough so as to enable it to enter into the kind of price war that its rivals have entered into. Also, with the company undertaking some inventory correction measures, it reckons that the retail sales were far more robust. As far as other products are concerned, the scooterette segment also seems to have taken a small hit as volumes were down 1% YoY. Exports however, have grown by a strong 20% YoY during the quarter, due mainly to an impressive 56% YoY jump in motorcycle exports.
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Margin woes continue: Raw material costs, as a percentage of sales, have increased by 440 basis points (4.4%), and this is the primary reason why the company’s operating margins have contracted by 380 basis points. High raw material costs, especially those of steel, aluminium, rubber and copper have continued to rise, impacting the margins negatively. Among other expenses, while staff costs have risen marginally, other expenses have witnessed an 80 basis point contraction as a percentage of sales and helped partially offset the rise in raw material costs.
| (Rs m) | 3QFY06 | 3QFY07 | Change | 9mFY06 | 9mFY07 | Change |
| Raw materials | 6,174 | 7,042 | 14.0% | 17,089 | 21,794 | 27.5% |
| % sales | 70.9% | 75.3% | 71.3% | 74.3% | ||
| Staff cost | 413 | 463 | 12.2% | 1,196 | 1,353 | 13.1% |
| % sales | 4.7% | 5.0% | 5.0% | 4.6% | ||
| Other expenditure | 1,520 | 1,553 | 2.2% | 4,110 | 4,932 | 20.0% |
| % sales | 17.4% | 16.6% | 17.2% | 16.8% |
Among other items, while other income has jumped 47% YoY and fixed costs have also been controlled, a huge 149% YoY jump in interest costs has meant that the drop in bottomline at 63% YoY is more pronounced than the operating profits decline of 51% YoY
What to expect?
At the current price of Rs 75, the stock is trading at a price-to-cash flow multiple of 6 times our estimated FY09 cash flow. While these are indeed tough times for the company and a turnaround should not be expected soon, we believe investors should be patient as the company has the product portfolio and the ability to give attractive returns over the long term. Further, the timely progress of its three new ventures viz., three-wheeler, Himachal Pradesh plant and the Indonesian venture, is also a provider of great solace. As such, we maintain our positive rating on the stock.
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