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TVS Motor: The agony piles on - Views on News from Equitymaster

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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.

Financial performance: Standalone snapshot
(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  
(* annualised, ** on trailing twelve months earnings)

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?

Sales break-up…
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.

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.

Cost break-up…
(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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