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TVS Motor: Can the show continue?
Jan 31, 2006

Performance Summary
TVS Motor announced its 3QFY06 results after market hours yesterday. For the third quarter, while the topline grew by 8% YoY, efficient cost management resulted in margin expansion. As a result, operating profits grew by 15% YoY. Though on a relative basis (compared to Bajaj Auto and Hero Honda), the performance appears to be subdued, it should be noted that 3QFY06 is the first quarter of FY06, where the company has reported a YoY improvement in margins. Despite this, the bottomline grew by a mere 10% YoY, primarily on account of a significant rise in the interest outgo.

(Rs m) 3QFY05 3QFY06 Change 9MFY05 9MFY06 Change
Net sales 8,037 8,714 8.4% 21,576 23,957 11.0%
Expenditure 7,508 8,107 8.0% 19,810 22,394 13.0%
Operating profit (EBDITA) 529 607 14.7% 1,766 1,563 -11.5%
EBDITA margin (%) 6.6% 7.0%   8.2% 6.5%  
Other income 115 120 4.0% 272 497 82.7%
Interest (net) (1) 35   8 86 983.5%
Depreciation 223 242 8.3% 658 700 6.4%
Profit before tax 422 450 6.8% 1,372 1,274 -7.1%
Extraordinary item - -   - -  
Tax 140 140 0.1% 476 395 -16.9%
Profit after tax/(loss) 282 311 10.0% 896 879 -1.9%
Net profit margin (%) 3.5% 3.6%   4.2% 3.7%  
No. of shares (m) 237.5 237.5   237.5 237.5  
Diluted earnings per share (Rs)*         5.7  
Price to earnings ratio (x)*         19.6  
(* trailing twelve months)            

What is company’s business?
TVS is a leading player in the two-wheeler industry in India. It was incorporated in 1982, as collaboration between TVS group of South India and Suzuki Motors, Japan. Year 2002 saw Suzuki Motors exit from the business, forcing the TVS management to commit itself to sizeable investment and develop its own R&D. The company has a presence in all the segments viz. motorcycles, scooters and mopeds. In FY05, while motorcycles constituted 58% of its total portfolio, scooters and mopeds contributed 19% and 23% respectively. Traditionally, a regional player (southern region), over the last few quarters, it has been making considerable efforts to expand its reach in other regions.

Performance
Higher moped sales dent realisations: As can be seen from the table below, higher moped sales in 3QFY06 were a surprise, considering the decline in the demand for mopeds over last five years. Going forward, we do not expect the momentum to sustain in the moped segment. On the motorcycles front, though volume growth in 3QFY06 was slower than 9mFY06, this is an industry wide phenomenon. This is primarily due to lower demand, post the Diwali season (read October 2005). In the ungeared scooter segment, the company managed to grow by around 10% YoY in 3QFY06 (in line with our full year estimates), despite increased competition from Honda, Bajaj Auto and Hero Honda. Going forward, we expect TVS to maintain this growth rate, if not higher. We have factored in a marginal decline in the market share for TVS in the ungeared scooter over a period of next three years.

Segmental breakup
  3QFY05 3QFY06 Change 9MFY05 9MFY06 Change
Motorcycles 203,245 222,309 9.4% 502,615 587,089 16.8%
Scooterettes 56,803 62,481 10.0% 175,862 193,857 10.2%
Mopeds 62,364 73,769 18.3% 192,368 210,568 9.5%
Total 322,412 358,559 11.2% 870,845 991,514 13.9%
Domestic 310,159 340,354 9.7% 831,536 930,194 11.9%
Exports 12,253 18,205 48.6% 39,309 61,320 56.0%
Total 322,412 358,559 11.2% 870,845 991,514 13.9%

During 3QFY06, the topline growth was slower as compared to volume growth, which can be largely attributed to the change in the product mix i.e. the company has sold more of mopeds as compared to motorcycles. It should be noted that average realisations for mopeds are at 52% discount to that of motorcycles.

Operating margins – Expanding after all: Operating margins of TVS have expanded for the first time in current fiscal, despite a marginal increase in the raw material costs (as a percentage of sales). Other operating cost, as a percentage of sales, is lower by 160 basis points (1.6%), largely due to benefits from economies of scale, as with increase in the volumes, the fixed cost per unit reduces. Also, the efforts of the company to curb costs have started yielding results.

Cost break - up...
(Rs m) 3QFY05 3QFY06 %Change 9MFY05 9MFY06 %Change
Raw materials 5,602 6,174 10.2% 14,573 17,088 17.3%
% sales 69.7% 70.9%   67.5% 71.3%  
Staff cost 378 413 9.4% 1,111 1,196 7.7%
% sales 4.7% 4.7%   5.1% 5.0%  
Other expenses 1,529 1,520 -0.6% 4,128 4,110 -0.4%
% sales 19.0% 17.4%   19.1% 17.2%  

For the nine-month period, though on the face of it, there appears to be a steep increase in the raw material costs (as a % of sales), a deeper analysis gives a correct picture. It should be noted in 1HFY05, the raw material (as a percentage of sales) was on the lower side when compared to it peers, which to an extent enabled TVS to report higher operating margins in 1HFY05.

Subdued net margins: Despite a 40 basis points expansion in operating margins, the net margins improved by mere 10 basis points. This has been primarily due to a significantly higher interest outgo. It should be noted that TVS is not only expanding its domestic capacity but also is setting up a greenfield project in Indonesia, for which company is planning to invest around US$ 100 m. As most of this expansion is through borrowed funds, the increase in the interest liability is not a surprise. We have factored in an interest expense of Rs 152 m for FY06.

What to expect?
At Rs 112, the stock is trading at a price to cash flow of 8.1 times our FY08 estimates. The 9mFY06 performance of TVS is more or less in line with our estimates. Similarly, if the company can carry forward the 3QFY06 performance in the next quarter, it can outperform our projections. However, having regards to its volatile past, we would not like to upgrade our numbers. Having said that, the management's commitment in the form of increased R&D spending and capital expenditure in difficult times tends to reflect the confidence level of the company. With a new strategy in place and increased thrust on exports, we feel that the company should be able to deliver on a consistent basis in the future. We had recommended a BUY on the stock at Rs 84 and we maintain our view.

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