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TVS: It works in spurts

Feb 21, 2005

Performance Summary
If one were to sum up the performance of TVS Motors in 3QFY05, the third largest player in the Indian two-wheeler segment, it will be called 'underperformance continues'. Having said that, the topline growth at 20% during the quarter was led by increased volume growth in the motorcycle segment and partly on account of the base effect. But the bottomline growth during the quarter was impacted by higher input and marketing costs.

(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net sales 6,721 8,037 19.6% 20,991 21,576 2.8%
Expenditure 6,224 7,508 20.6% 19,215 19,810 3.1%
Operating profit (EBDITA) 497 529 6.5% 1,776 1,766 -0.6%
EBDITA margin (%) 7.4% 6.6% 8.5% 8.2%
Other income 98 115 17.1% 275 272 -1.0%
Interest (net) (13) (1) -94.5% 12 8 -35.2%
Depreciation 181 223 23.5% 539 658 22.0%
Profit before tax 427 422 -1.2% 1,499 1,372 -8.5%
Tax 152 140 -8.2% 534 476 -10.9%
Profit after tax/(loss) 275 282 2.7% 966 896 -7.2%
Net profit margin (%) 4.1% 3.5% 4.6% 4.2%
No. of shares (m) 23.1 237.5 23.1 237.5
Diluted earnings per share (Rs)* 4.6 4.8 5.4 5.0
Price to earnings ratio (x) 14.6
(* annualised)

What is the company's business?
TVS is a leading player in the manufacture and sale of motorcycles, scooters and mopeds. Compared to its predominantly southern market oriented growth in the past, it is expanding presence in other regions as well. TVS was formerly promoted by the TVS group of South India and Suzuki of Japan. Suzuki exited the joint venture in 2002. Despite Suzuki's exit, the company has managed to gain market share by developing an indigenous motorcycle, 'Victor'. Apart from motorcycles, TVS also has presence in moped and ungeared scooter segments. The company hopes to grow volumes by focusing on international markets, especially South East Asia.

What has driven performance in 3QFY05?
A story of 'spurts' and 'misses': In 3QFY05, motorcycle volumes sold increased by 25% YoY on account of new launches in the northern markets (TVS Star). On a peer basis, while Bajaj Auto posted more than 60% rise in motorcycle sales in 3QFY05 (led by 'Discover'), Hero Honda's motorcycle sales was a tad lower than TVS. Higher growth in volumes for TVS in 3QFY05 was also on account of a 78% rise in export volumes. While this growth is commendable, one has to bear in mind the fact that TVS posted a 5% decline in net sales in 3QFY04 on the back of lower volumes. In this context, growth is partly inflated. Ungeared scooter volumes grew by 11% during the quarter (Scooty 'Pep'), in line with our full year estimates. We expect the company to further consolidate its market share in the ungeared segment, owing to a strong brand. Unlike previous years, mopeds sales have grown marginally, which we do not expect to sustain in the next two to three years.

Segmental break-upů
(units sold) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Motorcycles 162,596 203,245 25.0% 525,723 502,615 -4.4%
Scooters 51,174 56,803 11.0% 144,687 175,862 21.5%
Mopeds 60,474 62,364 3.1% 181,745 192,368 5.8%
Total 274,094 322,412 17.6% 852,155 870,845 2.2%
Exports (units) 6,888 12,253 77.9% 18,793 36,666 95.1%
Exports (Rs m) 178 302 69.6% 470 933 98.7%
Source: Company and our estimates

New launches impact margins: While operating margins of TVS have declined in 3QFY05 for TVS, this is in line with other major players in the sectors. The reasons are two-fold i.e. though raw material cost to sales in 3QFY05 is lower, adverse change in stock has increased expenses and secondly, other expenses has increased as a proportion to sales in 3QFY05 (led by increased marketing costs). As we go forward, any decline in steel and rubber prices in the global markets could act a strong support to margins. Having said that, continued volume decline in the moped segment and the consequent impact on the company's moped facilities is an area of concern.

Cost break-upů
(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Raw materials 4,914 5,801 18.1% 14,285 14,531 1.7%
% sales 73.1% 72.2% 68.1% 67.3%
Staff cost 302 378 25.1% 902 1,110 23.1%
% sales 4.5% 4.7% 4.3% 5.1%
Other expenses 1,355 1,529 12.8% 3,969 4,128 4.0%
% sales 20.2% 19.0% 18.9% 19.1%

Over the last few quarters: The graphs below highlight the performance of TVS Motors over the last few quarters (YoY change in net sales and EBDITA margin) and comparative EBDITA margin of the top three players in the sector. While the topline growth of TVS has moved to a new trajectory in 3QFY05, this also explains the lack of consistency in its performance. Post the 'Victor', one of the most successful motorcycle models from the company's stable till now, new variants have failed to provide a boost to volumes and this perhaps explains the underperformance of the stock as compared to its peers and the benchmark index.

What to expect?
TVS currently trades at Rs 73 implying a price to earnings multiple of 14.6 times annualised 9mFY05 earnings. Despite one of the best R&D facilities in the country, the lack of consistency is a key concern in our view. Having said that, the management's commitment in the form of increased R&D spending and capital expenditure (Rs 5 bn per annum) in such difficult times also reflects the confidence level of the company. On the balance, we suggest investors not to buy the stock and if at all one is planning to invest in a two-wheeler company, Bajaj Auto remains our preferred play from a two to three years perspective.

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