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TVS Motor: Profits up 16% YoY in FY06 - Views on News from Equitymaster

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TVS Motor: Profits up 16% YoY in FY06
Jun 26, 2006

Performance summary
TVS Motor, the country's third largest two-wheeler manufacturer, has announced mixed results for the fiscal ended March 2006. The topline growth at 13% YoY in FY06 is lower by 3% as compared to our estimates, which has resulted in operating margins falling much higher than expected during the year. Excluding the write-back of deferred liability in FY05, net profit growth stands at 16% YoY, which is commendable. While the company's bottomline performance was 11% lower than our estimates. For 4QFY06, however, excluding the write-backs, net profit has jumped by more than 165% YoY.

(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 7,183 8,393 16.8% 28,759 32,350 12.5%
Expenditure 6,833 7,911 15.8% 26,643 30,305 13.7%
Operating profit (EBDITA) 350 482 37.8% 2,116 2,045 -3.4%
EBDITA margin (%) 4.9% 5.7%   7.4% 6.3%  
Other income 152 214 40.3% 424 710 67.6%
Interest (net) - 46 - 8 131 1560.8%
Depreciation 239 240 0.4% 896 939 4.8%
Profit before tax 263 410 55.8% 1,635 1,685 3.0%
Extraordinary item 369 - - 369 - -
Tax 153 120 -22.0% 629 515 -18.2%
Profit after tax/(loss) 480 291 -39.3% 1,376 1,170 -15.0%
Net profit margin (%) 6.7% 3.5%   4.8% 3.6%  
No. of shares (m) 237.5 237.5   237.5 237.5  
Diluted earnings per share (Rs)         4.9 9
Price to earnings ratio (x)         20.1 11.1

What is the company 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. The year 2002 saw Suzuki Motors exit from the business, forcing the TVS management to commit itself to sizeable investments and develop its own R&D. The company has a presence in all the segments viz., motorcycles, scooters and mopeds. In FY06, while motorcycles constituted 60% of volume sales, scooters and mopeds contributed 18% and 22% respectively. Traditionally, a regional player (southern region), over the last few years, it has made significant progress to strengthen its presence in the western region, which is yielding desirable results. Exports accounted for 6% of volume sales in FY06 as compared to 4% in FY05.

What has influenced performance in FY06?
New models propel volumes: As compared to average motorcycle volume sales of 58,000 units in 1QFY06, TVS recorded an average of 73,000 units sold in 4QFY06, led by new model introductions during the year. As is known, the company invested significant sums in promoting the 'City' range in the entry-level segment and in December 2005, launched 'Apache' in the premium segment. In the first two months of the current fiscal year i.e., March and April 2006, TVS recorded motorcycle sales of 79,000 units in light of the ramp up in 'Apache' capacity. In our view, the key to success as far as TVS is concerned is the ability to launch new models and upgrades to keep volumes ticking on a 'sustainable basis'. Given the first two months' volume performance, even if the company manages to maintain volumes for the rest of FY07, motorcycle volumes will be higher by 5%. We have factored in higher market share for the company in FY07 and FY08 and we maintain our view.

In order to boost scooter volume sales, the company has to launch new models ahead of the competition if it aims at sustaining market share (Bajaj Auto has aggressive growth plans as far as the ungeared scooter segment is concerned for the next two years). Moped sales increased by 10%, which is a surprise considering that this segment has been losing out to motorcycles in a big way in the last eight years (volume sales till 1HFY06 was just 5% higher YoY). We do not foresee the mopeds segment providing the growth impetus in the next three years. Apart from the domestic market, exports will emerge much stronger (exports in FY06 was higher by 64% YoY, albeit on a lower base).

Segmental breakup
(Units) 4QFY05 4QFY06 Change FY05 FY06 Change
Motorcycles 176,921 219,565 24.1% 679,099 806,708 18.8%
Scooterettes 48,759 51,869 6.4% 224,621 245,726 9.4%
Mopeds 71,025 79,255 11.6% 263,393 289,823 10.0%
Total 296,705 350,689 18.2% 1,167,113 1,342,257 15.0%
Domestic 284,452 332,276 16.8% 1,118,553 1,262,524 12.9%
Exports 12,253 18,413 50.3% 48,560 79,733 64.2%
Total 296,705 350,689 18.2% 1,167,113 1,342,257 15.0%

Other expenses under control: As compared to our estimates, operating expenses were marginally lower by 1%. While we had factored in relatively higher raw material costs and other expenses, staff cost has risen faster, which we expect to reduce in FY07 and beyond once the new and existing capacities start contributing meaningfully at the topline level (including exports). As we go forward, we expect the company to save costs in transportation with the commissioning of a new plant in the northern market (Baddi). There is also an upside to our raw material cost estimates if steel and rubber prices soften meaningfully (this is applicable to all auto majors).

Cost break - up...
(Rs m) 4QFY05 4QFY06 %Change FY05 FY06 %Change
Raw materials 5,315 6,715 26.3% 19,846 23,818 20.0%
% sales 74.0% 80.0%   69.0% 73.6%  
Staff cost 297 373 25.4% 1,407 1,569 11.5%
% sales 4.1% 4.4%   4.9% 4.8%  
Other expenses 1,294 1,416 9.4% 5,422 5,525 1.9%
% sales 18.0% 16.9%   18.9% 17.1%  
Change in stock (74) (593) - (32) (607) -
% sales -1.0% -7.1%   -0.1% -1.9%  

Deferred effect on the bottomline: Last year, the company opted for repayment of deferred sales tax liability and the resultant effect was an income of Rs 369 m, which was one-time in nature. If one were to exclude the same from the analysis, the net profit in 4QFY06 has increased by more than 164% YoY. Other income has increased as the company raised funds through the external commercial borrowings route to funds its international plans, which was invested. Overall, the actual performance was 11% lower than our estimates.

Over the last few quarters: As is evident from the adjacent graph, in terms of volume growth, there is acceleration on the motorcycle front in recent quarters, which we expect to sustain going forward. Operating and net margins are also expected to improve in light of the northern plant in tax heavens. However, the company to sustain model launches to consolidate and gain market share in the motorcycle segment going forward, which is very crucial to sustain profitability.

What to expect?
The stock currently trades at Rs 99, implying a price to cash earnings multiple of 11.1 times. We have valued the company based on price to cash earnings in light of the significant capital expenditure incurred towards growing volumes in the domestic and international markets. Also, the company is expected to enter the three-wheeler market early next calendar year, which we have not factored in our assumptions. We continue to place high confidence in the management's ability to guide to launch new models and taste success in its Indonesian venture and therefore, maintain our 'Buy' view on the stock from a long-term perspective.

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