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TVS Motor: Cut to half - Views on News from Equitymaster
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TVS Motor: Cut to half
Jul 3, 2008

Performance summary
  • Topline suffers a decline of 17% YoY on the back of a similar fall in volumes.

  • Operating margins shrink 140 basis points as expenses fall at a slightly lower rate than the topline.

  • Higher depreciation and extraordinary items accentuate the fall at the operating level and lead to a 52% YoY decline in profits for the full year.

  • Recommends a dividend of Rs 0.7 per share (2.8% dividend yield) subject to shareholder approval.



(Rs m) FY07 FY08 Change
Units sold 1,528,665 1,288,861 -15.7%
Net sales 38,550 32,195 -16.5%
Expenditure 37,177 31,474 -15.3%
Operating profit (EBDITA) 1,373 722 -47.5%
EBDITA margin (%) 3.6% 2.2%
Other income 732 719 -1.8%
Interest (net) 321 22 -93.2%
Depreciation 876 946 8.0%
Profit before tax 909 473 -47.9%
Extraordinary income/(expense) - (119)
Tax 243 36 -85.2%
Profit after tax/(loss) 666 318 -52.3%
Net profit margin (%) 1.7% 1.0%
No. of shares (m) 237.5 237.5
Diluted earnings per share (Rs)* 1.3
Price to earnings ratio (x)* 18.7
(* on trailing twelve months earnings)

What has driven performance in FY08?
  • The company managed to sell 16% less vehicles than it did the year before. Naturally, this had an impact on the topline, which came in lower by 17% YoY. Domestic motorcycles sales, which accounted for nearly 60% of all the vehicles sold by the company in FY08 was the key reason behind the dismal performance on the volumes front. Although industry wide sales were down 12%, TVS saw its motorcycles sales in the domestic market fare even worse, falling by as much as 40% YoY.

  • Apart from lack of availability of finance, some of the problems were of the company’s own making. Foremost would be the lack of a good product in the executive segment of motorcycles. This segment accounts for nearly 50% of all the motorcycles sold in the country and the company had to pay heavily for not having a good product in this segment. Its latest offering ‘TVS Flame’ will go a long way in rectifying this problem. Among other segments, while scooter sales continued to remain flat, mopeds had another good year, growing by as much as 20% YoY.

  • TVS’ international business also had another good year, with exports volumes growing by as much as 33% YoY all segments put together. With motorcycles accounting for more than 80% of total export volumes, a robust 42% YoY jump here, helped exports put up an impressive show. With the company having its footprint in more than 50 countries, exports will continue to be a major focus area.

Sales break-up
Domestic FY07 FY08 % change
Motorcycles 844,174 502,788 -40.4%
Scooter/scooterette 250,085 250,156 0.0%
Mopeds 331,393 398,905 20.4%
Total 1,425,652 1,151,849 -19.2%
Exports
Motorcycles 80,966 114,780 41.8%
Scooter/scooterette 8,882 9,791 10.2%
Mopeds 13,165 12,441 -5.5%
Total 103,013 137,012 33.0%
Grand total 1,528,665 1,288,861 -15.7%
Source: SIAM

On the costs front, while TVS managed to keep raw materials expenses under check, a 2% growth in wages was largely responsible for the 140 basis points drop in operating profit margins. Since the company’s operating profits are highly leveraged, the drop of this magnitude in margins led to a steep 48% YoY decline in operating profits.

Cost break-up…
(Rs m) FY07 FY08 Change
Raw materials 29,034 24,338 -16.2%
% sales 75.3% 75.6%
Staff cost 1,723 1,764 2.4%
% sales 4.5% 5.5%
Other expenditure 6,420 5,372 -16.3%
% sales 16.7% 16.7%

Fall in net profits at 52% ToY came in lower than the operating profits led mainly by the rise in depreciation charges and an extraordinary expense to the tune of Rs 119 m. Had it not been for forex related gains that were set off against interest costs, the fall in bottomline would have been even more steeper.

What to expect?
At the current price of Rs 25, the stock is trading at a price to cash flow multiple of 2.5 times its expected FY10 cash flow. The company’s earnings have come in 4% below our FY08 estimates. As far as the medium term outlook is concerned, the company’s fortunes to a great extent hinge upon its ability to bring about an improvement in its operating profit margins. We expect the same to double from the current levels given the company’s efforts at cost cutting and its foray into new segments like three-wheelers. Thus, although the company does look like an attractive medium term story, the high sensitiveness of its intrinsic value to its operating margins makes it a high risk-high reward proposition. We will update our research report on the company shortly.

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