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TVS Motor: The investment phase jitters

Jul 24, 2006

Performance Summary
TVS Motor, India’s third largest manufacturer of two-wheelers has announced a mix set of results for 1QFY07. The topline of the company has grown at a respectable 25% YoY but higher raw material prices has resulted in a decline of 16% at the operating level. Also, while other income was higher by 55% YoY, it was not enough to bolster net profits, which suffered a decline of 15% over corresponding previous quarter.

Financial performance: Standalone snapshot
(Rs m) 1QFY06 1QFY07 Change
No of units sold 307,425 376,216 22.4%
Net sales 7,351 9,218 25.4%
Expenditure 6,854 8,802 28.4%
Operating profit (EBDITA) 497 416 -16.3%
EBDITA margin (%) 6.8% 4.5%  
Other income 115 178 54.6%
Interest (net) (24) (60) 146.7%
Depreciation 227 233 2.7%
Profit before tax 361 302 -16.5%
Tax 112 89 -20.6%
Profit after tax/(loss) 249 213 -14.7%
Net profit margin (%) 3.4% 2.3%  
No. of shares (m) 237.5 237.5  
Diluted earnings per share (Rs)* 4.2 3.6  
Price to earnings ratio (x)**   16.5  
(* annualised, ** on trailing twelve months earnings)

What is the 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. 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., motorcycle, 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 driven performance in 1QFY07?
Motorcycle sales helps in industry outperformance: The company sold 22% more two-wheelers during 1QFY07 than during 1QFY06. This number is higher than the industry growth rate of 20%. The growth was largely a result of an impressive 32% YoY growth in motorcycles sales during 1QFY07. Here also, TVS outperformed the industry growth rate of 24%. The company’s two latest offerings, TVS ‘Star City’ in the entry segment and ‘Apache’ in the premium segment have been instrumental in driving up the motorcycle sales. While TVS Star City has crossed the 800,000 mark since its launch, TVS Apache has become the number two brands behind ‘Bajaj Pulsar’ in the premium segment of the motorcycle market. As the company ramps up its production, it is further expected to make inroads into the segment.

(Units) 1QFY06 1QFY07 Change
Motorcycles 176,580 233,816 32.4%
Scooterettes 62,562 63,592 1.6%
Mopeds 68,283 78,808 15.4%
Grand total 307,425 376,216 22.4%
Exports 20,161 25,772 27.8%
Exports (as a % of total) 6.6% 6.9%  

On the performance of the company’s other offerings, while sale of scooterettes was up 2% YoY during 1QFY07, mopeds also put in a decent performance, as volumes were up 15% YoY. Exports were also higher by 28% YoY and crossed 10,000 units for the first time in the month of June 2006. Realisations were up nearly 3% YoY, as motorcycles which are high value products formed 62% of the overall sales mix of the company as compared to 57% during 1QFY06.

Cost break-up…
(Rs m) 1QFY06 1QFY07 Change
Raw materials 5,268 6,785 28.8%
% sales 71.7% 73.6%  
Staff cost 380 429 12.9%
% sales 5.2% 4.7%  
Other expenses 1,206 1,588 31.7%
% sales 16.4% 17.2%  

Raw material price inflation and other expenses hurt margins: Prices of key inputs such as steel, aluminum, rubber continued to inch northwards during the quarter and this has put pressure on the company’s operating margins, as it was unable to pass this on to the consumer due the competitive landscape of the Indian two-wheeler industry. Also, the other expenses of the company at over 17% of sales have been growing at a faster pace since 4QFY06 on account of new launches. Nevertheless, this is significantly higher than its peers. Just to put things in perspective, other expenses for peers like Bajaj Auto and Hero Honda have hovered in the region of 9% to 10% of sales. As a consequence, operating margins have contracted by 230 basis points during 1QFY07.

However, going forward, we expect the margins to improve on the back of certain cost rationalisation measures like the setting up of its new plant in the northern region, increased capacity utilisation and a reduction in sales and marketing expenses as its products cross the introduction phase and enter the growth phase in their lifecycle.

Higher other income fails to prop bottomline: Despite a 55% growth in other income and lower tax provisioning, the bottomline has suffered a decline of 15% over 1QFY06.

What to expect?
At the current price of Rs 79, the stock is trading at a price to cash flow multiple of 5 times our estimated FY08 earnings. Despite the pressure on margins currently, we remain positive on the company, as it will not only register improved volumes in the domestic as well as international markets but it will also incur cost savings. The international venture (Indonesia) and the proposed three-wheeler launch towards the end of the fiscal year will also augment sales growth. Though we continue to have a positive view on the stock, the risks involved are higher.

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