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TVS Motor: Worst of the lot
Jul 27, 2007

Performance summary
  • Led by a 15% drop in volumes, topline falls by the same margin

  • Operating profits fall by 54% YoY as operating margins tumble 210 basis points

  • Extraordinary income helps restrict the bottomline fall to 65% YoY, which otherwise would have been wiped off almost completely

(Rs m) 1QFY07 1QFY08 Change
Units sold 376,331 320,183 -14.9%
Net sales 9,218 7,833 -15.0%
Expenditure 8,802 7,642 -13.2%
Operating profit (EBDITA) 416 191 -54.0%
EBDITA margin (%) 4.5% 2.4%  
Other income 178 182 2.2%
Interest (net) (60) (98) 63.8%
Depreciation 233 239 2.4%
Profit before tax 301 37 -87.8%
Extraordinary income/(expense) - 72  
Tax 89 34 -62.3%
Profit after tax/(loss) 213 75 -64.5%
Net profit margin (%) 2.3% 1.0%  
No. of shares (m) 237.5 237.5  
Diluted earnings per share (Rs)* 3.6 1.3  
Price to earnings ratio (x)**   26.9  

What is the company’s business?
TVS Motor is the third largest company in the Indian two-wheeler industry with a domestic market share of 19% in FY07. The TVS Group of South India is the promoter of the company. Compared to its predominantly southern-market oriented growth in the past, it has been expanding presence in other regions. Despite Suzuki's exit in 2002, the company gained market share by developing an indigenous motorcycle, 'Victor' and currently its ‘StarCity’ and ‘Apache’ are also making waves in the domestic market. Apart from motorcycles, TVS also has presence in the moped and ungeared scooter segments. In mopeds, it has a commanding market share of more than 93%. The company hopes to grow volumes by focusing on international markets, especially South East Asia. A big step in this direction was its recent launch of a step through named ‘Neo’ in the Indonesian market.

What has driven performance in 1QFY08?
Motorcycles – A big underperformer: Motorcycles, key contributors to the company’s volumes have had a dismal quarter, as domestic sales were lower by a huge 39% YoY. This performance was worse than the industry’s where volumes declined nearly 15% YoY. As per the management, the company has chosen to opt out of a price war, currently fought between the top two players and this quite visibly, has hurt its volumes. The company’s other two segments viz. scooterettes and mopeds have however continued to find buyers and volumes here were higher by 11% and 29% YoY respectively. Hence, courtesy the strong performance of these two segments, overall domestic volumes decline at 16% YoY looked better than the decline in motorcycles alone. The company’s exports also fared poorly as volumes were higher by just 2% YoY as compared to the 29% growth it achieved in FY07. With a high value product like motorcycles witnessing a steep decline, one would have expected topline to also fall significantly in value terms, but the company has done well to restrict the fall to 15% YoY, in line with the overall decline in volumes.

Sales break up..
(Units) 1QFY07 1QFY08 Change
Motorcycles 214,868 130,161 -39.4%
Scooterettes 60,773 67,447 11.0%
Mopeds 74,918 96,362 28.6%
Domestic total 350,559 293,970 -16.1%
Exports 25,772 26,213 1.7%
Grand Total 376,331 320,183 -14.9%
Source:SIAM

High costs continue to haunt: Company’s operating margins are the lowest among the top three players and hence, more sensitive to inflationary trends. Not surprisingly then, a 13% fall in costs has led to a huge 54% drop in operating profits and a 210 basis points contraction in operating margins. The main culprit once again has been the raw material expense, as they accounted for still higher proportion of sales as compared to last quarter. While wage costs have also increased, the company has done well to prune its other expenses.

Cost break-up…
(Rs m) 1QFY07 1QFY08 Change
Raw materials 6,785 5,953 -12.3%
% sales 73.6% 76.0%  
Staff cost 429 467 8.9%
% sales 4.7% 6.0%  
Other expenses 1,588 1,222 -23.1%
% sales 17.2% 15.6%  

Interest costs have witnessed a steep rise, edging higher by 64% YoY, perhaps due to piling up of inventories at dealers. This further shaved off whatever little profit the company earned from operations. Infact, had it not been for the extraordinary income to the tune of Rs 75 m, the company would have barely managed to stay profitable. Including the same, the bottomline is not too healthy either, as it has witnessed a 65% drop over corresponding previous quarter.

Over the last few quarters
As seen from the table below, the company’s performance over the last few quarters has been nothing to write home about, especially on the margins front. While this has been an industry wide phenomenon, the company has been the worst hit on account of its low margins and a conscious decision to stay out of price wars.

Over the last few quarters
  1QFY07 2QFY07 3QFY07 4QFY07 1QFY08
Net sales (YoY growth %) 25.4% 36.6% 7.3% 9.6% -15.0%
OPM 4.5% 5.2% 3.2% 1.1% 2.4%
NPM 2.3% 2.3% 1.2% 1.0% 1.0%

What to expect?
At the current price of Rs 60, the stock is trading at a price to earnings multiple of 27 times its trailing twelve month earnings. We believe that the current downtrend in the domestic motorcycles industry is a temporary phenomenon and volumes growth should remain in the higher single to lower double-digit rates over a long-term period. We also believe that TVS has the products to take advantage of such a trend. Further, its other ventures like the Indonesian operations and the three-wheeler project are also likely to add to its growth. We would update our numbers soon.

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