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TVS Motor: Out of the woods? - Views on News from Equitymaster

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TVS Motor: Out of the woods?

Jul 28, 2008

Performance summary
  • Topline grows by 16% YoY during 1QFY09 on the back of robust growth in motorcycles sales
  • High operating margin leverage results into an impressive 63% YoY growth in operating profits as the company manages to trim staff costs and other expenses
  • Bottomline registers a fall of 7% YoY on the back of exceptional income in same quarter last year. Excluding the same, bottomline witnesses a huge 22-fold jump during 1QFY09.

(Rs m) 1QFY08 1QFY09 Change
Net sales 7,833 9,111 16.3%
Expenditure 7,642 8,798 15.1%
Operating profit (EBDITA) 191 312 63.4%
EBDITA margin (%) 2.4% 3.4%  
Other income 182 137 -25.0%
Interest (net) 98 96 -2.2%
Depreciation 239 253 6.0%
Profit before tax 37 100 173.1%
Extraordinary income/(expense) 72    
Tax 34 30 -10.4%
Profit after tax/(loss) 75 70 -6.9%
Net profit margin (%) 1.0% 0.8%  
No. of shares (m) 237.5 237.5  
Diluted earnings per share (Rs)*   1.4  
Price to earnings ratio (x)*   21.3  
(* on trailing twelve months earnings)

What has driven performance in 1QFY09?

    The 16% YoY growth TVS Motor’s topline during 1QFY09 was led by a 9% YoY growth in overall volumes. As far as the volume break up is concerned, while domestic sales were higher by 6% YoY, exports jumped an impressive 50% YoY. Motorcycle segment, the biggest contributor to domestic sales witnessed its volumes inch higher by 13% YoY on the back of new launches like ‘Flame’ and variants of ‘Apache’. It should be borne in mind that the company now has a complete portfolio in the motorcycles space and this has resulted in improved volumes during the quarter. Among other segments, while mopeds continued to surprise on the positive side, scooter sales disappointed, falling by nearly 7% YoY. This was largely due to disruption in production as some key vendors failed to supply the company with crucial components. Volumes though are likely to normalise in the remainder of the year.

    sales break up

    (Units) 1QFY08 1QFY09 Change
    Motorcycles 152,100 171,700 12.9%
    Scooterettes 70,200 65,500 -6.7%
    Mopeds 99,651 104,030 4.4%
    Domestic total 321,951 341,230 6.0%
    Exports 26,213 39,294 49.9%
    Grand Total 348,164 380,524 9.3%

    On the operating performance front, the company has witnessed a strong 63% YoY growth in profits on the back of a 1% expansion in margins. Since the company operated on wafer thin margins during same quarter last year, a small reduction on the staff costs and other expenses front has resulted into a significant jump in operating profits. Important to add that a similar impact could also be witnessed on the other side where a small increase in costs could lead to a huge fall in operating profits. To conclude, lower the margins, greater is the volatility in earnings.

    cost break up

    (Rs m) 1QFY08 1QFY09 Change
    Raw materials 5,953 6,958 16.9%
    % sales 76.0% 76.4%  
    Staff cost 467 506 8.3%
    % sales 6.0% 5.6%  
    Other expenses 1,222 1,334 9.2%
    % sales 15.6% 14.6%  

    Despite the strong jump in operating profits, TVS’ bottomline has come in lower by 7% YoY. However, profits during corresponding quarter last year include an extraordinary income to the tune of Rs 75 m. Excluding the same, bottomline has seen a huge 22 fold jump during 1QFY09. While improved operating performance has been the key driver behind the same, benign depreciation charges and lower tax outgo has also helped shore up the company’s bottomline during the quarter.

What to expect?
At the current price of Rs 30, the stock is trading at a multiple of 3 times our estimated FY11 cash flow. We have lowered our valuation band for the company and we now value the company on a price to cash flow band of 4 to 7 times as against our earlier band of 7 to 10 times. However, even on our revised band, the company looks an attractive medium term story. The key to our projections though is the improvement in operating margins failing which it will continue to languish at lower levels. In essence, the stock looks a high risk-high reward proposition.

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Mar 22, 2019 (Close)


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