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TVS Motor: Margins take a dent
Aug 2, 2005

Introduction to results
TVS Motor, the third largest two-wheeler manufacturer in the country, announced its results last week. While the topline growth of the company during the quarter has been encouraging, the operating margins came under considerable pressure as expenses rose at a faster clip. Apart from this, a significant rise in interest expense negated all the benefits of a higher other income.

(Rs m) 1QFY05 1QFY06 Change
Net sales 6,111 7,351 20.3%
Expenditure 5,548 6,854 23.5%
Operating profit (EBDITA) 563 497 -11.8%
Operating profit margin (%) 9.2% 6.8%  
Other income 70 115 64.9%
Interest (net) 1 24  
Depreciation 212 227 7.2%
Profit before tax 420 361 -14.1%
Extraordinary items - - -
Tax 148 112 -24.5%
Profit after tax/(loss) 272 249 -8.5%
Net profit margin (%) 4.4% 3.4%  
No. of shares (m) 238 238  
Diluted earnings per share (Rs)* 4.6 4.2  
P/E (x)   19.8  
(* annualised)      

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. Year 2002 saw Suzuki Motors exit from the business, forcing the TVS management to commit itself to sizeable investment and develop its own R&D. The company has a presence in all the segments viz. motorcycles, scooters and mopeds. In FY05, while motorcycles constituted 58% of its total portfolio, scooters and mopeds contributed 19% and 23% respectively. Traditionally, a regional player (southern region), over the last few quarters, it has been making considerable efforts to expand its reach in other regions.

What has driven the performance in 1QFY06?
Segmental breakup
  1QFY05 1QFY06 Change
Motorcycles 138,220 176,580 27.8%
Scooterettes 54,832 62,562 14.1%
Mopeds 60,820 68,283 12.3%
Total 253,872 307,425 21.1%
Domestic 241,684 287,264 18.9%
Exports 12,188 20,161 65.4%
Total 253,872 307,425 21.1%
Volumes – an all round performance:  As can be seen from the table, all round volume sales across segments enabled the company to post a 20% YoY topline growth. In the motorcycle segment, TVS launched two new models, ‘Star’ and ‘Centra’ in 2004. Apart from this, it also introduced ‘Victor GLX’, the upgraded version of its successful model ‘Victor’. These launches have enabled the company to improve on its volumes. If one were to sum the performance of the company in the motorcycle segment over last few quarters, it would be an ideal example of spurts and misses (see graph below). However, one should note that the decline in volumes in 4QFY05 was primarily owing to the higher base in 4QFY04, which was a factor of the introduction of ‘Star’ in January 2004.

We feel that the primary reason for the fall in the market share of the company in the past was its inability to provide a replacement for its erstwhile successful brand ‘MAX-R100’, a two-stroke engine motorcycle. However, with the launch of ‘Star’, we feel that the gap has been filled. Apart from this, the company’s strategy to concentrate on major models (i.e. Star, Victor, Scooty, etc.) should be beneficial in the future. Given the strong presence of the company in the ungeared scooter segment (which is expected to be another growth driver, besides motorcycles), we feel that the fall in the volumes for the company has bottomed out. Further, the company’s thrust on exports (as reflected by the 65% YoY increase in 1QFY06, albeit on a small base) will provide some cushion to the volatility being witnessed in domestic volume sales.

Cost break-up...
(Rs m) 1QFY05 1QFY06 Change
Raw materials 4,027 5,268 30.8%
% sales 65.9% 71.7%  
Staff cost 363 380 4.7%
% sales 5.9% 5.2%  
Other expenses 1,158 1,206 4.1%
% sales 18.9% 16.4%  
The same old raw material story:  Just like any other automobile manufacturer, TVS has been facing the brunt of rising raw material costs, primarily steel. It should be noted that steel, which accounts for almost 40% to 45% of the operating costs, has witnessed an increase in prices by about 60% over the last couple of years. The adversity is further aggravated due to the inability of the company to pass on the burden onto the consumer in the same proportion. The pricing pressure, due to competitive environment, is clearly visible from the fact that the sales growth has been lower than volume growth.

The adverse impact of high raw material costs has completely overshadowed the efforts by TVS to control costs as evident by the reduction in staff cost and other expenses (as a % of sales).

Interest costs – as expected:  The rise in interest expenses should be viewed with respect to the capex plans of the company. TVS has outlined an expansion plan involving outlay of Rs 4.5 bn over the next two years. While the exact schedule of the borrowings is not available, we have estimated an interest outgo of Rs 117 m in FY06 as against Rs 8 m in FY05. Further, this rise in interest costs negated the impact of the 65% rise in other income. All of the above led to contraction in bottomline by 9% YoY.

What to expect?
At Rs 83, the stock is trading at a price to earnings multiple of 19.8 times its annualised 1FY06 earnings and about 11 times our estimated FY07 earnings. The company’s volatile history raises some doubt about its ability to perform on a consistent basis. Having said that, the management's commitment in the form of increased R&D spending and capital expenditure in such difficult times tends to reflect the confidence level of the company. Further, as stated earlier, we feel that the fall in the volumes for the company has bottomed out. With a new strategy in place and increased thrust on exports, we feel that the company should be able to deliver on a consistent basis in the future. We had recently recommended a BUY on the stock and maintain the same.

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