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TVS: Where to from here? - Views on News from Equitymaster
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  • Sep 28, 2001

    TVS: Where to from here?

    TVS is a leading player in the manufacture and sale of motorcycles, scooters and mopeds. It was promoted by the TVS group of South India and Suzuki of Japan. Recently, Suzuki decided to exit the joint venture. Here we look at the ramifications of the stake sale and what are the prospects for the company in the long run.

    Suzuki has decided to sell its 25.97% stake in the joint venture to Sundaram Clayton at Rs 15 per share (total consideration of around Rs 90 m). This works out to an 82% discount to the current market price of Rs 84. The company’s technology agreement will be valid for a period of 30 months and TVS would be allowed to use Suzuki’s brand name for the aforesaid period after which the Japanese multinational will be allowed to enter the Indian market. Currently, Sundaram Clayton has a 32.5% stake in the company and after the stake sale it will go up to 58.4%.

    The impact on the company is multi-fold. For one, the company’s imported machinery spares, as a percentage of total consumption, has gone up from 9.5% in FY00 to 27.3% in FY01. Besides, raw materials imported as a percentage of total consumption has also increased from 11.5% in FY00 to 14.0% in FY01. The reason could be the introduction of new range of models like Fiero and Spectra, which seem to have a lower proportion of indigenous content. Given this backdrop, the company might have to scale up use of indigenous components within the next 30 month.

    Import statistics…
    (% of total consumption) FY00 FY01
    Machinary spares 9.5% 27.3%
    Raw materials & comp 11.5% 14.0%
    Royalty 1.0% 1.0%
    Besides, the company has to consistently introduce new models in order to sustain its market share in such a competitive environment. The exit of Suzuki from the joint venture does not augur well for the company on this front. Though the company has 30 months time, it might have to substantially increase its research and development expenses to develop an in-house technology for motorcycles. On the other hand, it might want to find a new partner in the company. Since none of the European motorcycle manufacturers have presence in India, the company could rope in BMW or Ducati for a stake in the company (remember, BMW entered the Indian markets in early 1990s but failed on account of its premium pricing strategy). But it remains to be seen how the scenario emerges.

    The shareholding pattern…
    (% of total) Pre-sale Post-sale
    Indian Promoters 32.5% 58.4%
    Collaborator 26.0% -
    FIIs & NRIs 7.4% 7.4%
    Banks & FIs 11.3% 11.3%
    Mutual funds 1.6% 1.6%
    Other companies 5.9% 5.9%
    Directors 0.0% 0.0%
    Public 15.3% 15.3%
    Total 100.0% 100.0%
    Among the positives, TVS is the third largest player in the two-wheeler segment has sold 863,446 units as of March 2001, a growth of 3% YoY. The company has a commanding market share of 66% in the mopeds segment. While industry volumes fell by 7%, TVS showed a negative growth of 4% to 0.3 m units for mopeds. It has a significant presence in the southern region. On the motorcycles front, TVS had launched a number of new models last year and has lined up atleast two models for FY02. Consequently, this should increase its presence in the 100 cc segment. With the motorcycle segment growing at a CAGR of an estimated 25%, the company’s brand equity should enable it to capitalize on its leadership position.

    But the company has been suffering on various counts over the last few years. Competitors like Hero Honda and Bajaj Auto have made significant inroads in the Southern market, where TVS has a big presence. While the motorcycle segment grew at a rate of around 20% in 1QFY02, TVS posted a 2% fall in volumes. Though scooter sales grew by 12% in 1QFY02, thanks to the new launches in the ‘Scooty’ range, moped volumes plummeted by 39%. As a result, overall volumes fell by 16% in 1QFY02.

    Sales mix…
    (% of sales) FY00 FY01
    Mopeds 25.4% 24.2%
    Motorcycles 52.4% 53.5%
    Scooters 14.8% 14.9%
    Spares 7.5% 7.4%
    Total 100.0% 100.0%
    Since mopeds contributed an estimated 45% of total volumes for the company in FY01, the stagnating mopeds segment does not augur well for TVS. With competitors launching 4-stroke motorcycles at a marginal premium to the mopeds and scooters segment, there has been a notable shift in consumer preferences towards motorcycles. Also, with India coming into the WTO purview, imports are expected to flood the markets. This might further add to the woes of the company.

    But TVS is focusing on value engineering and cost reduction to maintain margins. This combined with an expected rise in agricultural production, on the back of a good monsoon, should benefit the company in posting better volume growth towards the end of FY02.

    The key lies in roping an international player and introducing new models to push growth. Given the credibility of the management, one would expect the management to take initiatives at a faster pace.



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