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TVS Motor: Revels in low inflation environment - Views on News from Equitymaster

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TVS Motor: Revels in low inflation environment
Oct 23, 2009

Performance summary
  • Topline grows by 9% during the quarter led by 6% growth in volume sales, both on a YoY basis
  • Operating profits grow nearly 22% YoY as margins expand by 70 basis points
  • Net profit more than doubles as benign depreciation charges and tax credit add further buoyancy to the good operating show
  • Half yearly bottomline zooms 145% YoY on the back of a modest 8% growth in topline


(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 10,342 11,299 9.3% 19,586 21,186 8.2%
Expenditure 9,701 10,518 8.4% 18,340 19,629 7.0%
Operating profit (EBDITA) 641 780 21.8% 1,247 1,556 24.9%
EBDITA margin (%) 6.2% 6.9%   6.4% 7.3%  
Other income 10 28 195.0% 16 31 90.7%
Interest (net) 122 153 25.8% 217 325 49.3%
Depreciation 389 410 5.4% 806 815 1.0%
Profit before tax 139 245 76.1% 239 449 87.5%
Extraordinary income/(expense) - (3)   - (7)  
Tax 35 (4) -111.7% 65 15 -76.8%
Profit after tax/(loss) 104 246 136.1% 174 427 144.9%
Net profit margin (%) 1.0% 2.2%   0.9% 2.0%  
No. of shares (m) 237.5 237.5   237.5 237.5  
Diluted earnings per share (Rs)*         2.4  
Price to earnings ratio (x)*         26.2  
* on trailing twelve months earnings

What has driven performance in 2QFY10?
  • With bigger competitors like Bajaj Auto and Hero Honda getting aggressive with their product launches, TVS Motor has found it difficult to grow its motorcycle volumes during the quarter. The same has seen a fall of nearly 5% in the domestic markets. Motorcycles exports have also been nothing to write home about as they have taken a hit of 35% YoY. However, what has saved the day for the company is the growth in scooter and mopeds in the domestic markets, as they have grown by 19% and 31% respectively on a YoY basis. Sales of three wheelers have also witnessed a strong growth of 150%, albeit on a lower base. Going forward, motorcycles may receive a fillip as the company looks to launch a new model in the segment.

    sales break up
    Domestic 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
    Motorcycles 130,617 124,256 -4.9% 258,940 248,067 -4.2%
    Scooter/scooterette 70,192 83,470 18.9% 130,143 148,639 14.2%
    Mopeds 113,219 147,731 30.5% 215,677 274,416 27.2%
    Electric two-wheelers 3,757 135 -96.4% 5,985 255 -95.7%
    Three wheelers 1,226 3,074 150.7% 1,991 5,204 161.4%
    Total 319,011 358,666 12.4% 612,736 676,581 10.4%
    Exports            
    Motorcycles 46,956 30,428 -35.2% 82,996 59,395 -28.4%
    Scooter/scooterette 2,680 3,110 16.0% 4,362 5,071 16.3%
    Mopeds 2,613 1,542 -41.0% 4,185 1,970 -52.9%
    Electric two-wheelers - - n.a. - - n.a.
    Three wheelers - 185 n.a. - 300 n.a.
    Total 52,249 35,265 -32.5% 91,543 66,736 -27.1%
    Grand total 371,260 393,931 6.1% 704,279 743,317 5.5%

  • The company’s high operating leverage has meant that even a 70 basis point improvement in operating margins has led to a 22% growth in operating profits. While raw material costs have come down significantly as a percentage of sales on account of lower commodity prices, higher other expenditure has taken some sheen off the same. Nevertheless, the company has still managed to eke out a small margin improvement.

  • Apart from higher operating margins, benign depreciation charges and tax credit to the tune of Rs 4 m has helped the company to propel its growth further and has resulted in a strong 136% growth in net profits. Net profit for the half year has also witnessed similar buoyancy, coming in higher by 145% YoY.

What to expect?
At the current price of Rs 62, the stock trades at a multiple of 6x its expected FY12 cash flow per share. The company has done well of late not only in terms of improving its topline but also in containing costs. However, any further improvement on the margin front looks difficult to come by and the growth will have to be driven by growth in volumes. While the same has received an impetus on account of the company’s entry in the three-wheeler business, we expect TVS to continue to remain a distant third in the two-wheeler space. The company’s valuations at current levels warrant some degree of caution.

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