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TVS Motor: The pain endures - Views on News from Equitymaster

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TVS Motor: The pain endures
Oct 24, 2007

Performance summary
  • Led by a 23% drop in volumes, topline falls by almost the same rate during the quarter
  • Operating profits fall 46% YoY as operating margins tumble by 160 basis points

  • Higher interest charges further chops away at the profits, resulting into a 52% YoY decline in net profits for the quarter

  • Half yearly performance has been even poorer, with the bottomline shrinking by 58% YoY, on the back of a 19% YoY drop in topline

    (Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
    Units sold 419,195 323,057 -22.9% 795,526 643,240 -19.1%
    Net sales 10,779 8,234 -23.6% 19,997 16,068 -19.6%
    Expenditure 10,219 7,934 -22.4% 19,021 15,576 -18.1%
    Operating profit (EBDITA) 560 301 -46.3% 976 492 -49.6%
    EBDITA margin (%) 5.2% 3.6%   4.9% 3.1%  
    Other income 109 179 64.8% 287 361 25.9%
    Interest (net) 62 70 13.8% 122 168 38.4%
    Depreciation 244 240 -1.7% 478 479 0.3%
    Profit before tax 363 169 -53.3% 664 206 -69.0%
    Extraordinary income/(expense) - -   - 72  
    Tax 114 50 -56.2% 203 84 -58.9%
    Profit after tax/(loss) 248 119 -52.0% 461 195 -57.8%
    Net profit margin (%) 2.3% 1.4%   2.3% 1.2%  
    No. of shares (m) 237.5 237.5   237.5 237.5  
    Diluted earnings per share (Rs)*         1.7  
    Price to earnings ratio (x)*         33.9  
    ( * on trailing twelve months earnings)

    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 2QFY08?
    Steep decline in motorcycles: The company has seen its motorcycles sales slip by a huge 51% YoY over the previous quarter, due largely to depressed industry conditions. Higher interest rates have been making people postpone purchases and this has hit the motorcycles industry badly where domestic volumes were down 16% YoY. As often happens in such a scenario, the weakest player suffers the most and TVS, by virtue of being the smallest of the big three, has had to take the maximum hit. By using their superior balance sheets and marketing muscles to good effect, the top two players have managed to make a big dent in TVS’ market share during the quarter. However, not sitting quiet, TVS has taken the fight to the enemy camp and will soon launch an all- new 125 cc bike called ‘Flame’, which it hopes would revive its sagging fortunes.

    Among other segments, scooter segment has also seen the company’s market share erode during the quarter as volumes grew by just 4% as against the industry growth rate of 22% YoY. Here too, the field is getting crowded with new models being launched rapidly by rivals. The saving grace has been the mopeds division, where thanks to revival in demand from some of the Southern states, volumes have picked up by 20% YoY during 2QFY08. The company has done well on the exports front too as 24% growth in motorcycles has seen the overall exports go up by 14% YoY.

    sales break up
    Domestic 2QFY07 2QFY08 % change 1HFY07 1HFY08 % change
    Motorcycles 233,858 114,273 -51.1% 448,726 244,434 -45.5%
    Scooter/scooterette 70,894 73,503 3.7% 131,667 140,950 7.1%
    Mopeds 82,714 99,039 19.7% 157,632 195,401 24.0%
    Total 387,466 286,815 -26.0% 738,025 580,785 -21.3%
    Exports            
    Motorcycles 24,463 30,211 23.5% 43,423 50,542 16.4%
    Scooter/scooterette 2,470 2,182 -11.7% 5,289 4,775 -9.7%
    Mopeds 4,796 3,849 -19.7% 8,789 7,138 -18.8%
    Total 31,729 36,242 14.2% 57,501 62,455 8.6%
    Grand total 419,195 323,057 -22.9% 795,526 643,240 -19.1%
    Source: SIAM

    Margin pressure continues: Company’s operating margins are the lowest among the top three players and hence, more sensitive to inflationary trends. Not surprisingly then, a 22% fall in costs has led to a huge 46% drop in operating profits and a 160 basis points contraction in operating margins. The main culprit has been the salary costs, which have increased by 4% in absolute terms during the quarter. The solace though has come from the raw materials side, where the company did not face a significant upward spike.

    cost break up
    (Rs m) 2QFY07 2QFY08 Change
    Raw materials 7,967 6,146 -22.9%
    % sales 73.9% 74.6%  
    Staff cost 461 480 4.2%
    % sales 4.3% 5.8%  
    Other expenditure 1,791 1,307 -27.0%
    % sales 16.6% 15.9%  

    Interest costs have witnessed a rise, edging higher by 14% YoY, perhaps due to piling up of inventories at dealers and capex incurred towards new launches. This further shaved off profits the company earned from operations and has led to a bottomline fall of 52% on a YoY basis during the 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 as far as topline growth is concerned. Margins though have shown a marked improvement and have been the highest amongst the last four quarters. However, they are still way off the levels earned by the top two companies and that seems to be the key challenge facing the company.

    over the last few quarters
      2QFY07 3QFY07 4QFY07 1QFY08 2QFY08
    Net sales (YoY growth %) 36.6% 7.3% 9.6% -15.0% -23.6%
    OPM 5.2% 3.2% 1.1% 2.4% 3.6%
    NPM 2.3% 1.2% 1.0% 1.0% 1.4%

    What to expect?
    At the current price of Rs 57, the stock is trading at a price to earnings multiple of 34 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 soon make changes to our current estimates for the company.

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