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TVS Motor: The slide continues

Oct 25, 2004

Performance summary
TVS Motor, India’s third largest two-wheeler manufacturer has continued to experience topline pressure and has reported a small 3% YoY drop in topline during 2QFY05. The fall in bottomline however is slightly higher at 8%. The corresponding figures for 1HFY05 stood at 5% and 11% respectively.

(Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Net sales 7,646 7,429 -2.8% 14,271 13,539 -5.1%
Expenditure 6,962 6,755 -3.0% 12,991 12,302 -5.3%
Operating profit (EBDITA) 683 674 -1.4% 1,279 1,237 -3.3%
EBDITA margin (%) 8.9% 9.1%   9.0% 9.1%  
Other income 91 87 -4.6% 176 157 -11.1%
Interest (net) 12 8 -38.0% 25 9 -65.5%
Depreciation 190 223 17.3% 358 435 21.3%
Profit before tax 572 530 -7.3% 1,072 950 -11.4%
Extraordinary item - -   -    
Tax 202 188 -7.0% 382 336 -11.9%
Profit after tax/(loss) 370 342 -7.5% 691 614 -11.1%
Net profit margin (%) 4.8% 4.6%   4.8% 4.5%  
No. of shares (m) 23.1 237.5   23.1 237.5  
Diluted earnings per share (Rs)* 6.2 5.8   5.8 5.2  
Price to earnings ratio (x)   12.7     14.1  
(* annualised)            

What is the company’s business?
TVS is a leading player in the manufacture and sale of motorcycles, scooters and mopeds. Compared to its predominantly southern market oriented growth in the past, it is expanding presence in other regions as well. TVS was formerly promoted by the TVS group of South India and Suzuki of Japan. Suzuki exited the joint venture in 2002. Despite Suzuki's exit, the company has managed to gain market share by developing an indigenous motorcycle, 'Victor'. Apart from motorcycles, TVS also has presence in moped and ungeared scooter segments. The company hopes to grow volumes by focusing on international markets, especially South East Asia.

What has driven performance in 2QFY05?
Motorcycles sales continue to suffer:  The company has once again failed to impress, as overall two-wheeler volumes have declined (down 3% during the second quarter). Motorcycles segment have been the worst hit (13% decline in volumes during 2QFY05). The slide in market share could be attributed to the company’s larger dependence on a single market and absence of a truly successful model, besides ‘Victor’. Moreover, its product portfolio was tilted towards two-stroke bikes, which have virtually fallen out of favor. With the launch of its entry-level four-stroke bike and other models, the company is hopeful that it will once again regain its lost market share. But with competition intensifying, the road ahead seems bumpy. Its other two-wheelers, namely scooters and mopeds, have managed to record positive growth rates with the former growing by 17% during the quarter.

Segmental break-up...
Segment 2QFY04 2QFY05 %change 1HFY04 1HFY05 %change
Motorcycles 184,419 161,150 -12.6% 363,127 299,370 -17.6%
Scooters 54,896 64,227 17.0% 93,513 119,059 27.3%
Mopeds 65,607 69,184 5.5% 121,271 130,004 7.2%
Total 304,922 294,561 -3.4% 577,911 548,433 -5.1%

Operating profits:  On the operating front, the company has witnessed a marginal 20 basis points improvement in operating margins during the quarter. What is commendable however, is the fact that despite its peers feeling the heat of higher raw material expenses, the company has managed to bring down its material expenses during the quarter. But higher wage costs have offset this savings on the raw material side. Despite the good show, the company’s margins are much lower as compared to bigger players like Bajaj Auto and Hero Honda and still much needs to be done to bring them at par with the best in the industry.

Cost break-up...
(Rs m) 2QFY04 2QFY05 %Change 1HFY04 1HFY05 %Change
Raw materials 5,232 4,944 -5.5% 9,777 8971 -8.2%
% sales 68.4% 66.5%   68.5% 66.3%  
Staff cost 297 370 24.4% 600 733 22.1%
% sales 3.9% 5.0%   4.2% 5.4%  
Other expenses 1,433 1,442 0.6% 2,614 2599 -0.6%
% sales 18.7% 19.4%   18.3% 19.2%  

Net profits:  While tax provisioning is lower as compared to last quarter, higher depreciation charges has led to the fall in topline getting amplified and resulting in a 8% drop in bottomline. With the company incurring significant capex towards development and manufacturing of new models, higher depreciation charges are likely to persist in the near to medium term.

What to expect?
At Rs 73, the company trades at a P/E of 14 times its annualised 1HFY05 earnings. While the company’s efforts at launching models are laudable, it is the relatively smaller size of the company’s balance sheet and low level of operating margins that raises concern. Overall, the risks outweigh the positives.

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