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TVS Motor: A mixed bag! - Views on News from Equitymaster

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TVS Motor: A mixed bag!
Oct 26, 2006

Performance summary
TVS Motor, the third largest two-wheeler manufacturer in the country, has witnessed mixed performance during 2QFY07. While robust volume growth and a small contraction in margins has seen a 22% jump in operating profits on a 37% growth in topline, bottomline has suffered a decline of 22%, largely due to a 58% reduction in other income and a 131% jump in interest costs. For 1HFY07, while the topline has grown 31% YoY, a huge 140 basis points contraction in operating margins has resulted into a bottomline decline of 19%.

(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Net sales 7,892 10,779 36.6% 15,243 19,997 31.2%
Expenditure 7,433 10,219 37.5% 14,287 19,021 33.1%
Operating profit (EBDITA) 459 560 21.9% 956 976 2.1%
EBDITA margin (%) 5.8% 5.2%   6.3% 4.9%  
Other income 261 109 -58.4% 377 287 -23.8%
Interest (net) (27) (62) 130.6% (51) (122) 138.2%
Depreciation 231 244 5.9% 458 478 4.3%
Profit before tax 463 363 -21.7% 824 664 -19.4%
Extraordinary income/(expense) - -   - -  
Tax 144 114 -20.4% 255 203 -20.5%
Profit after tax/(loss) 320 248 -22.3% 569 461 -18.9%
Net profit margin (%) 4.0% 2.3%   3.7% 2.3%  
No. of shares (m) 237.5 237.5   237.5 237.5  
Diluted earnings per share (Rs)* 5.4 4.2   4.8 3.9  
Price to earnings ratio (x)**         23.8  

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. The year 2002 saw Suzuki Motors exit from the business, forcing the TVS management to commit itself to sizeable investments and develop its own R&D. The company has a presence in all the segments viz., motorcycle, scooters and mopeds. In FY06, while motorcycles constituted 60% of volume sales, scooters and mopeds contributed 18% and 22% respectively. Traditionally, a regional player (southern region), over the last few years, it has made significant progress to strengthen its presence in the western region, which is yielding desirable results. Exports accounted for 6% of volume sales in FY06 as compared to 4% in FY05.

What has driven performance in 2QFY07?
‘Apache and Star’ – The two jewels in its crown: As per the company, robust growth in turnover was due to strong brands and result of the good demand witnessed in the sale of its motorcycles. During the quarter, the motorcycles sales of 258,321 units compared to 188,200 recorded last year (up 37.3% YoY as against the industry growth of 17.4%). Consequently, motorcycles market share during the quarter jumped to 14.8% compared to 12.6% reported last year during the same period. In fact, during the quarter, the growth rate of TVS Motor Company in all segments was higher than the industry growth rate i.e motorcycles, scooters and mopeds. The company improved its overall two-wheeler market share from 17.8% to 20.1%.

TVS Apache continued to receive good response in all the markets it has been launched and was able to garner the No. 2 position in the premium segment of motorcycle market (22%).

Exports recorded the highest ever sales in a quarter by recording 31,729 units compared to 22,954 units recorded during the same period last year, at a growth of 38%

Sales break-up (2QFY07)
Domestic 2QFY06 2QFY07 % change
Motorcycles 173,261 233,858 35.0%
Scooter/scooterette 65,618 70,894 8.0%
Mopeds 63,697 82,714 29.9%
Total 302,576 387,466 28.1%
Exports      
Motorcycles 14,939 24,463 63.8%
Scooter/scooterette 3,196 2,470 -22.7%
Mopeds 4,819 4,796 -0.5%
Total 22,954 31,729 38.2%
Grand total 325,530 419,195 28.8%

Input price pressure hurts margins: The increased cost of raw material like steel, aluminum, rubber continued to impact the margins of the company. In view of the continued firmness in input cost, the company affected a price increase of some of the models around mid September 2006. Despite the move, there was a 60 basis points drop in operating margins, thus restricting the operating profit growth rate to 22% YoY.

Cost break-up…
(Rs m) 2QFY06 2QFY07 Change
Raw materials 5,646 7,967 41.1%
% sales 71.5% 73.9%  
Staff cost 403 461 14.3%
% sales 5.1% 4.3%  
Other expenditure 1,384 1,791 29.4%
% sales 17.5% 16.6%  

Lower other income to the tune of 58% and higher financing costs meant that growth at the operating level would not translate into a higher net profit number for the company and as a consequence, the company ended the quarter with a 22% YoY drop in net profit.

Motorcycles market share

What to expect?
At the current price of Rs 108, the stock is trading at an attractive price-to-cash flow multiple of 7 times our estimated FY09 cash flow per share. The success of its recent launches in the motorcycles segment is a proof of the company’s ability to come out with world-class products and hold its own in the competitive Indian market. Hence, notwithstanding the short-term blips, we are confident of the company’s ability to take advantage of the industry growth story. However, lower margins vis-ŕ-vis its peers remain a concern.

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