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TVS Motor: Volumes up, profit down! - Views on News from Equitymaster
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TVS Motor: Volumes up, profit down!
Oct 28, 2005

Introduction to results
TVS Motor announced its 2QFY06 results yesterday. In comparison to its peers, the performance of the company has been below par. For the second quarter, while the though the topline grew by mere 6%, mired by higher raw material costs, the operating profits fell by 32% YoY. Similarly, the net profit also saw a decline of 7% YoY. Having regards to the sharp fall in the operating profits, the company has managed well to reduce the impact on the bottomline.

(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Net sales 7,429 7,892 6.2% 13,539 15,243 12.6%
Expenditure 6,755 7,433 10.0% 12,302 14,287 16.1%
Operating profit (EBDITA) 674 459 -31.9% 1,237 956 -22.7%
EBDITA margin (%) 9.1% 5.8%   9.1% 6.3%  
Other income 87 261 200.3% 157 377 139.9%
Interest (net) 8 27 235.0% 9 51 466.7%
Depreciation 223 231 3.5% 435 458 5.3%
Profit before tax 530 463 -12.6% 950 824 -13.3%
Extraordinary item - -   - -  
Tax 188 144 -23.7% 336 255 -24.0%
Profit after tax/(loss) 342 320 -6.6% 614 569 -7.4%
Net profit margin (%) 4.6% 4.0%   4.5% 3.7%  
No. of shares (m) 237.5 237.5   237.5 237.5  
Diluted earnings per share (Rs)* 5.8 5.4   5.2 4.8  
Price to earnings ratio (x)         17.8  
(* annualised)            

What is 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. Year 2002 saw Suzuki Motors exit from the business, forcing the TVS management to commit itself to sizeable investment and develop its own R&D. The company has a presence in all the segments viz. motorcycles, scooters and mopeds. In FY05, while motorcycles constituted 58% of its total portfolio, scooters and mopeds contributed 19% and 23% respectively. Traditionally, a regional player (southern region), over the last few quarters, it has been making considerable efforts to expand its reach in other regions.

What has driven the performance in 2QFY06?

Segmental breakup
  2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Motorcycles 161,150 188,200 16.8% 299,370 364,780 21.8%
Scooterettes 64,227 68,814 7.1% 119,059 131,376 10.3%
Mopeds 69,184 68,516 -1.0% 130,004 136,799 5.2%
Total 294,561 325,530 10.5% 548,433 632,955 15.4%
Domestic 279,693 302,576 8.2% 527,339 589,840 11.9%
Exports 14,868 22,954 54.4% 21,094 43,115 104.4%
Total 294,561 325,530 10.5% 548,433 632,955 15.4%

Motorcycles – leading the way: As can be seen from the above table, TVS Motor maintained the momentum in the motorcycle segment during the second quarter. This has been due to a number of factors. Firstly, the company changed its strategy and started concentrating on few ‘power’ brands since the commencement of FY06. Secondly, TVS Motor has adopted an aggressive publicity and promotion strategy, which was not the case during last few years. Finally, the launch of ‘Star City’ and ‘Victor Edge’, the upgraded versions of ‘Star’ and ‘Victor’ respectively has enabled the company to grow volumes. Had it not been for the unfortunate events in the month of July 2005 (due to rains), the volumes growth in 2QFY06 would have been much higher.

Operating margins – hits a road block: There has been a sharp decline of 330 basis points in the operating margins of TVS. This has been primarily on account of 500 basis points increase in the raw material costs. Though on the face of it, the increase appears to be steep, a deeper analysis gives a correct picture. It should be noted in 2QFY05, the raw material (as a percentage of sales) was on the lower side when compared to it peers and earlier period (see adjacent graph), which to an extent enabled TVS to report a higher operating margin in 2QFY05. Apart from this, increasing share of motorcycles in the volume mix has also resulted in higher raw material cost.

The leap jump in the raw material costs has completely overshadowed the efforts of the company on other operating expenses front which has declined by 4% YoY. This has been despite increasing publicity and promotional expenses undertaken by the company.

Cost break - up...
(Rs m) 2QFY05 2QFY06 %Change 1HFY05 1HFY06 %Change
Raw materials 4,944 5,646 14.2% 8,971 10,914 21.7%
% sales 66.5% 71.5%   66.3% 71.6%  
Staff cost 370 403 8.9% 733 783 6.8%
% sales 5.0% 5.1%   5.4% 5.1%  
Other expenses 1,442 1,384 -4.0% 2,599 2,590 -0.4%
% sales 19.4% 17.5%   19.2% 17.0%  

Subdued net margins: Apart from the raw material impact, a 235% YoY increase in interest expense has affected net margins. However, TVS has managed to reduce the impact of the above factors. This has been on account of a 200% YoY increase in other income and a 400 basis points reduction in the effective tax rate. The increase in interest outgo should be viewed in light of company’s borrowing schedule in order to fund its expansion plans. The company has chalked out Rs 4.5 bn expansion plan, which involves setting up a two-wheeler plant in Himachal Pradesh and Indonesia and a three-wheeler plant in South. These plants are expected to be operational in FY07. While the exact schedule of the borrowings is not available, we have estimated an interest outgo of Rs 117 m in FY06 as against Rs 8 m in FY05.

Over the last few quarter: If one were to sum the performance of the company, it would be an ideal example of hits and misses (see adjacent graph). We feel that the primary reason for the fall in the market share of the company in the past was its inability to provide a replacement for its erstwhile successful brand ‘MAX-R100’, a two-stroke engine motorcycle. However, with the launch of ‘Star’, we feel that the gap has been filled. Apart from this, the company’s strategy to concentrate on major models (i.e. Star, Victor, Scooty) should yield results (in value terms) in the future. Given the strong presence in the ungeared scooter segment (which is expected to be another growth driver, besides motorcycles), we feel that the worst is over for the company.

What to expect?
At Rs 83, the stock is trading at a price to earnings multiple of 9 times and price to cash flow of 5.7 times our FY08 estimates. The topline performance (46% of full year) of the company is largely in line with our FY06 estimates. However, higher than estimated raw material costs (as a percentage of sales) has resulted in a lower than expected growth in the bottomline (42% of our estimates). Similarly, the company’s volatile history raises some doubt about its ability to perform on a consistent basis.

Having said that, the management's commitment in the form of increased R&D spending and capital expenditure in such difficult times tends to reflect the confidence level of the company. Further, as stated earlier, we feel that the fall in the volumes for the company has bottomed out. With a new strategy in place and increased thrust on exports, we feel that the company should be able to deliver on a consistent basis in the future. We had recommended a BUY on the stock at Rs 84 and we maintain our view.

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