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TVS Motor: The positive side of leverage - Views on News from Equitymaster

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TVS Motor: The positive side of leverage
Nov 1, 2008

Performance summary
  • Topline grows by 23% YoY during 2QFY09 on the back of robust growth in motorcycle sales.

  • High operating leverage results into an impressive 44% YoY growth in operating profits as the company manages to trim staff costs and other expenses.

  • Bottomline registers a fall of 12% YoY on the back of exceptional income in the corresponding quarter of last year. Profit before tax (PBT), which excludes the impact of the exceptional, grows by a strong 107%, driven mainly by strong operating performance and benign depreciation charges.



(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 8,388 10,342 23.3% 16,317 19,586 20.0%
Expenditure 8,036 9,832 22.4% 15,678 18,637 18.9%
Operating profit (EBDITA) 353 510 44.5% 639 949 48.4%
EBDITA margin (%) 4.2% 4.9%   3.9% 4.8%  
Other income 25 10 -61.2% 112 16 -85.2%
Interest (net) 70 122 73.4% 168 217 29.2%
Depreciation 240 258 7.7% 479 509 6.2%
Profit before tax 67 139 106.8% 104 239 130.3%
Extraordinary income/(expense) 102 -   174 -  
Tax 50 35 -30.0% 84 65 -22.2%
Profit after tax/(loss) 119 104 -12.7% 195 174 -10.4%
Net profit margin (%) 1.4% 1.0%   1.2% 0.9%  
No. of shares (m) 237.5 237.5   237.5 237.5  
Diluted earnings per share (Rs)*         1.3  
Price to earnings ratio (x)*         23.5  
( * on trailing twelve months earnings)

What has driven performance in 2QFY09?
  • The 23% YoY growth in TVS’ topline was led by the motorcycles segment, where overall volumes improved by a strong 26% YoY. Here, both domestic sales as well as exports contributed to the overall volume improvement. Exports however, stole the limelight, registering growth of more than 60% YoY. While sales of motorcycles in the domestic market (14% YoY) grew by a lot less as compared to exports, it nevertheless was an impressive performance given the adverse retail-financing environment. The company’s presence across all the key segments helped it counter the difficult environment to some extent. Among other segments, while scooters managed to grow only marginally, growth in mopeds stood at an impressive 14% in the domestic markets.

  • On the operating performance front, the company has witnessed a strong 44% YoY growth in profits on the back of a 0.7% expansion in margins. Since the company operated on wafer thin margins during same quarter last year, a small reduction on the staff costs and other expenses front has resulted into a significant jump in operating profits. Important to add that a similar impact could also be witnessed on the other side where a small increase in costs could lead to a huge fall in operating profits. To conclude, lower the margins, greater is the volatility in earnings.

    cost break up
    (Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
    Raw materials 6,270 7,731 23.3% 12,223 14,690 20.2%
    % sales 74.7% 74.8%   74.9% 75.0%  
    Staff cost 480 582 21.1% 947 1,087 14.8%
    % sales 5.7% 5.6%   5.8% 5.6%  
    Other expenditure 1,285 1,521 18.4% 2,507 2,859 14.1%
    % sales 15.3% 14.7%   15.4% 14.6%  

  • Despite the strong jump in operating profits, TVS’ bottomline has come in lower by 13% YoY. However, profits during corresponding quarter last year include an extraordinary income to the tune of Rs 102 m. If one were to exclude the impact of the same i.e. consider the PBT numbers then the growth has stood at an impressive 107%. Besides superior operating performance, a benign depreciation charge has also contributed to this strong show at the PBT level.

    What to expect?
      At the current price of Rs 29, the stock is trading at a multiple of 3 times our estimated FY11 cash flow. The company looks an attractive medium term story. The key to our projections though is the improvement in operating margins failing which it will continue to languish at lower levels. In essence, the stock looks a high risk-high reward proposition.

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