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TVS Motor: Analyst meet extracts
Nov 9, 2005

TVS Motor, the third largest manufacturer of two wheelers in the country, held an analyst meet to give an insight into the future plans of the company, the extracts of which are as follows:

What is the company’s business?
TVS Motor is a leading player in the two-wheeler industry in India. It was incorporated in 1982, as collaboration between TVS Motor group of South India and Suzuki Motors, Japan. Year 2002 saw Suzuki Motors exit from the business, forcing the TVS Motor’s 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.

An insight into past four years: The performance of TVS Motor has been lagging in the motorcycle segment when compared to its peers. The management attributed this to a number of reasons. Firstly, post the severance of ties with Suzuki in 2002, the company needed time to develop a reasonable technical platform. Apart from this, scalability was also an issue. Thirdly, the product development time at around 24 months was significantly high when compared to peers. As a result, the company was slow in offering a four-stroke engine replacement for its erstwhile two-stroke engine motorcycles. This was one of the significant reasons for losing market share.

However, the company believes that it has a reasonably strong R&D base, product development capabilities (reduced to around 15 months) and has developed adequate scale (total production capacity of 2 m units). Also, with the launch of four-stroke motorcycle ‘Star’ and its variants, TVS seem to be on a better footing as compared to the past four years.

Domestic expansion: TVS is setting up a plant in Himachal Pradesh with an initial investment of Rs 900 m. As per the management, apart from tax incentives, the new facility will act as a satellite plant in the initial phase and hence, is expected to improve margins once fully operational in 1QFY07. Similarly, the company is also setting up a three-wheeler plant in Mysore. However, the plant will take atleast 15 to 18 months to start production and hence, management was not willing to share much of the plans. However, as per the management, the current size of the domestic three-wheeler sector is around 360,000 units, valued at Rs 25 bn. Further, there is a significant potential for exports of three wheelers.

ASEAN expansion: As per the management, the Indonesian market size is estimated at 5 m units, 90% of which are step-thrus (grown at 30% per annum in last two years). The size of ASEAN region is close to 10 m units. Presently, Honda Motorcycles is the market leader with around 50% share, followed by Suzuki Motors and Yamaha (30% market share put together). The Chinese motorcycles dominate the rest of the market. As per the management, while the offerings of Japanese players are expensive, the Chinese bikes have quality issues. Hence, it believes that there is good growth potential.

TVS Motor is investing around US $ 50 m to US $ 70 m for setting up a plant in Indonesia with an initial capacity of 300,000 units (commercial production is expected to begin by December 2006). The company aims to achieve cash break-even in the first year of commercial production.

Funding of the expansion plans: The funding for these expansions will be through a mixture of debt and equity. For this purpose, it has obtained a line of credit worth US$ 80 m at an average cost of 4.5% per annum. As the funding details are not available, we have factored in a borrowing of around US$ 65 m at an exchange rate of Rs 45 per dollar.

While, we have factored in the funding part, we have not considered the potential volume growth in our projections from the satellite plant, three-wheelers capacity and Indonesia. To that extent, there is an upside.

Cost reduction plans: There has been a significant increase in raw material costs during 1HFY06 YoY. In order to control costs, the company is looking at global sourcing of materials, especially from China. TVS expects cost savings of around 15% to 20% as a result of this strategy. The benefits are expected to flow from the 2HFY06 onwards. Apart from this, the company is aiming to ensure optimum utilisation of assets and resources. For instance, it aims to improve its fixed asset turnover ratio from 2.6 times to around 5 times in next three years. Similarly, it aims improve revenue per employee by around 100% from the current levels. We have factored in sales to assets ratio of 3.8 times for FY08 and improvement in sales per employee by 6 % per annum.

Future launches: TVS aims to reduce the product development time to around 12 months in the immediate future. It is planning to launch a new motorcycle in the premium category (above 150 cc). Similarly, TVS is planning to replace ‘Victor’ by October 2006. The management also aims to introduce two new model/variants each year, going forward.

Fuel prices: The management expects the fuel prices to rise in the future. However, the rise in fuel prices will be beneficial for the two-wheeler industry because of fuel efficiency aspects as compared to four-wheelers. Currently, the average cost per km for a two-wheeler is less than a rupee as compared to around Rs 3 per km in case of ‘Maruti 800’.

What to expect?
At Rs 95, the stock is trading at price to earnings multiple of 10.4 times and price to cash flow of 6.5 times our FY08 estimates. We believe that the worst is over for the company in terms of volume. Further, the management’s commitment in R&D and capital expenditure during the difficult times indicates the confidence level. Having said that, a volatile past history raises some concerns. With a new strategy in place and increasing thrust on exports, we believe that company can deliver on a consistent basis, which was not the case in last four years. We had recommended a BUY on the stock at Rs 84. We maintain our view.

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