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TVS’ ASEAN venture: Sensitivity analysis

Dec 8, 2005

The Indian two wheeler manufacturers are increasingly looking at exports as an important revenue stream, with a specific concentration on the ASEAN (Association of South East Asian Nations) region, which is a consortium of ten countries, including Thailand, Indonesia, Malaysia, the Philippines, Vietnam and Singapore. The move appears to be a follow-up of the long drawn efforts to improve the technological and cost competitiveness and diversify into newer markets. It should be noted that Indian players are amongst the most efficient manufacturers of the two-wheelers in the world. TVS Motor, the third largest two-wheeler manufacturer in India, has drawn aggressive plans for its entry into the ASEAN region. The company will be investing around US$ 70 m in setting up a manufacturing plant in Indonesia and is considering it as a hub for the ASEAN region. This plant is expected to commence production by the fourth quarter of FY07. Currently, exports account for around 6% of TVS’ total volumes. Further, the management has clarified that the ASEAN region has no significant contribution to current exports, but is expected to be a big contributor going forward. In this article, we shall dwell further into this venture of TVS Motor.

The global two-wheeler market: The size of the global two-wheeler market is estimated to be around 37 m units. Around 90% of this market is dominated by sub 250cc vehicles, wherein lies the expertise of the Indian players like Bajaj Auto, Hero Honda and TVS Motor. As can be seen from the adjacent chart, the maximum demand for two wheelers comes from the Asian region (around 92%). This is primarily because the average per capita GDP of this region is less than US$ 1,200 to US$ 1,300 (the threshold point for the demand for four-wheelers).

ASEAN market: The ASEAN two-wheeler market size is estimated to be around 10 m units (or 27% of global volumes). While Indonesia accounts for around 40% to 45% of this market, Thailand and Vietnam are other major players with 19% and 15% share respectively. The two-wheeler sales are in the nature of step-thrus and motorcycles. However, the Indonesian market is largely dominated by the step-thrus (bebeks). Similarly, either the expensive Japanese offerings or the cheap Chinese products dominate these markets. This makes the Indian players believe that there exists adequate room for them and a market share in the region of 12% to 15% is achievable in a period of 12 to 18 months.

Where is TVS placed?
About the project: TVS Motor is setting up a plant involving initial investment of US$ 70 m in association with a local partner (primarily for distribution and related issues). The initial capacity will be 120,000 units, which can be scaled upto 300,000 units, as per the company’s management. The necessary approval of the project has already been obtained from the Indonesian government and the required land has been purchased. The product development is on schedule and the management expects the launch from the new plant in December 2006 (4QFY07). The funding of the project will be through a mix of debt and equity. It should be noted that TVS has obtained a line of credit worth US$ 100 m for this purpose.

What is the potential benefit?
Before commencing on the number crunching, we would like to clarify that in our research report, while we have factored in the investment and the debt burden, we have not factored in the volume growth as the potential benefit is expected only in FY08.

In this article we have done a sensitivity analyses based on different market share of TVS in FY08 and different CAGR growth for the ASEAN region, with CY04 volumes being at 10 m units.

CY07E* - ASEAN region sensitivity analysis
TVS market share 3% 5% 8% 10% 12% 15%
If the ASEAN markets grows at 7% CAGR during CY04-CY07
Incremental EPS for TVS 0.21 0.34 0.55 0.69 0.82 1.03
% of FY08E estimates 2.5% 4.1% 6.5% 8.2% 9.8% 12.3%
If the ASEAN markets grows at 9% CAGR during CY04-CY07
Incremental EPS for TVS 0.22 0.36 0.58 0.73 0.87 1.09
% of FY08E estimates 2.6% 4.3% 6.9% 8.6% 10.4% 13.0%
If the ASEAN markets grows at 11% CAGR during CY04-CY07
Incremental EPS for TVS 0.23 0.38 0.61 0.77 0.92 1.15
% of FY08E estimates 2.7% 4.6% 7.3% 9.1% 10.9% 13.7%
* CY07 for ASEAN will be FY08 for India            

Despite considering the incremental EPS for TVS as has been indicated in the table above under different scenarios, investors need to understand that the company will have to compete not only with local players but also other Indian players (like Bajaj Auto and Hero Honda) that are eyeing this market.

What is the downside risk?
The biggest risk that the company faces is that of failure of its project in terms of volume offtake, especially when one considers the past volatile record of the company. However, we believe that, over the past four years, TVS has developed its R&D skill-set and has seemingly learnt from its past mistakes.

As stated earlier, since we have not taken any gains arising from this project in our FY08E, while factoring in the rising depreciation and interest burden, we do not see any downside due to risk associated with this project. Further, even after incorporating the debt burden in our projection, the debt/equity is around 0.5, which gives further comfort. We believe that this venture should yield results in the long run for TVS. Incidentally, the management is also having similar thoughts!

We had recommended TVS Motor as a ‘Buy’ in July 2005 at Rs 84 with a target price of Rs 126. At the current juncture, we maintain our view on the stock.

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