The company is unable to make any headway in gaining market share in the competitive motorcycle and scooter market. The investments in its siblings are in a shambles with no clue on what the morrow will beget. But at the same time the parent is a financially well managed entity. This is the paradox of the company's functioning.
The management needs to get a complete grip of its functioning
TVS Motor Company is very firmly in the grip of Venu Srinivasan, the elder sibling to Gopal Srinivasan. As a matter of fact Gopal does not even feature among the list of directors of the company. He makes do with two investment companies and an NBFC operation for his sustenance from what I can make of it. (According to the shareholding pattern that the company has provided the promoter and promoter group holds a more than comfortable 57.4% of the outstanding piddling voting capital of Rs 475 m. This presumably infers that the larger TVS family holds this largesse -the entire promoter shareholding is held by Sundaram Clayton--and not just by Venu and his immediate family. (In the preceding year the vast bulk of the promoter holding was held through a closely held investment company sporting the name of Anusha Investments Ltd. Since then it has resorted to some fancy book entries). It also appears that Venu, this patni and his offspring do not hold any shares in the company on an individual basis. It may also be noted that the company is also the repository of investments in siblings, fellow siblings and associates to the tune of Rs 8.7bn (Rs 9.3 bn previously) and this is a cross that it has to bear come what may given the group shareholding pattern.
That the company is very much in his grasp is quite evident from the manner in which he appointed his greenhorn son Sudarshan Venu as a whole time director of the company in February this year. Sudarshan who is all of 24 years of age has the academic credentials but lacks any experience whatsoever in the job he is expected to perform following his anointment --and a move which elicited public criticism from the emerging fledgling shareholder/ investor bodies. Curiously enough, K N Radhakrishnan who holds the dual titles of President and CEO is not a member of the board. One wonders as to what the reporting structure in the company is.
The revenue streams
As is well known the company makes three varieties of two wheelers ---motorcycles, scooters and mopeds, and the 3 wheeler autoriksha. It makes a variety of motorcycles, scooters, and mopeds both for the domestic and international markets, and the three wheeler autoriksha in the domestic and export formats. The mopeds division was spun off from the parent company Sundaram Clayton many moons ago.
The net revenues for the year (including operating income and other income) were a tad lower at Rs 70.8 bn against Rs 71.63 bn due to lower volume and rupee sales of both motorcycles and scooters. It is motorcycle sales which are at the numero uno position from the revenue point of view followed by mopeds and scooters in that order. Way behind are three wheeler sales-but this department is on the upswing. Another item of note is the sales of 'spares and accessories'. What is interesting (irony really) in the sales breakup is that the company is a pygmy in terms of volume sales in the motorcycle segment. It has a 6% share in the overall market. In un-geared scooters too it is a bit player with a market share of a shade under 15%. It however hogs 100% of the market in the mopeds segment. But this latter factor is not a compliment. Its hold in the three wheeler market where it has two competitors in the main is not known.
In line with the decrease in revenues the pre-tax profit too went in the same direction recording a figure of Rs 2.5 bn against Rs 3.16 bn previously-before providing for the depreciation of one of its investments that is. This fall in profit is despite the lower percentage outflow of 'cost of materials consumed including purchased stock in trade' relative to 'revenue from operations'. What gave a cost push to revenue expenses was the sharp rise by 46% in advertising and publicity at Rs 2 bn from Rs 1.4 bn previously, and the 27% growth in other marketing expenses to Rs 2.6 bn from Rs 2 bn previously. Selling its products requires a lot of moolah given the competition, and especially so in the light of declining revenues. This aspect of the equation will only grow as the heat gets more intense. The very interesting feature here is that 'other operating income and other income' amounting to Rs 996 m and Rs 238m respectively together accounted for close to 49% of pre-tax profit against a similar quantum in the preceding year. What exactly 'other operating revenues' consists of is not very clear-but 'other income' mostly consists of interest income and a small slice of dividend income.
The investment schedule
Like Sundaram Clayton which also belongs to the same branch of the family, the company is being groomed as a holding company of sorts. As I had stated earlier TVS Motor boasts of non-current investments of a book value of Rs 8.7 bn which is marginally lower than the figure of Rs 9.3 bn previously. The investment is almost divided 50:50 between equity shares and preference shares. Almost all the investments pertain to pickings in sidekick companies spawned by the parent - the largest single investment is in the preference shares of TVS Motor Services, Chennai at Rs 2.7 bn, followed by equity investment in TVS Motor (Singapore) at Rs 2 bn. Two other prominent investments are the preference share investment in its Indonesia based offspring with a book value of Rs 1.5 bn and the equity investment in its Amsterdam basedoffshoot at Rs 1.3 bn. The company also holds a block of shares in Suprajit Engineering, which makes two wheeler parts and is headquartered at Bangalore. It is not known whether this company is a part of the Venu Srinivasan group or is strictly categorised as a strategic investment. The reason for the fall in the book value of investments at year end is the provisioning for its Amsterdam based investment by Rs 916m.
It may be noted that the equity investment in TVS Motor Services, Chennai is a miniscule Rs3.8 m while it does not have any equity stake in the Indonesian venture. It appears to be a pure preference capital play in this company. It also boasts of siblings based out of Singapore and Sri Lanka. The point to note here is that the total dividend return from its eight siblings and 'others' amounted to Rs 17 m and Rs 14 m respectively. But that was not the primary objective of the parent when the investments were first committed and it is in for the long haul in this matter.TVS Motor also makes do with 32 fellow siblings, two associate companies and one enterprise over which key management personnel have significant influence.
Inter-se revenue transactions
TVS Motors does however make do with quite some inter-se revenue deals with its group companies. It purchased goods worth Rs 3.9 bn from three siblings including a very large chunk from Sundaram Clayton and Sundaram Auto Components, and sold goods valued at Rs 10 bn to group companies including a very large chunk to Sundaram Auto Components. There are other revenue interactions with group companies too but they are of a minor nature. Why the company would want to sell what it produces to Sundaram Auto Components is however not very clear, because as the name suggests, the company makes automotive components - but this is the reality of the matter.
The company also makes do with a load of debt though it made an attempt to reduce debt in a year when both the top line and the bottom-line were on the decline. (A part of the need for the borrowings is that it makes do with a piddling owned capital base of Rs 475 m. It is another matterthat this capital base is also backed up by humungous reserves of Rs 11.8 bn). The year-end debt fell to Rs 6.3 bn from Rs 8.3 bn previously. What is very remarkable however is that the interest debited to the P&L account shows that the company has a very tight control over the interest outflow. The interest outflow in 2012-13 amounted to Rs 480 m against Rs 571 m previously. The reasons for this dichotomy appear two fold -it has availed of a sales tax deferral loan of Rs 2.4 bn on which no interest is payable, as also a soft loan (presumably at a low rate of interest) of Rs 1.5 bn from SIPCOT-the apex State Industries body. This no doubt is smart thinking and doing by the management. The company has also accounted for marginal sums due to 'forex fluctuation' and 'exchange fluctuation on loans' -but it does not appear to have contracted any foreign currency loans-at least this is my reading of the situation.
Its ability to repay loans was due to twin benefits on capital account. The company spent substantially less on fixed assets and simultaneously it spent a lot less on acquiring investments. This helped facilitate the repayment of the interest bearing loans. Cash and cash equivalents were kept at rock bottom levels at year end.
Fine working capital management
But inspite of being a marginal player in both the motorcycle and scooter segments the company does make do with fine working capital management. Low inventory levels relative to revenue flows for one and compounded by meagre trade receivables of Rs 3 bn. The latter development shows the company's clout in the market and besides, the trade payables at Rs 8.2 bn towers over that of the trade receivables. Also to be noted is that the current assets at year end are lower than that of the current liabilities which in turn helps to temper working capital costs. If the company's finances are in good shape the same cannot be said of that of its siblings.
The lost case siblings
The company has provided the brief financials of nine siblings and the financials do not add up to anything. The financials resemble a welter of confusion and hopelessness. At the top of the heap in terms of paid up capital is PT. TVS Motor Company Indonesia with a capital base of Rs 4.3 bn. (According to the investment schedule of the parent, its investment in the company is entirely in the form of preference shares and these shares have a total book value of Rs 1.5 bn at a price of Rs 473 per share. This on the face of it is an odd pricing. But it also reflects the writing down of the investment I would reckon). It boasts of negative reserves of Rs 4.2 bn which is equal to the paid up capital. In other words its net worth is fully eroded. It rang up revenues of Rs 1 bn and generated a post-tax loss of Rs 245 m. Next in the pecking order is the Singapore offshoot with a paid up capital of Rs 2 bn and negative reserves of Rs 52 m. It has no revenues and no expenses. This is simply remarkable. What became of the large capital that was invested in the company? Third in the firing line is the Amsterdam offshoot where the parent has provided for part depreciation for its investment in it. It has a paid up capital of Rs 1.3 bn and negative reserves of Rs 811 m. This company too has very little to show for it at the end of the day. Revenues of Rs 68 m and a whacking pre-tax loss of Rs 885 m is all that it could muster up. How did it manage to rack up such humungous losses? What in heaven's name does this little subsidiary do for a living? In similar vein, its fourth offshore sibling based out of Shanghai is also a total non performer every which way. The company may or may not be ruing its offshore diversifications-one does not know. One also wonders whether the parent has stood any guarantee for any borrowings that these siblings may have contracted.
The onshore diversifications are on a much better wicket - thankfully. Sundaram Auto Components its wholly owned Indian offspring with which it has multiple deals going has a capital base of Rs 115 m, and reserves and surplus of Rs 757 m. It generated revenues of Rs 13.7 bn, and a wafer thin pre-tax profit of Rs 219 m. The vast bulk of the revenues must be emanating from the inter-se deals that it has going with its parent. As stated earlier the sibling sold goods worth Rs 1.7 bn to the parent and the parent in turn sold goods worth Rs 9.9 bn to the sibling-- for further resale. One is not able to get a hang of this pointless exercise at all. But, alteast, this worthy is able to hold its head above water- thanks to the benefaction of the parent. The other siblings TVS Energy, TVS Wind Energy, and TVS Wind Power are making a go of it for whatever it is worth. They have a long haul ahead of them.
It may be pertinent to add that the only sibling in the above list to propose a dividend is Sundaram Auto Components which handed out a piddling Rs 29 m to the parent.
At the end of the day this scrip definitely does not fit into the definition of an investment proposition.
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.