TVS Motors. Initiating coverage. Getting into different league; initiate with BUY BUY. Sector: AUTO. Exhibit 1: Financial summary (Rs mn)

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1 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Initiating coverage BUY TVS Motors Sector: AUTO 12 th February, 215 Getting into different league; initiate with BUY We initiate coverage on TVS Motor Ltd. (TVS) with a BUY and a price target of Rs. 45 implying 35% upside. Despite the recent out performance 53.4/219.8 in 6m/1 year compared with Sensex, we envisage further upside in stock led by 1) recent launches in motorcycle and scooter segment, 2) improving market share and operational efficiency, 3) ~4bps expansion in EBITDA margins, over FY14-18e and 4) strong FCF generation. Scooter segment faster growth in overall mix: Scooter has remained one of the fastest growing segment of 25% CAGR in overall 2W industry (15% CAGR). Despite being the 3rd player TVS managed to fast track its market share growth supported from strong volumes. It has improved its market share to 15.6% so far from 12.6% in FY14. We expect current sales mix of 24% to increase to 3% by FY18. We assume scooter segment volume to grow at a CAGR of 26% led by strong portfolio, favorable growth dynamics, and strategic positioning. Motorcycle segment re-establishing presence: TVS is taking measures to re-establish itself in the motorcycle segment by plugging the gaps. Although it has been a relevant but marginal player with ~5.5% market share in the past, (volumes grew sub 5% over FY9-14). With recent launches, TVS has moved up in the market share from 4.8% to ~6% in last one year. With strong R&D back up and upcoming launches we expect ~19%/23% CAGR in volumes/sales between FY14-18e. TVS-BMW JV - firming up its strategic positing: TVS-BMW tie-up for manufacturing and selling bikes should elevate TVS strategic positioning in the domestic market in premium category, (25-5 cc. We believe the tie up brings unique advantage to TVS; 1) access to faster growing premium segment market 57% CAGR in last 3 years, 2) strong BMW brand perception. We are modeling for TVS-BMW tie up and conservatively assumes base case volumes growth of 2-25% in FY17/18e Expansion in operating margins: We expect operating margins to improve by ~4 bps over FY14-18e Key reasons: 1) operating leverage from recent launches in the 2W segment (Jupiter, Scooty Zest start city+), improved portfolio mix, gaining market share from upcoming launch in 2W. Management expects to achieve early double-digit margins in next few years. Valuation & recommendation: We argue for a 16x multiple to FY18 EPS, ahead of 46% EPS growth over FY14-18e. On PEG basis, TVS is ~.3x (FY17e P/E to growth F14 17e). The stock currently trades at 16.1x FY17e and 11.9x F18e. Initiate coverage on TVS with BUY rating and target price of Rs. 45 (upside 35%) Exhibit 1: Financial summary (Rs mn) Y/E March FY13 FY14 FY15e FY16e FY17e FY18e Net sales 71,693 79,619 1,,515 1,21,588 1,46,73 1,76,231 Growth Operating margin PAT 2,69 2,64 3,546 5,212 8,865 12,3 Adjusted PAT 2,69 2,64 3,546 5,212 8,865 12,3 EPS (Rs) Growth P/E(x) ROE ROCE Net debt/equity (x) (.9) (.16).7.4 (.6) (.13) P/Bv (x) Price Price Target Up/Down Rs. 31 Rs. 45 Bloomberg Code TVSL IN Share Holding Promoters 57.4 FII DIIs Stock Data Nifty 8627 Sensex week high/low 322/78 Maket Cap (Rs. Mn) Price performance 1M 3M 6M 1Y Absolute Relative to Sensex Relative Performance Source:-Bloomberg BSE Sensex Vaishali Parkar Kumar vaishali.parkar@bobcaps.in Reuters Code TVSM.NS As on 31st Dec. 214 TVS Motors

2 TVS Motor Company Ltd. 12 February 215 Company Profile TVS Motor Company (TVS) is a flagship company of ~USD 6.5bn, sundaram group. TVS is the third largest two-wheeler manufacturer in India and one among the top ten in the world, with annual turnover of more than USD 1.3 bn in FY14. The company provides full range of two wheelers (motorcycles, scooters, moped) and three wheelers. TVS has a 6.3% market share in motorcycle, 15.6% market share in scooters, 1 % market share in moped and 1.6% market share in three wheelers segment. With around 9 authorised dealer and 32 sub dealer, TVS has a pan India presence. The company has four manufacturing plants, three located in India (Hosur, Tamil Nadu and Mysore, Karnataka and Nalagarh, Himachal Pradesh) and one in Indonesia Exhibit 2: Net sales distribution Spare parts, 12.1% Three wheelers, 9.8% Moped, 18.7% Motorcycle, 39.% Source: Company, BOBCAPse Scooter, 2.5% Exhibit 3: Change in product contribution to total sales volume Motorcycle Scooters Mopeds 3-Wheelers TVSL- BMW tieup products Scooters contribution to increase from 24% to 3% by FY18 1% 8% 6% 4% 2% % FY1 FY11 FY12 FY13 FY14 FY15e FY16e FY17e FY18e Source: Company, BOBCAPse Equity research 2

3 FY1 FY11 FY12 FY13 FY14 FY15e FY16e FY17e FY18e Volume' TVS Motor Company Ltd. 12 February 215 Investment rationale Scooter segment faster growth in overall mix Over the last five years scooter segment has remained one of the fastest growing segment of 25% CAGR in overall 2W industry (12% CAGR). This is largely led from stylish look, fuel efficiency, increasing working class women, high power scooters, and change in gender perception for scooters. In our view 21 has been an inflection year for TVS with successful launches (Wigo and TVS Pep plus). Despite being the 3rd player TVS managed to fast track its market share growth supported from strong volumes. Jupiter success in 11cc: Jupiter has been a right fit (launched in Sep 13) to overall portfolio and has helped TVS gain 2bps more in market share in past 15months. This launch is mainly targeted keeping India s male consumers in mind. At present, Jupiter run rate is ~ 28, units/pm. Given the fact that Jupiter is young in the market and have improved features (suspension etc) the scope of volume expansion could be meaningful in coming years. TVS also launched Scooty Zest in 3QFY15 in 11cc segment. We expect current sales mix of 23% to increase to 3% by FY18 (implying 26% in CAGR). We assume scooter segment volume to grow at a CAGR of 26% led by strong portfolio, favorable growth dynamics, strategic positioning, and stronger volumes. Exhibit 4: Comparative landscape for Jupiter TVS Jupiter Honda Activa Hero Maestro Comment Competitive price Ex- Showroom price among the (Mumbai) competition Displacement (cc) Max Power rpm 8 75 rpm rpm Dimensions (LxBxH) 1834x65x x71x x71x1165 Fuel Efficiency Overall (Kmpl offer higher fuel efficiency, Industry Exhibit 5: TVS scooters volumes growth We expect 26%CAGR growth over FY14-18e 1,4 1,2 1, Scooters Growth % Equity research 3

4 Ex-showroom price (Mumbai) Jan 214 Feb 214 Mar 214 Apr 214 May 214 Jun 214 Jul 214 Aug 214 Sep 214 Oct 214 Nov 214 Dec 214 Volume' TVS Motor Company Ltd. 12 February 215 Exhibit 6: TVS scooter market share trend over one year 8 TVSL scooter volume % of market share 2 Market share moved up after recent launch of Jupiter Source: Company, Industry Exhibit 7: TVS product portfolio in scooter segment New products are focused on high power engine 6, 5, 4, 3, Scooty Pep+ Wego Jupiter Scooty Zest 2, Source: Company, Industry 1, Engine Displacement (cc) Motorcycle segment re-establishing presence TVS is taking measures to re-establish itself in the motorcycle segment by plugging the gaps. Although it has been a relevant but marginal player with ~5.5% market share in the past, (volumes grew sub 5% over FY9-14) TVS aspires to ensure as meaningful player in forthcoming years. The company is mainly present in premium and entry level segment. Premium segment: TVS has a leading market share of 61% in 15-2cc segment (which represents ~24% to the total premium segment). We expect, TVS-BMW tie up will help TVS to further strengthen its position in the premium segment. Economy segment: Economy segment contribute ~ 65% in total motorcycle segment (TVS has ~6% market share). The market remains highly competitive. TVS aims to launch new models (positioned between economy and executive segment) at cheaper price. Earlier, TVS has successfully launched Star sport and star city + in this segment New launches: the company has planned two launches in 1HFY16 With strong R&D back up and upcoming launches we expect ~19%/23% CAGR in volumes/sales between FY14-18e. Equity research 4

5 Ex-showroom price(mumbai) Jan 214 Feb 214 Mar 214 Apr 214 May 214 Jun 214 Jul 214 Aug 214 Sep 214 Oct 214 Nov 214 Dec 214 Volume' FY1 FY11 FY12 FY13 FY14 FY15e FY16e FY17e FY18e Volume' TVS Motor Company Ltd. 12 February 215 Exhibit 8: Comparative landscape for TVS Star City+ Honda Dream Yuga TVS Star City+ Hero Passion X Pro Comment Competitive price Ex- Showroom price among the (Mumbai) competition Displacement (cc) Max Power 8 75 rpm rpm 8 75 rpm Dimensions (LxBxH) 222x733x x75x18 25x765x1115 Fuel Efficiency Overall (Kmpl) , Industry Exhibit 9: TVS Motorcycle volumes growth trend Best in class fuel efficiency 2, Motorcycle Growth % 4 Motorcycle segment to grow at a CAGR of 19% over FY14-18e 1,5 1, Exhibit 1: TVS market share trend over one year 4 TVSL Motorcycle volume % of market share 8 Market share shown improvement with new launches , Industry Reducing gap between 1-15 cc with new launches Exhibit 11: TVS product portfolio in motorcycle segment 8, Apache 7, 6,, Industry 5, Phonix TVS sport 4, Star City + 3, 2, Engine Displacement (cc) Equity research 5

6 Volume' TVS Motor Company Ltd. 12 February 215 Mopeds cash cow business TVS has monopoly in the moped segment and has been a cash cow for the company since past several years. Moped contributed ~2% of FY14 sales, which is slated to come down with faster pace growth in the scooter segment. Our broad view on the forward growth trends is positive; expect 6% over next 3 years (6% in past 5 years) Three Wheelers growth drive from exports TVS started three wheelers business in FY9 and currently drives 2-3% of total sales (higher OPM); exports accounts for nearly 8-85%. Domestic market is highly competitive with almost 95% market controlled by 4 players (TVS has 3-4% market share - 5th position) after Bajaj auto (5% market share, 1st position) TVS is focusing on export market and is planning to increase production capacity to ~15, P.M. by 2HFY16. We forecast 28% volume growth over FY14-18e (on low base) led by continued strong demand from export markets and replacement demand in local market. Exhibit 12: Three wheelers growth trend Three wheelers to grow at a CAGR f 28% over FY14-18e Three Wheelers Growth % FY12 FY13 FY14 FY15e FY16e FY17e FY18e , Industry Exports market- growth opportunities fairly remains attractive TVS exports volume accounts for 15% of the total sales and has grown at steady pace of ~18% CAGR in last five years in exports market. Motorcycle and 3W has been the highest contributor with ~92% of export volumes. Going forward, we expect, TVS exports to grow 2.4x by F18e (23% CAGR over FY14-18e) and could account for 18% of sales. In our view, geographical expansion, deep penetration in existing market (Latin America, Asia, Africa), and potential launches in the scooter segment are key driver to this growth. Equity research 6

7 FY1 FY11 FY12 FY13 FY14 FY15e FY16e FY17e FY18e Volume' TVS Motor Company Ltd. 12 February 215 Exhibit 13: Export volumes growth trend Exports to grow at a CAGR of 23% over FY14-18e Total Export Growth % TVS-BMW JV - firming up its strategic positing Earlier, TVS-BMW announced 5:5 joint venture in April 213, for manufacturing and selling bikes between 25-5cc, which, in our view, should elevate TVS strategic positioning in the domestic market in premium category. The tie up does not entail any equity participation or royalty payments. TVS invested 2 million (~Rs.1.42bn) and will manufacture on its own, BMW will bear the cost of testing and development in Germany. Two distinct products, with different specifications, will produced under each brand name and will be sold by both partners in global markets, through their respective distribution networks. Market dynamics attractive with less competition in engine capacity with 25cc and more. Few local players that are in market are through MNC collaboration like Bajaj KTM and Royal Infield. The segment accounted for 4-4.5% of the total 2W volumes and grew at 57% between F12-14 (strong 71% growth in F14). Although most of financial terms are undisclosed but we believe the tie up brings unique advantage to TVS; 1) access to faster growing premium segment market 57% CAGR in last 3 years, 2) strong BMW brand perception Longer-term growth demand prospects appears benign in view of an increase in discretionary spends and increasing no of youth the demand for >25cc motorcycle. We are modeling for TVS-BMW tie up and conservatively assumes base case volumes growth of 2-25% in FY17/18e. We assume 2-25% volume growth in FY17/18e Exhibit 14: TVS-BMW forecast (Rs mn) F Y16e FY 17e FY 18e Base case Sales Rs. (mn) 396 1,45 1,372 Volume 1,8 4,32 5,4 Month of sales Monthly run rate YoY growth% 2 25 Realisation (Rs./vehicle) 22, 242, 254,1 YoY growth% 1 5 Equity research 7

8 Rs. Bn Rs./share TVS Motor Company Ltd. 12 February 215 Financial Summary Earning momentum to continue; expects 46% CAGR over FY14-18e: We expect, TVS sales and profits to grow at 21% and 46% CAGR between FY14-18e respectively. This is led from strong volumes, new launches, better product mix (motorcycles, scooters, three wheelers), and rising share of exports resulting in market share gains. Further, it s nearly zero debt profile and strengthening Balance sheet position augurs well for future M&A activity. Exhibit 15: EPS to grow at 46% CAGR of FY14-18e FY1 FY11 FY12 FY13 FY14 FY15e FY16e FY17e FY18e Margins to expand on new launches We believe TVS has moved up in the competition with its strategy of launching competitive products among the portfolio. We estimate 4 bps margin expansion from 6% in FY14 to 1.2% in FY18. Key reasons: 1) operating leverage from recent launches in the 2W segment (Jupiter, start city +), improved portfolio mix (rising contribution from high margin scooter segment from 21% in F14 to 26% in F18), gaining market share from upcoming launch in 2W (two new products in 1Q/2QFY16e). Further, new introduction under BMW JV (> 25cc segment) will incrementally improve overall operating margins over longer term. Management expects to achieve early double-digit margins in next few years. We expect ~4bps expansion over FY14-18e Exhibit 16: EBITDA margin expansion led by new launches 2 EBITDA EBITDA margin % FY1 FY11 FY12 FY13 FY14 FY15e FY16e FY17e FY18e Equity research 8

9 Rs. Bn TVS Motor Company Ltd. 12 February 215 Comfort from improving returns ratios With a comfortable D/E ratio, improvement in operating efficiency, we expect, TVS will improve and sustain its return ratios. Exhibit 17: Improving ROE/ ROCE ROE ROCE FY1 FY11 FY12 FY13 FY14 FY15e FY16e FY17e FY18e Strong FCF generation; driven from operational efficiency We estimate TVS to generate Rs21bn in cumulative FCF from FY14-18 (compared with Rs8bn from FY11-14). Strong operating profits and efficient working capital management likely to drive the improvement. This is despite capex estimate of Rs9bn in FY14-18 vs Rs6bn in FY11-14 Exhibit 18: Strong FCF generation 12 FCF We estimate TVS to generate Rs21bn in cumulative FCF from FY14-18e (1) FY1 FY11 FY12 FY13 FY14 FY15e FY16e FY17e FY18e Equity research 9

10 TVS Motor Company Ltd. 12 February 215 Indonesia turnaround will be delayed The subsidiary is incurring losses since inception (FY6) due to sluggish volume growth. Earlier, management anticipated to reach breakeven by FY15 end which did not happen. We believe the complete turnaround could get delayed as it would require ~7, units/months to breakeven (vs. current run rate of ~25units/month). Accordingly, we are not building material upside from Indonesia subsidiary. To recap, PT TVS, Indonesia is a 1% subsidiary of TVS in which TVS has invested ~US$1.25bn till date. The Subs is involved in manufacturing and selling of 2W in South East Asia. Some of the launches includes Dazz, Neo XR, Rcokz New, Max 125 Sports, and Apache RTR. Key risk Competition risk: TVS is operating in a very high competative segment where, it has a competition from listed as well as private players, success of new launches are dependent on factors like technology, style, look which makes product highly competitive in the market. Delay in new launches: Delay in new launches may trim our earnings growth prospects as this may lead to shift in prospective customers to other brands. Higher than expected recovery for demand: TVS expect, full recovery in demand from 2HFY16. Any dealy in demand recovery may be a risk to our estimates. Equity research 1

11 Feb-4 Aug-4 Feb-5 Aug-5 Feb-6 Aug-6 Feb-7 Aug-7 Feb-8 Aug-8 Feb-9 Aug-9 Feb-1 Aug-1 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 TVS Motor Company Ltd. 12 February 215 Valuation: TVS has been one of the best performing auto stocks amongst its peers in last 2 years (absolute stock return 2x). The company has taken consistent measures to expand its market share via niche product launches. This has resulted in strong earnings growth. Despite strong outperformance from the stock 53.4/219.8 in 6m/1 year compared with Sensex. We envisage further upside in stock. TVS trades at 26.6x one-year forward P/E, and we expect following factors to further drive stock upside together with P/E rerating: 1) strengthening financial health with Rs21bn in cumulative FCF generation next 3 years, 2) improving portfolio mix leading to 4-5bps expansion in operating margins by FY18e, 3) faster EPS CAGR of 46 % vs peers We take slightly a longer view and argue for 16x P/E on FY18 EPS (1-15% premium to sector P/E). After the announcement of the BMW tie up (premium bike) and consistent launch success, TVS's valuation has transformed and has been trading at average 2-25% premium to the sector P/E in last 4 years, which we expect should continue. Also, TVS forward P/E is quoting 18% discount to its 1 years historic average which is further increasing ~4% in FY18 which should narrow with improving confidence in the EPS growth of 46% over next 3 years. We are not anticipating material upside from Indonesian subsidiary in our forecast. We assign 16x to FY18 EPS of Rs 25.3 and arrive to the target price of Rs 45 an upside of 35% Exhibit 19: Stock performance details Company EPS growth Stock performance Mcap Promoter Inst FY 11- FY14- (Rs. Bn) holding % Holding % 6m 1Yr 2Yr 3Yr 14 17e Hero TVS Motor Bajaj Auto 6, Source: Company, Bloomberg, BOBCAPSe, Industry Exhibit 2: TVS forward P/E is trading at 18%/4% discount on FY17/FY18 EPS 7 1 Y mean=19.7x PE(x) Avg on F18e=12x current=26.2x 2 1 Source: Company, Bloomber, BOBCAPSe Equity research 11

12 TVS Motor Company Ltd. 12 February 215 Financials Exhibit 21: Income Statement Y/E Mar (Rsmn) FY13 FY14 FY15e FY16e FY17e FY18e Net sales 71,693 79,619 1, , ,73 176,231 growth COGS 53,41 57,989 76,351 94,79 113, ,134 Staff Cost 4,71 4,761 6,31 5,836 6,455 7,754 SG&A Cost 1,13 12,86 11,985 12,426 12,787 15,356 EBITDA 4,9 4,782 6,148 8,537 13,594 17,986 growth (13) Depreciation 1,34 1,317 1,469 1,628 1,787 1,946 EBIT 2,786 3,466 4,679 6,98 11,87 16,4 Other income Interest paid Extraordinary/Exceptio nal items (98) PBT 1,636 3,525 4,792 7,43 11,98 16,257 Tax ,246 1,831 3,115 4,227 PAT 1,16 2,616 3,546 5,212 8,865 12,3 Adjusted PAT 2,69 2,64 3,546 5,212 8,865 12,3 growth (17) Exhibit 22: Balance Sheet Y/E Mar (Rsmn) FY13 FY14 FY15e FY16e FY17e FY18e Cash & Bank balances ,364 3,534 5,388 Other Current assets 12,17 14,124 17,24 19,481 22,41 25,853 Investments 8,688 8,959 9,259 9,69 9,959 1,39 Net fixed assets 1,476 11,738 13,269 14,64 15,853 16,97 Other non-current assets Total assets 31,356 35,647 4,499 45,95 51,756 58,457 Current liabilities 13,237 15,823 18,16 2,539 23,547 27,83 Borrowings 4,941 4,424 4,94 4,5 4,5 4,5 Other non-current liabilities 931 1,247 1,247 1,247 1,247 1,247 Total liabilities 19,19 21,494 23,356 26,286 29,294 32,83 Share capital Reserves & surplus 11,772 13,678 16,668 18,334 21,987 25,152 Shareholders' funds 12,247 14,153 17,143 18,89 22,462 25,627 Total liabilities 31,356 35,647 4,499 45,95 51,756 58,457 Equity research 12

13 TVS Motor Company Ltd. 12 February 215 Exhibit 23: Cash Flow Statement Y/E Mar (Rsmn) FY13 FY14 FY15e FY16e FY17e FY18e Profit after tax 1,636 3,525 4,792 7,43 11,98 16,257 Depreciation 1,34 1,317 1,469 1,628 1,787 1,946 Chg in working capital (77) Cash flow from operations 3,684 4,2 3,99 6,569 1,356 13,649 Capital expenditure (771) (2,364) (3,) (3,) (3,) (3,) Change in investments 621 (271) (3) (35) (35) (35) Cash flow from invst. (15) (2,635) (3,3) (3,35) (3,35) (3,35) Free cash flow 3,534 1, ,219 7,6 1,299 Issue of shares Net inc/dec in debt (2,213) (517) (33) Dividend (incl. tax) (327) (412) (556) (556) (556) (556) Other financing activities (41) (2,653) (4,28) (7,89) Cash flow from financing (2,581) (927) (568) (2,83) (4,836) (8,446) Inc/(Dec) in Cash & Bank bal ,364 3,534 5,388 Exhibit 24: Ratio analysis Y/E Mar FY13 FY14 FY15e FY16e FY17e FY18e Per share data (Rs) EPS CEPS DPS BV Profitability ratios Gross margins Operating margins Net margins Valuation ratios (x) PE P/BV EV/EBITDA EV/Sales RoE RoCE Equity research 13

14 TVS Motor Company Ltd. 12 February 215 Sales and Dealing Team Purvesh Shelatkar Senior Vice President & Head Equity Anil Pawar Senior Manager Dealing Sachin Sambare Manager Dealing /33 Ashwin Patil Executive Dealing Research Vaishali Parkar Kumar Analyst Padmaja Ambekar Analyst Akanksha Tripathi Analyst Disclaimer BUY. We expect the stock to deliver >15% absolute returns. HOLD. We expect the stock to deliver 5-15% absolute returns. SELL. We expect the stock to deliver <5% absolute returns. Not Rated (NR). We have no investment opinion on the stock. The BoB Capital Markets research team hereby certifies that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report." 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