TVS Srichakra BUY. Performance Update. CMP `1,877 Target Price `2,228. 4QFY2015 Result Update Tyres. 3 year price chart.

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1 4QFY2015 Result Update Tyres May 26, 2015 TVS Srichakra Performance Update Y/E March (` cr) 4QFY2015 4QFY2014 % chg (yoy) 3QFY2015 % chg (qoq) Total Income (5.0) EBITDA EBITDA margin (%) Adj PAT (3.4) For 4QFY2015, TVS Srichakra (TVSSL) reported a good set of numbers. Its top-line for the quarter improved marginally by 1.8% yoy to `465cr. The benefit from the low raw material prices has resulted in net raw material cost coming down by 863bp yoy to 56.1% of sales. Employee and other expenses rose by 233bp yoy and 112bp yoy to 9.2% and 20.9% of sales respectively. The EBITDA margin expanded by 518bp yoy to 13.8%, beating our estimate of 12.4%. The depreciation expense increased drastically by 222.3% yoy during the quarter to `19cr; but at the same time, interest expense came down by 53.1% yoy to `4cr owing to reduction in debt. Consequently, the net profit grew by 56.9% yoy to `34cr vis-à-vis our expectation of `31cr. Steady two-wheeler (2W) sales and capacity expansion by top clients to aid top-line growth: TVSSL s key client Honda Motorcycle & Scooter India (HMSI) has posted robust numbers for 4QFY2015, which is impressive compared to negative or almost no growth posted by other major clients. HMSI has set out aggressive plans to scale up its business in India with a view to become the largest subsidiary of its parent. HMSI has mentioned that capacity constraints had resulted in the company not being able to grow at a faster pace and has lined up aggressive capex plans for the future. We expect capacity addition by major clients to result in good revenue visibility for TVSSL as it is a market leader in the 2W OEM segment. Additionally, the company (TVSSL) wants to garner a larger share in the high margin replacement market segment where it holds the number three position. Outlook and valuation: We expect TVSSL s top-line to grow at a CAGR of 12.3% over FY E to `2,389cr. We expect the operating margin to improve to 12.1% in FY2017E on the back of lower rubber prices and improvement in market share in the aftermarket segment. Consequently, the net profit is expected to be at `155cr in FY2017E. At the current market price, the stock is trading at a PE of 9.3x its FY2017E earnings. We have a Buy rating on the stock with a revised target price of `2,228 based on a target PE of 11.0x for FY2017E earnings. BUY CMP `1,877 Target Price `2,228 Investment Period 12 Months Stock Info Sector Market Cap (` cr) Tyres 1,437 Beta 1.2 Net debt (` cr) Week High / Low 2084/391 Avg. Daily Volume 4,387 Face Value (`) 10 BSE Sensex 27,644 Nifty 8,370 Reuters Code TVSC.BO Bloomberg Code SRTY IN Shareholding Pattern (%) Promoters 46.3 MF / Banks / Indian Fls 0.1 FII / NRIs / OCBs 0.1 Indian Public / Others 53.5 Abs.(%) 3m 1yr 3yr Sensex (3.5) TVSSL year price chart 2,550 2,050 1,550 1, Key financials Y/E March (` cr) FY2013 FY2014 FY2015E FY2016E FY2017E Net sales 1,476 1,671 1,896 2,112 2,389 % chg Net profit % chg (10.3) EBITDA margin (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) Milan Desai EV/Sales (x) ext: 6846 EV/EBITDA (x) milan.desai@angelbroking.com ; Note: CMP as of May 25, Please refer to important disclosures at the end of this report 1 50 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15

2 Exhibit 1: 4QFY2015 performance Y/E March (` cr) 4QFY2015 4QFY2014 % chg (yoy) 3QFY2015 % chg (qoq) FY2015 FY2014 % chg Net Sales (5.0) 1,896 1, Net raw material (11.8) 282 (7.4) 1,123 1, (% of Sales) Staff Costs (0.6) (% of Sales) Other Expenses (4.6) (% of Sales) Total Expenditure (4.0) 427 (6.1) 1,678 1, Operating Profit OPM bp bp Interest 4 9 (53.1) 7 (43.6) (28.1) Depreciation Other Income 3 (4) (174.9) Exceptional Item - - (12) (12) - PBT (% of Sales) Tax 10 (1) (1852.6) (% of PBT) 22.7 (2.7) Reported PAT Adjusted PAT PATM Equity capital (cr) EPS (`) Exhibit 2: Actual vs. Angel estimate (4QFY2015) (` cr) Actual (` cr) Estimate (` cr) % variation Total Income (7.1) EBIDTA EBIDTA margin Adj. PAT Top-line slightly below estimates, margin impresses. TVSSL s top-line for the quarter improved marginally by 1.8% yoy to `465cr. This is below our estimate of `500cr. This could be attributed to poor 2W sales posted by most clients in 4QFY2015, although HMSI was an exception, which grew by an impressive 12.4% on a yoy basis. TVSSL witnessed a decline in net raw material cost during the quarter, which came down by 863bp yoy to 56.1% of sales. Further, employee and other expenses rose by 233bp yoy and 112bp yoy to 9.2% and 20.9% of sales, respectively. The EBITDA margin expanded by 518bp yoy to 13.8%, beating our estimate of 12.4%. Depreciation expense increased drastically by 222.3% yoy during the quarter to `19cr but at the same time, interest expense came down by 53.1% to `4cr on the back of reduction in debt. Consequently, the net profit grew by 56.9% yoy to `34cr vis-à-vis our expectation of `31cr. May 26,

3 For FY2015, TVSSL s top-line grew by 13.5% yoy to `1,896cr. Adjusting for `12cr expense in 3QFY2015 for short reversal of input tax credit on stock transfer pertaining to prior year, the EBITDA margin improved by 431bp yoy to 11.5%. Owing to higher depreciation in the past quarter, the depreciation expense increased by 68.5% to `40cr while the interest expense declined by 28.1% yoy to `30cr. Adjusting for the one time exceptional item, the net profit for the year grew by 137.3% yoy to `113cr. TVSSL has also increased the dividend for the year from `16 per share to `33.8 per share. Exhibit 3: Top-line maintaining good growth Exhibit 4: Lower RM cost led to margin expansion (` cr) Revenue (LHS) yoy growth (RHS) 489 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY QFY (%) QFY13 EBITDA margin (LHS) RM cost/sales (RHS) QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY Dealer Check As per our interaction with tyre dealers across the country, the prices of 2W tyres have not witnessed any correction in the past quarter. Some dealers in Delhi, Chennai and Bangalore said that there is still some shortage in 2W tyres while there were contradictory views given by dealers in Kolkotta. Unanimously, all dealers were reluctant in keeping Chinese 2W tyres as they were more concerned about customer satisfaction as these tyres lack the after sales service aspect. The reviews on TVSSL s new launches have been favorable as dealers have been raving about the improved quality of the new launches, which have been performing better than the competition. The prices in the past quarter for TVS tyres were stable and the dealers do not foresee any cuts in the future (hinting at stable prices). May 26,

4 Investment rationale Steady performance of HMSI coupled with capacity addition by major clients to ensure revenue visibility After a good showing over the previous five quarters, the 2W and 3W industry lost momentum in 4QFY W sales remained flat for 4QFY2015, posting a marginal growth of 0.2%. As far as OEMs are concerned, TVSSL is a market leader with HMSI, Hero MotoCorp (HMCL), TVS Motor Company (TVS), Bajaj Auto and India Yamaha Motor (Yamaha) featuring among its major clients. HMSI has been the lone bright spot in the past quarter, posting growth of 12.4% yoy for 4QFY2015 compared to almost no growth or even negative growth for other clients. The standout performer for HMSI has been the Activa model, which has become the number one selling 2W in India over the past year. HMSI has started FY2016E on a good note by posting close to 9.0% yoy growth for the month of April and we expect this strong run to continue on the back of new launches along with efforts taken by the company to improve its rural presence. Exhibit 5: 2W/3W production growth (yoy) Exhibit 6: 2W sales growth by manufacturer (yoy) wheeler 3-wheeler Bajaj HMCL HMSIL TVS Yamaha (%) (% ) (5.0) (15.0) (1.0) (3.0) (7.7) (11.8) 4QFY13 2QFY14 4QFY14 2QFY15 4QFY15 (10.0) (30.0) 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 In order to grow at a rapid pace in India, HMSI has set out aggressive plans to strengthen its 2W operations in India. The company s current capacity stands at 4.6mn units per year which it plans to expand to 6.4mn units over the next two years. HMSI is positive on its growth prospects in India and has citied capacity constraints faced by the company being the major reason behind its aggressive capacity expansion plan. Along the same line, HMCL has also undertaken expansion plans and its capacity is set to touch the 7.9mn units per year mark in FY2017E from the present 7.7mn units per year. Exhibit 7: Capex plans for major clients Client Current Capacity Increase FY17E Capacity Increase % HMSI 4.6mn 1.8mn 6.4mn 39.1 HMCL 7.65mn 2.25mn 9.9mn 29.4 May 26,

5 We believe that given its market leadership position in the OEM segment, TVSSL stands to benefit from the expected increase in volume arising out of expansion programs undertaken by its key clients Higher share in Aftermarket segment to aid growth The company is looking to focus on the aftermarket segment, which has higher margins, with an aim to increase its market share. According to the Management, the company ranks third in terms of market share in the aftermarket segment. The company has been consistently growing in the aftermarket segment over the past two years which has enabled it to consistently outperform the industry growth rate. Export sales to increase TVSSL s exports accounted for ~13% of the total turnover in FY2014 and its portfolio also includes tyres for agricultural and different industrial segments for the export markets. The company has strengthened its presence in Europe over the past few years through its Eurogrip range of tyres (catering to European as well as other global markets). The company is focusing on increasing exports of agriradial tyres and exporting 2W/3W tyres to countries in South America, Africa and South East Asia. The Management is especially upbeat about the export prospects of 2W tyres. Outlook for international operations to be bleak in the near term TVSSL s investment in the TVS Europe Distribution Ltd accounts for major portion of non-current investment. TVS Europe Distribution was set up as a special purpose vehicle to acquire Universal Components UK, which at the time of acquisition was UK s leading independent wholesale distributor of commercial vehicle parts and accessories. The subsidiary had posted net profit of `16cr in FY2014 resulting in consolidated EPS doubling from `35.5 to `72.0 in FY2014. However, the performance for FY2015 seems to be subdued owing to slowdown in Europe resulting in the subsidiary posting loss. Going forward, the performance of TVS Europe Distribution Ltd is likely to be lackluster and should contribute meaningfully to the consolidated profits once the situation in Europe improves. Stable rubber prices to help in sustaining margins Domestic natural rubber (NR) prices have followed the global trend, ie having declined due to excess production by rubber producing countries - Thailand, Indonesia and Malaysia, and drop in demand from China. Additionally, with declining oil prices and a decline in the price of styrene butadiene rubber (SBR) which is also used for manufacturing tyres, raw material costs are expected to remain at lower levels. Although the Thai government has made efforts to increase their domestic rubber prices, this has had no impact on the global prices of natural rubber. As per the International Rubber Study Group, the surplus in natural rubber and synthetic rubber is expected to reach 1mn tonne and 3mn tonne, respectively. NR currently trades at `125/kg in the domestic market; we expect it to likely trade at the levels of ~`135-`140/kg in the near future. May 26,

6 Exhibit 8: International vs. Domestic rubber price trend International Price Domestic Price (`/kg) May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Source: Angel Research May 26,

7 Financial performance On the back of better performance by HMSI and capacity addition undertaken by major clients, we expect TVSSL to perform well. We expect its top-line to grow at a CAGR of 12.3% over FY E to `2,389cr. The company is confident of smooth revenue flow backed by strong growth in its major OEM consumer segment and is also focusing on increasing its market share in the aftermarket segment. Raw material cost as a percentage of sales has declined in FY2015 owing to declining rubber prices. We expect the operating margin to remain at current levels and improve by 62bp over FY E to 12.1%. Exhibit 9: Revenue to grow at 12.3% CAGR Exhibit 10: EBITDA Margin to be at 12.1% in FY2017E (` cr) 2,800 2,400 2,000 1,600 1, ,404 1,476 Revenue (LHS) Revenue growth (RHS) ,671 1,896 2,112 2,389 FY2012 FY2013 FY2014 FY2015 FY2016E FY2017E (%) (` cr) EBITDA (LHS) EBITDA margin (RHS) FY2012 FY2013 FY2014 FY2015 FY2016E FY2017E (%) We expect the company to reduce its debt to `199cr in FY2017E, which will lower its interest expense. Consequently, we expect the company to report a profit of `155cr in FY2017E. EPS Sensitivity analysis For FY2017E, we are expecting rubber prices to be at the level of `138/kg. Our assumption of 0.5% decline in rubber prices in FY2016E with 2.3% increase in FY2017E and flat tyre realizations for FY2016E and 1.0% increase in FY2017E gives us an EPS of `202.5 for FY2017E. Any increase in raw material cost will result in increase in realizations. May 26,

8 Exhibit 11: Rubber and Realization change impact on FY2017E EPS % chg. in rubber prices (15.0) (10.0) (5.0) % chg. in Realization (7.0) (3.5) (48.0) (92.5) (5.0) (2.5) (46.9) (3.0) (1.4) (1.0) Exhibit 12: Relative valuation Company Year Mcap (` cr) Sales (` cr) OPM (%) PAT (` cr) EPS (`) ROE (%) P/E (x) P/BV (x) EV/ Sales (x) TVSSL FY2016E 1,437 2, TVSSL FY2017E 1,437 2, CEAT FY2016E 3,161 6, CEAT FY2017E 3,161 7, JK Tyre FY2016E 2,538 8, JK Tyre FY2017E 2,538 8, Apollo tyres FY2016E 9,348 12, Apollo tyres FY2017E 9,348 14, MRF SY2015E 15,097 13, MRF SY2016E 15,097 14, , Bloomberg Outlook and valuation We expect the top-line of the company to grow at a CAGR of 12.3% over FY E to `2,389cr. We expect the operating margin to improve to 12.1% in FY2017E owing to lower rubber prices and improvement in market share in the aftermarket segment. Consequently, the net profit is expected to be at `155cr in FY2017E. At the current market price, the stock is trading at a PE of 9.3x its FY2017E earnings. We have a Buy rating on the stock with a revised target price of `2,228 based on a target PE of 11.0x for FY2017E earnings. May 26,

9 Exhibit 13: One-year forward PE band Price (`) 4x 6x 10x Feb-10 Jun-10 Oct-10 Mar-11 Jul-11 (`) Nov-11 Mar-12 Aug-12 Dec-12 Apr-13 Sep-13 Jan-14 May-14 Sep-14 Feb-15 Key downside risks to our recommendation: Any rise in rubber prices, increase in inflation, increasing competition, slowdown in 2W and 3W industry and lowerthan-expected demand in the replacement market, will have an adverse impact on the company s performance. The import duty on NR has been increased from 20% or `30/kg to 25% or `30/kg. Further upward revision in the duty will have an adverse impact on TVSSL s profitability. May 26,

10 The Company TVSSL is a part of the TVS Group. The company is a leading manufacturer of two-wheeler and three-wheeler tyres and enjoys a market share of 25% (FY2011). The company manufactures a complete range of two-wheeler and three-wheeler tyres for the domestic market. For the export market, the company manufactures industrial pneumatic tyres, farm and implements tyres, skid steer tyres, multipurpose tyres and floatation tyres, among others. TVSSL s manufacturing units are located at Madurai, Tamil Nadu and Pantnagar, Uttarakhand rolling out ~240lakh tyres per year. With a network of over 2,400 dealers and 34 depots across the country, the company is a major supplier to TVS Motors, Hero MotoCorp, HMSI, Bajaj Auto, LML, Piaggio, Atul Auto Ltd., Mahindra 2Wheelers and India Yamaha Motor. The company also exports to the US, Europe, South America, Africa and Australia. May 26,

11 Standalone Profit & Loss Statement Y/E March (` cr) FY2013 FY2014 FY2015E FY2016E FY2017E Total operating income 1,476 1,671 1,896 2,112 2,389 % chg Net Raw Materials 1,011 1,104 1,123 1,250 1,429 % chg Other Mfg costs % chg Personnel % chg Other % chg Total Expenditure 1,391 1,551 1,678 1,861 2,100 EBITDA % chg (32.1) (% of Net Sales) Depreciation& Amortisation EBIT % chg (41.8) (% of Net Sales) Interest & other Charges Other Income (% of Net Sales) Recurring PBT % chg (92.9) Exceptional Item - - (12) - - PBT (reported) Tax (% of PBT) PAT (reported) Extraordinary Expense/(Inc.) ADJ. PAT % chg (10.3) (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg (10.3) Dividend Retained Earning May 26,

12 Standalone Balance Sheet Y/E March (` cr) FY2013 FY2014 FY2015E FY2016E FY2017E SOURCES OF FUNDS Equity Share Capital Reserves& Surplus Shareholders Funds Total Loans Other Long Term Liabilities Long Term Provisions Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Long Term Loans and advances Other Non-current asset Current Assets Cash Loans & Advances Inventory Debtors Other current assets Current liabilities Net Current Assets Misc. Exp. not written off Total Assets May 26,

13 Standalone Cash Flow Statement Y/E March (` cr) FY2013 FY2014 FY2015E FY2016E FY2017E Profit before tax Depreciation Change in Working Capital 129 (81) 47 (50) (27) Less: Direct taxes paid (12) (8) (37) (53) (63) Others 4 24 (3) (2) (3) Cash Flow from Operations (Inc.)/Dec. in Fixed Assets (19) (57) (76) (68) (78) (Inc.)/Dec. in Investments 1 0 (13) - - Interest received (21) (7) (7) - - Others 81 (7) Cash Flow from Investing 42 (70) (92) (66) (75) Issue of Equity Inc./(Dec.) in loans (106) 71 (64) (16) (15) Dividend Paid (Incl. Tax) (7) (14) (30) (30) (30) Others (82) (38) Cash Flow from Financing (195) 19 (94) (46) (45) Inc./(Dec.) in Cash 39 (37) Opening Cash balances Closing Cash balances May 26,

14 Standalone Key Ratios Y/E March FY2013 FY2014 FY2015E FY2016E FY2017E Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Net sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value DuPont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset TO (Gross Block) Inventory / Net sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Int. Coverage (EBIT/ Int.) May 26,

15 Research Team Tel: Website: DISCLAIMER Angel Broking Private Limited (hereinafter referred to as Angel ) is a registered Member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited and MCX Stock Exchange Limited. It is also registered as a Depository Participant with CDSL and Portfolio Manager with SEBI. It also has registration with AMFI as a Mutual Fund Distributor. Angel Broking Private Limited is a registered entity with SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide registration number INH Angel or its associates has not been debarred/ suspended by SEBI or any other regulatory authority for accessing /dealing in securities Market. Angel or its associates including its relatives/analyst do not hold any financial interest/beneficial ownership of more than 1% in the company covered by Analyst. Angel or its associates/analyst has not received any compensation / managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. Angel/analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market making activity of the company covered by Analyst. This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Pvt. Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Pvt. Limited endeavors to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates may have investment positions in the stocks recommended in this report. Disclosure of Interest Statement TVS Srichakra 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors Ratings (Based on expected returns Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) over 12 months investment period): Reduce (-5% to -15%) Sell (< -15) May 26,