CMP: INR411 TP: INR492 (+20%) Buy

Transcription

1 BSE SENSEX S&P CNX 27,916 8,615 Bloomberg TVSL IN Equity Shares (m) M.Cap.(INRb)/(USDb) / Week Range (INR) 341/201 1, 6, 12 Rel. Per (%) -8/-14/16 Avg Val, INR m 548 Free float (%) 42.6 Financials & Valuations (INR b) Y/E Mar 2017E 2018E 2019E Net Sales EBITDA PAT EPS (INR) Gr. (%) BV/Sh (INR) RoE (%) RoCE (%) P/E (x) P/BV (x) Estimate change TP change Rating change 27 October QFY17 Results Update Sector: Automobiles TVS Motor Company CMP: INR411 TP: INR492 (+20%) Buy In-line; Margin improvement continues; Strong EPS growth to continue Strong volume growth drives sales : Total volumes grew 20% YoY (+14% QoQ) to 816k units, driven by ~30% YoY growth (+17% QoQ) in motorcycles and moped segment growth of ~35% YoY (+5% QoQ). This is despite muted growth in scooters at ~6% YoY (+17% QoQ) and decline in exports of ~12% YoY. Realizations grew 4.7% QoQ to ~INR42k driven by better mix. Net sales grew 21% YoY (+19% QoQ) to INR34.3b. EBITDA margins continue to rise as operating leverage benefits kick-in: EBITDA margin expanded by 110bp QoQ (+10bp YoY) to 8.1% (v/s est 7.9%), driven by operating leverage benefits despite decline in higher margins export business. Higher than expected other income boosted PAT to INR1.8b (v/s est INR1.6b), a growth of ~35% YoY (+46% QoQ). Earnings call highlights: a) Management re-iterated its two year target of market share (of 18%) and EBITDA margins (double digit), b) It is taking initiatives to recovery back lost scooter market share, c) Product from BMW alliance to be launched during early 2017, and d) Invested ~INR500m in equity of captive finance company TVS Credit Services (as against earlier investment routed through preference shares of SPV). Valuation and view: We have upgraded our estimates for FY17/18 by 6%/3% respectively to factor in for stronger than estimated moped volumes and better margins. We expect strong earnings momentum for TVSL over next 2-3 years led by a) ramp-up of Victor volumes and recovery in scooter market share, b) benefit of monsoons and 7 th Pay commission to aid sustained volume growth in H2FY17, c) launch of BMW Alliance product in early 2017, d) recovery in export markets as crude oil prices recover and e) resultant margin improvement. The stock trades at 22.2x/17.5x FY18E/19E EPS. Maintain Buy with a target price of INR492 (~18x FY19E EPS + ~INR68/share for BMW alliance). Jinesh Gandhi (Jinesh@MotilalOswal.com); Venil Shah (Venil.Shah@MotilalOswal.com); /Aditya Vora (Aditya.Vora@MotilalOswal.com); Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 Net sales driven by volume growth; Lower moped share aids QoQ realisations jump Total volumes grew 20.2% YoY (+13.6% QoQ) to 816k units, driven by ~30% YoY growth (+17% QoQ) in motorcycles even as scooters grew just 5.7% YoY (but +17% QoQ). The moped segment grew ~35% YoY (+5% QoQ). 3W volumes (-38% YoY) were lower due to a sharp slump in export volumes. Overall Exports declined by ~12% YoY. 3W exports declined ~60% YoY and have hit the hardest as key export markets have been hit by USD unavailability leading to higher pricing for vehicles and reduced purchasing power. Realizations increased 5% QoQ (+0.5% YoY) to ~INR42k (in-line with estimates) led by decline in the share of the moped segment which declined 230 bp QoQ to 28.6%, while share of motorcycles increased +140bp QoQ to 40.7%. As a result, Net sales grew ~21% YoY (+19% QoQ) to INR34b (in-line). Exhibit 1: Motorcycles/Mopeds drive volumes for Q2FY17 Volumes ('000 units) Growth (%) (8.4) QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 Exhibit 2: 3W volumes decline for 3rd consecutive quarter Volume Growth (%) (38.0) Motorcycles Scooters Mopeds Three-wheelers Exhibit 3: Market share (%) Newly launched Victor and Apache push market share in motorcycle segment; Competition in scooter segment intensifies Motorcycles Scooters Overall 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 27 October

3 Exhibit 4: Robust volumes drives revenues in 2QFY Net sales (INR b) Growth (%) Exhibit 5: Share of mopeds drops QoQ, but rises YoY Motorcycles Scooters Mopeds 3Ws (4.8) QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 EBITDA margins in line at 8.1% driven by operating leverage benefits Gross margins improved ~30bp QoQ to ~27.7% despite mild pressure on RM price front. EBITDA margin expansion by 110bp QoQ (+10bp YoY) to 8.1% (v/s est 7.9%) was driven by operating leverage benefits as volumes jumped 13.6% QoQ. Employee costs to sales declined 50 bp QoQ to 5.8%, while other expenses to sales declined 40 bp QoQ to 13.8%. Higher than expected other income negated higher depreciation costs and thereby PAT grew 35% YoY to INR1.8b (v/s est INR1.6b). Exhibit 6: EBITDA margins rise 90bps QoQ on strong operating leverage benefits EBITDA (INR m) EBITDA margin (%) ,171 1,234 1,428 1,312 1,627 1,602 1,502 1,728 2,270 1,966 1,785 2,004 2,767 Exhibit 7: Higher other income and lower tax rate offsets higher depreciation drives PAT growth of 35% YoY PAT Growth (%) , , QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 1,077 1,178 1QFY14 2QFY14 1,213 1,774 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 Other key highlight from the conference call Management hopeful of robust growth in festive season: Following strong growth in Dussera, management is hopeful that Dhanteras volume growth would also be strong. Victor/Apache 200 volumes have done well post their pan-india launch in 1QFY17. Management clarified that there is no capacity constraint for ramping up Apache volumes to meet demand. Management targets 23-24% market share in this premium motorcycle segment. As per the management rural demand has been impacted by unseasonal rains in some states and some localized problems in some southern states. Rural 27 October

4 demand is likely to pick-up in H2FY17 as these problems recede and macro factors improve. Management targets 18% market share in 2W segment, up from 13.8% YTD FY17. Management also acknowledged the need to add more products in order to gain market share (especially in the 125 cc executive segment) BMW alliance: Project is on track, with its first product (G310R) to be launched during FY17 and not specifically during the festive season. Inventory at dealers increased from days to days in 1QFY17.Retail inventory is estimated to be marginally higher QoQ. Management maintained EBITDA margin target of ~10% in next couple of years Exports volumes continue to struggle, especially 3W volumes (- 60% in 2QFY17). Management is hopeful of higher exports in H2FY17 as forex availability in key export markets improves going forward, on crude oil prices recovery Debt reduction: With strong cash flows of INR3.6b in H1, there has been a debt reduction of ~INR3b. Management expects the company to turn debt-free in the next months. Capex: FY16 capex was at INR4.5b; the management has guided ~INR 4b in FY17 which includes brownfield expansion at its existing manufacturing plants. It invested INR500m in its equity shares of TVS Credit Services Limited, a wholly owned subsidiary of TVS Motor Services. This is a direct equity investment in TVS Credit Services, as against earlier investment routed through preference shares of TVS Motor Services. TVS Credit Services has a book of INR45b, with the portfolio being split equally between a) Two Wheelers and b) Tractors and used cars. BMW Motorrad tie-up to give additional revenue stream, technological edge We believe this tie-up would give TVSL an additional revenue stream in the form of contract manufacturing for BMW Motorrad. Moreover, it would give an aspirational value to TVSL products, particularly premium ones. TVSL would invest EUR20m over CY13-15, with the first product expected to be launched in early BMW showcased concept from TVS alliance in Brazil, receiving very good response. We are yet to factor in for this alliance in our estimates, now factor in for TVS-BMW alliance in our estimates. Based on ~7.5% market share for BMW (BMW enjoys ~14% market share in >650cc segment) in global market in cc segment (~1m units market size), implies EPS contribution of ~INR4 per share. We value this alliance at 18x FY19E EPS resulting in INR68 per share to our target price. 27 October

5 Exhibit 8: BMW G310-R bike Source: Company Exhibit 9: Motorcycle industry volumes (>250 cc) in select global markets Europe k units USA k units India 400k units Brazil 150k units Canada 35k units Japan 32k units Australia 30k units Others 60k units Size of (250cc-650cc) Motorcycle market 1mn Units Size of (650cc and above) Motorcycle market 1mn Units Source: MOSL Exhibit 10: TVS-BMW alliance scenario analysis Scenario - Potential Market Share (%) Volumes global market ( cc) Units 1,000,000 1,000,000 1,000,000 1,000,000 BMW Alliance Volumes (Units) 50,000 75, , ,000 Net Realization (INR) 238, , , ,645 Revenues in (INR m) 11,932 23,865 33,410 41,763 EBITDA Margins (%) EBITDA (INR m) 1,074 2,386 3,675 5,012 Tax rate (%) PAT (INR m) 805 1,802 2,756 3,759 Incremental contribution to EPS EPS (Post JV) Upside to FY18E EPS on account of JV (%) October

6 Valuation and view Recent launches to plug the gap in product portfolio; becomes 3rd largest in domestic 2Ws: Successful launch of Jupiter and Star City Plus are driving customers back to TVS brand, after long time. Market share in both the scooters and motorcycles are on rising trend, with TVS now 3rd largest in domestic 2W. With the newly launched Victor, we believe TVS will address the gap in its existing portfolio (absence in the Executive 100 segment). Refreshed version of Apache to strengthen its hold in the growing premium segment. To regain lost market share in the scooter segment: TVS scooter volumes have grown 10.5% YoY even as the industry has grown 27% YoY, leading to ~200 bp YoY drop in market share. Management also seemed confident of regaining back the lost market share by putting appropriate measures to target the same. We build a conservative 11.7% CAGR FY16-19E volume growth for TVS scooter portfolio. EBITDA margins to improve 250bp over FY16-19E with improving market position and scale, expect: TVSL has been generally aggressive in pricing the products due to its weak brand equity. Improving competitive positioning together with operating leverage (particularly on marketing and employee cost) to drive 250bp margin expansion to 9.2% over FY16-19E. BMW Motorrad tie-up to give additional revenue stream, technological edge: Not factored in our estimates: We believe this tie-up would give TVSL an additional revenue stream in the form of contract manufacturing for BMW Motorrad. Moreover, it would give an aspiration value to TVSL products, particularly premium ones. TVSL would invest EUR20m over CY13-15, with the first product expected to be launched in 2HFY17. We value this alliance at 18x FY19E EPS resulting in INR67 per share to our target price. Valuation and view (earnings momentum to remain strong): We have upgraded our estimates for FY17/18 by 6%/3% respectively to factor in for stronger than estimated moped volumes and better margins. We expect strong earnings momentum for TVSL over next 2-3 years led by a) ramp-up of Victor volumes and recovery in scooter market share, b) benefit of monsoons and 7 th Pay commission to aid sustained volume growth in H2FY17, c) launch of BMW Alliance product in early 2017, d) recovery in export markets as crude oil prices recover and e) resultant margin improvement. The stock trades at 22.2x/17.5x FY18E/19E EPS. Maintain Buy with a target price of INR492 (~18x FY19E EPS + ~INR68/share for BMW alliance). Exhibit 11: Revised Estimates(Standalone) (INR M) FY17E FY18E Rev Old Chg (%) Rev Old Chg (%) Volumes (mn units) Net Sales 133, , , , EBITDA 10,111 9, ,393 13, EBITDA (%) bp bp Net Profit 6,359 6, ,811 8, EPS (INR) October

7 Exhibit 12: Valuations trading above historical average, reflecting improving fundamentals 40 P/E (x) 15 Yrs Avg(x) 5 Yrs Avg(x) 10 Yrs Avg(x) 10.0 P/B (x) 15 Yrs Avg(x) 5 Yrs Avg(x) 10 Yrs Avg(x) Oct-01 Dec-02 Feb-04 Apr-05 Jun-06 Aug-07 Sep-08 Nov-09 Jan-11 Mar-12 May-13 Jun-14 Aug-15 Oct Oct-01 Dec-02 Feb-04 Apr-05 Jun-06 Aug-07 Sep-08 Nov-09 Jan-11 Mar-12 May-13 Jun-14 Aug-15 Oct-16 Source: MOSL Source: MOSL Exhibit 13: Comparative valuation CMP Rating TP P/E (x) EV/EBITDA (x) RoE (%) RoCE (%) EPS CAGR (%) (INR)* (INR) FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E FY16E-18E Auto OEM's Bajaj Auto 2,764 Buy 3, Hero MotoCorp 3,315 Neutral 3, TVS Motor 411 Buy M&M 1,301 Buy 1, Maruti Suzuki 5,860 Buy 6, Tata Motors 522 Buy Ashok Leyland 85 Buy Eicher Motors 24,532 Buy 28, Auto Ancillaries Bharat Forge 857 Buy 1, Exide Industries 191 Buy Amara Raja Batteries 998 Buy 1, BOSCH 22,278 Neutral 24, October

8 Story in charts: Robust ~37% EPS CAGR over FY16-19E Exhibit 14: Expect a 15% CAGR over FY16-19E Volumes (units) Growth (%) ,198 2, ,080 2,564 2,710 3,224 3,692 4,159 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E 5.7 Exhibit 15: Strong 18% CAGR in revenues over FY16-18E Net sales (INR m) Growth (%) , , , , , , ,819 FY13 FY14 FY15 FY16 FY17E FY18E FY19E Exhibit 16: Operating leverage to drive margins EBITDA (INR m) EBITDA margin (%) ,090 4,781 6,066 7,507 10,111 13, ,631 Exhibit 17: Higher PAT growth with improving margins 1,810 (27.3) PAT (INR m) Growth (%) ,607 3,478 4,321 6,359 8,811 11,197 FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY13 FY14 FY15 FY16 FY17E FY18E FY19E Exhibit 18: FCF to remain strong despite high capex plans CFO (INR m) Capex (INR m) FCF (INR m) Exhibit 19: Sharp improvement in return ratios RoCE (%) RoE (%) 14,262 14,588 12,072 10,262 8,374 8,072 10,588 5,184 3,3032,536 2,604 3, ,580-3,669-2,778-4,000-4,568-4,000-4, FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY13 FY14 FY15 FY16 FY17E FY18E FY19E 27 October

9 Key operating metrics Exhibit 20: Snapshot of Revenue model units FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E Motorcycle 836, , , , ,114 1,016,443 1,311,751 1,550,698 1,760,075 Growth (%) % of total vols Scooter 452, , , , , , , ,729 1,118,493 Growth (%) % of total vols Moped 703, , , , , , ,475 1,017,477 1,120,268 Growth (%) % of total vols Total 2Ws 1,992,004 2,158,147 1,983,050 1,996,250 2,428,908 2,567,517 3,107,035 3,553,903 3,998,836 Growth (%) % of total vols Ws 39,860 39,792 49,190 80, , ,821 77,934 91, ,445 Growth (%) % of total vols Domestic 1,787,313 1,910,226 1,787,007 1,762,073 2,122,966 2,224,847 2,732,582 3,130,484 3,507,532 Growth (%) % of total vols Exports 244, , , , , , , , ,749 Growth (%) % of total vols Total volumes 2,031,864 2,197,939 2,032,240 2,077,092 2,541,799 2,678,338 3,184,969 3,645,318 4,106,281 Growth (%) ASP (INR/unit) 30,947 32,492 34,765 38,332 39,509 41,981 41,771 43,479 45,252 Growth (%) Net Sales (INR m) 62,880 71,415 70,650 79, , , , , ,819 Growth (%) October

10 Financials and valuations Standalone - Income Statement (INR Million) Y/E March FY13 FY14 FY15 FY16 FY17E FY18E FY19E Volumes (units) 2,044,000 2,073,000 2,518,000 2,678,702 3,190,220 3,651,612 4,113,827 Growth (%) (6.5) Gross Revenues 77,329 86, , , , , ,490 Less: Excise Duty 6,679 6,902 7,156 9,883 12,255 14,410 16,671 Net Sales 70,650 79, , , , , ,819 Change (%) Materials Consumed 50,965 56,728 72,971 80,255 96, , ,068 % of Sales Personnel Expenses 4,071 4,761 5,924 6,642 7,716 8,876 10,034 % of Sales Selling & Distribution Expenses 6,974 8,421 9,071 11,186 12,373 14,581 16,724 % of Sales General & Administrative Expenses 4,549 4,927 6,391 6,849 6,386 7,291 8,362 % of Sales Total Expenditure 66,560 74,838 94, , , , ,188 % of Sales EBITDA 4,090 4,781 6,066 7,507 10,111 13,393 16,631 Margin (%) Depreciation 1,304 1,317 1,533 1,898 2,782 3,028 3,348 EBIT 2,786 3,465 4,533 5,609 7,329 10,364 13,282 Int. and Finance Charges PBT after EO Exp. 1,636 3,525 4,562 5,660 8,422 11,748 14,929 Tax Rate (%) Reported PAT 1,160 2,616 3,478 4,321 6,359 8,811 11,197 PAT Adj for EO items 1,810 2,607 3,478 4,321 6,359 8,811 11,197 Change (%) Net Profit 1,810 2,607 3,478 4,321 6,359 8,811 11,197 Adj EPS Standalone - Balance Sheet (INR Million) Y/E March FY13 FY14 FY15 FY16 FY17E FY18E FY19E Equity Share Capital Total Reserves 11,772 13,678 15,979 18,893 23,681 30,779 39,691 Preference Capital Net Worth 12,247 14,153 16,454 19,368 24,156 31,254 40,166 Minority Interest Deferred Liabilities 931 1,247 1,528 1,757 1,757 1,757 1,757 Total Loans 6,345 4,424 9,187 7,585 7,185 6,685 6,685 Capital Employed 19,523 19,824 27,170 28,710 33,098 39,695 48,607 Gross Block 22,479 24,723 28,218 31,996 35,856 39,856 43,856 Less: Accum. Deprn. 12,365 13,466 14,922 16,067 18,849 21,878 25,226 Net Fixed Assets 10,115 11,257 13,296 15,929 17,006 17,978 18,629 Capital WIP Total Investments 8,688 8,959 10,125 11,846 13,346 14,596 14,596 Curr. Assets, Loans&Adv. 12,029 14,950 21,732 21,542 31,350 40,229 53,249 Inventory 5,097 5,482 8,197 8,260 9,773 11,643 13,650 Account Receivables 3,005 3,341 5,039 5,787 6,847 8,157 9,564 Cash and Bank Balance ,751 11,062 19,078 Loans and Advances 3,752 5,302 8,443 7,167 7,979 9,367 10,958 Curr. Liability & Prov. 11,670 15,823 18,878 20,916 29,055 33,557 38,317 Account Payables 11,136 14,612 17,390 19,932 23,575 28,078 32,837 Provisions 534 1,211 1, ,479 5,479 5,479 Net Current Assets , ,296 6,672 14,932 Appl. of Funds 19,523 19,824 27,169 28,709 33,098 39,695 48,607 E: MOSL Estimates October

11 Financials and valuations Ratios Y/E March FY13 FY14 FY15 FY16 FY17E FY18E FY19E Basic (INR) EPS Growth (%) Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sales EV/EBITDA Dividend Yield (%) Return Ratios (%) EBITDA Margins (%) Net Profit Margins (%) RoE RoCE RoIC Operating Ratios Fixed Asset Turnover (x) Inventory (Days) Debtor (Days) Creditor (Days) Working Capital (Days) Leverage Ratio (x) Current Ratio Interest Cover Ratio Debt/Equity Standalone - Cash Flow Statement (INR Million) Y/E March FY13 FY14 FY15 FY16 FY17E FY18E FY19E CF from Operating incl EO 4,181 5, ,457 12,800 10,390 12,654 (inc)/dec in FA ,580-3,669-4,568-4,000-4,000-4,000 Free Cash Flow 3,414 2,658-2,823 3,889 8,800 6,390 8,654 CF from Investments ,598-4,933-5,195-4,038-3,568-2,066 (Inc)/Dec in Debt ,069 4, Interest Paid Dividend Paid ,065-1,570-1,713-2,284 CF from Fin. Activity -3,152-1,988 3,308-3,006-2,340-2,511-2,572 Inc/Dec of Cash ,423 4,310 8,016 Add: Beginning Balance ,707 11,017 Closing Balance ,707 11,017 19, October

12 Corporate profile Company description TVS Motor Company is 4 th largest two-wheeler company in India. TVS Motor Company is the flagship company of the 100 year old six billion USD TVS Group, which has some 40 companies and holdings in the automotive sector. TVS Motor Company offers the widest range of product in the Indian two and three wheeler industry. TVS Motor Company has international presence in more than 50 countries in Asia, Africa and Latin America. Exhibit 1: Sensex rebased Source: MOSL/Bloomberg Exhibit 2: Shareholding pattern (%) Sep-16 Jun-16 Sep-15 Promoter DII FII Others Note: FII Includes depository receipts Source: Capitaline Exhibit 3: Top holders Holder Name % Holding Reliance Capital Trustee Co Ltd 5.4 Jwalamukhi Investment Holdings 4.4 Franklin Templeton Mutual Fund 3.4 Tree Line Asia Master Fund (Singapore) PTE 1.5 Columbia Acorn International 1.4 Source: Capitaline Exhibit 4: Top management Name Designation Venu Srinivasan Chairman & Managing Director Sudarshan Venu Joint Managing Director K S Srinivasan Company Secretary Exhibit 5: Directors Name C R Dua Hemant Krishan Singh Prince Asirvatham T Kannan Name H Lakshmanan Lakshmi Venu R Ramakrishnan Source: Capitaline *Independent Exhibit 6: Auditors Name A N Raman V Sankar Aiyar & Co Type Cost Auditor Statutory Exhibit 7: MOSL forecast v/s consensus EPS MOSL Consensus (INR) forecast forecast Variation (%) FY FY Source: Capitaline Source: Bloomberg 27 October

13 N O T E S 27 October

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