3QFY19 Result Update TVS Motor Company 23 January 2019 Reuters: TVSM.BO; Bloomberg: TVSL IN Better-Than-Expected Margins TVS Motor Company s 3QFY19 performance was above our expectations as it reported PAT of Rs1.78bn which was 18% above our estimate. EBITDA margin at 8.1% for the quarter was above our estimate of 7.6%. Margins were higher due to two reasons: 1) Reclassification of other income in operating income as per new IND-AS rules. 2) Better cost control because of lower other expenditure. Net sales at Rs46.6bn grew 26% YoY on 20% YoY volume growth. Absolute EBITDA at Rs3.8bn grew by a strong 25% YoY and was 11% above our estimate. Gross margin for the quarter at 24.2% remained flat on QoQ basis. Realisation for the quarter grew 3% QoQ/5% YoY as the company went for a price hike in 3QFY19, which coupled with a better product mix resulted in strong improvement. The company, in the post-results conference call, indicated that it again went for a price hike in January 2019 for select models and also expects the demand in 4QFY19 to be better than in 3QFY19. The company has started rolling out models with CBS/ABS facilities in 4QFY19 as the new vehicle norms come into effect from the current quarter. As regards raw material costs, the company indicated that the benefit of softening in raw material costs will be visible with a one-quarter lag and it is also working on other internal cost control measures to improve margins. We have retained our margin estimates for FY19/FY20/FY21 but have marginally raised our volume/sales estimates by 1% each for FY19/FY20/FY21. However, we have retained Sell rating on the stock as its valuation remains highly expensive at 34x/27x FY19E/FY20E EPS, respectively. We have valued the stock based on 20x September 2020 estimated EPS of Rs22 with a target price of Rs442. Rising costs to restrict margin expansion: TVS Motor Company s 3QFY19 EBITDA margin at 8.1% was ~50bps above our estimate. We believe that going forward margin expansion will not be significant as cost pressure relating to regulatory changes is likely to increase significantly from FY20 onwards. We note that the recent increase in insurance costs impacted the demand for two-wheelers, while the festive demand this year has been lower than expected. With further cost pressure coming from higher input costs, a weak Indian rupee and rising regulatory-related costs, we don t believe that margins could surprise on the higher side. From April 2019 onwards, CBS and ABS for two-wheelers will become mandatory, further adding to the pressure on OEMs to pass on the cost pressure. Further, BS VI engines from April 2020 are likely to result in a significant price hike for vehicles from the current levels. We have retained our existing EBITDA margin estimates at 8.2%/8.6%/8.2% for FY19/FY20/FY21, respectively. However, as we move into FY21, we believe two-wheeler OEMs will not be able to fully pass on the costs relating to the transition from BS IV to BS VI norms. Continues to gain market share: TVS Motor Company s domestic two-wheeler growth has been faster than domestic industry two-wheeler growth, with significant outperformance on scooters, and the company has also done well on the export front which led to overall volume outperformance in 9MFY19. We note that in the motorcycle space, Bajaj Auto has captured a significant incremental share in 9MFY19 because of aggressive pricing and also schemes which led to stagnant market share/loss for most of the other players. TVS Motor Company s recent launches have helped the company gain market share from competitors. The company, in the conference call, indicated that it expects a significant improvement in Radeon model sales with January 2019 sales numbers expected to be closer to 20,000 units. January is also a festive and wedding month, which coupled with improved financing is likely to result in better sales of two-wheelers in 4QFY19.However, with competition increasing and Bajaj Auto s aggressiveness in entry segment motorcycles, we don t expect significant market share gains for TVS Motor Company in the domestic twowheeler market over FY20/FY21. Stretched valuation; retain Sell rating: TVS Motor Company s stock currently factors in a best-case scenario with strong market share gains and margin expansion. The stock trades at premium multiples of 34x/27x FY19E/FY20E earnings, respectively, We have retained Sell rating on the stock with a target price of Rs442 (20x September 2020E EPS of Rs22). SELL Sector: Automobile CMP: Rs554 Target Price: Rs442 Downside: 20% Gaurant Dadwal Research Analyst gaurant.dadwal@nirmalbang.com +91-22-6273 8145 Vivek Sarin Research Associate vivek.sarin@nirmalbang.com +91-22-6273 8176 Key Data Current Shares O/S (mn) 475.1 Mkt Cap (Rsbn/US$bn) 263.3/3.7 52 Wk H / L (Rs) 734/479 Daily Vol. (3M NSE Avg.) 1,618,016 Price Performance (%) 1 M 6 M 1 Yr TVS Motor Company (3.3) 2.2 (21.5) Nifty Index 1.6 (1.5) (1.5) Source: Bloomberg Y/E March (Rsmn) 3QFY18 2QFY19 3QFY19 YoY (%) QoQ (%) Net revenues 36,987 49,935 46,640 26.1 (6.6) Raw material costs 26,783 37,840 35,347 32.0 (6.6) Gross profit 10,204 12,095 11,293 10.7 (6.6) Staff costs 2,118 2,449 2,367 11.7 (3.4) Other expenses 5,081 5,363 5,169 1.7 (3.6) Total expenditure 33,982 45,653 42,883 26.2 (6.1) EBITDA 3,005 4,282 3,757 25.0 (12.2) EBITDAM (%) 8.1 8.6 8.1 (7bps) (52bps) Depreciation 824 1,016 1,012 22.8 (0.4) Interest costs 122 212 167 37.1 (21.1) Other income 44 7 7 (85.4) (12.2) PBT 2,104 3,062 2,585 22.9 (15.6) Tax 560 949 801 42.9 (15.6) Net profit 1,543 2,113 1,784 15.6 (15.6) NPM (%) 4.2 4.2 3.8 (35bps) (41bps) EPS (Rs) 3.2 4.4 3.8 50.6 (69.3) Source: Company, Nirmal Bang Research Please refer to the disclaimer towards the end of the document.
Exhibit 1: Financial summary Revenues 1,21,353 1,51,297 1,80,942 2,08,993 2,39,266 YoY (%) 9.3 24.7 19.6 15.5 14.5 EBITDA 8,571 11,292 14,913 17,960 19,599 EBITDA (%) 7.1 7.5 8.2 8.6 8.2 PAT 5,581 6,626 7,660 9,862 11,074 YoY (%) 14.1 18.7 15.6 28.7 12.3 EPS (Rs) 11.7 13.9 16.1 20.8 23.3 RoE (%) 25.6 25.1 24.4 26.5 24.9 RoCE (%) 20.0 24.5 30.3 32.6 30.6 P/E (x) 47.2 39.8 34.4 26.7 23.8 EV/EBITDA (x) 32.0 24.3 18.3 15.2 13.9 EV/Sales (x) 2.3 1.8 1.5 1.3 1.1 Source: Company, Nirmal Bang Research Exhibit 2: Change in our estimates New estimates Old estimates Change (%) (Rsmn) FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E Volume 40,20,772 44,65,440 48,66,370 39,71,207 44,10,918 48,08,032 1.2 1.2 1.2 Net sales 1,82,990 2,11,336 2,41,886 1,80,942 2,08,993 2,39,266 1.1 1.1 1.1 EBITDA 15,031 18,081 19,769 14,913 17,960 19,599 0.8 0.7 0.9 EBITDA margin (%) 8.2 8.6 8.2 8.2 8.6 8.2 - - - PAT 7,682 9,879 11,112 7,660 9,862 11,074 0.3 0.2 0.3 EPS (Rs) 16.2 20.8 23.4 16.1 20.8 23.3 0.4 (0.0) 0.4 Source: Company, Nirmal Bang Research Exhibit 3: Deviation of our estimates from actual performance in 3QFY19 (Rsmn) Actual Our estimate Deviation 3QFY19 3QFY19 % Net sales 46,640 44,583 4.6 EBITDA 3,757 3,388 10.9 Net profit 1,784 1,511 18.1 Source: Nirmal Bang Research Key conference-call highlights Demand: The management indicated that Radeon, Ntorque 125 and Aapche RTR 160 motorcycle models are doing very well. Apache brand motorcycle sales topped 3mn units. The Ntorque scooter model is expected to clock sales of ~25,000 units in the month of January. Industry-wide growth during the third quarter of FY19 was affected by macro-level factors like revised insurance norms and liquidity problems, but 4QFY19 is expected to be better. Going forward, the company does not expect a significant change in its category mix, while scooters as a category is likely to grow faster versus industry growth. New launches: During the quarter, the company launched variants of TVS Apache RTR 180, Ntorque and Radeon motorcycles in the commuter segment. It is receiving good customer feedback and is likely to touch sales of ~20,000 units/month in January. The company s electric vehicle will be introduced in the next financial year. Commodity costs: Raw material costs continued to retain their upward bias and the company expects the same to either reduce or remain at the current level going forward. Exports: Revenues from exports accounted for 23% of sales during the quarter and stood at Rs10,560mn versus. Rs11,400mn in the preceding quarter. The company expects to continue its growth momentum because of good acceptance of its products, stable crude oil prices and also stable currency outlook. The company realised a net forex rate of Rs71.5/US$ vs. Rs69.5/US$ in the preceding quarter. It undertook small price hikes for certain brands in specific export markets and will be starting exports of three-wheelers to Egypt. 2 TVS Motor Company
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Price revision: TVS Motor Company went for a price hike of 0.6% in 3QFY19, with its YTD blended price hike amounting to 0.9%. Increase in prices along with a better product mix and a favourable currency level contributed to higher realisation in 3QFY19. Guidance: The management indicated that it is confident of expanding EBITDA margin in the coming quarters. Capex: The company has total capacity of 5mn units annually and it has given FY19 capex guidance of Rs7,000mn. Of this ~Rs5,000mn has already been spent. Other expenses: The management indicated that 50% of the company s sales are funded via retail financing channel, of which TVS Credit accounts for a 52% share. TVS Credit currently has a book value of Rs80bn and YTD PBT of Rs1.4bn. Exhibit 4: P/E charts (Rs) 900 800 700 600 500 400 300 200 100 0 (x) 140 120 100 80 60 40 20 0 Price 20 25 30 35 Source: Nirmal Bang Research P/E Mean 1sd -1sd Source: Nirmal Bang Research 3 TVS Motor Company
Financials Exhibit 5: Income statement Net sales 1,21,353 1,51,297 1,82,990 2,11,336 2,41,886 % growth 9.3 24.7 20.9 15.5 14.5 Raw material costs 88,534 1,11,330 1,35,413 1,56,388 1,78,995 Staff costs 7,456 8,680 9,982 11,479 13,488 Other expenses 16,792 19,995 22,565 25,387 29,633 Total expenditure 1,12,782 1,40,005 1,67,959 1,93,254 2,22,116 EBITDA 8,571 11,292 15,031 18,081 19,769 % growth 5.8 31.8 33.1 20.3 9.3 EBITDA margin (%) 7.1 7.5 8.2 8.6 8.2 Other income 1,734 1,448 362 869 1,303 Interest costs 440 566 537 521 505 Gross profit 32,819 39,967 47,577 54,947 62,890 % growth 5.0 21.8 19.0 15.5 14.5 Depreciation 2,878 3,387 3,882 4,252 4,622 Profit before tax 6,987 8,786 10,974 14,177 15,946 % growth 11.1 25.8 24.9 29.2 12.5 Tax 1,406 2,161 3,292 4,298 4,834 Effective tax rate (%) 20.1 24.6 30.0 30.3 30.3 Net profit 5,581 6,626 7,682 9,879 11,112 % growth 14.1 18.7 15.9 28.6 12.5 Extraordinary items - - - - - Reported net profit 5,581 6,626 7,682 9,879 11,112 % growth 14.1 18.7 15.9 28.6 12.5 Source: Company, Nirmal Bang Research Exhibit 7: Balance sheet Equity 475 475 475 475 475 Reserves 23,608 28,329 33,448 40,182 47,863 Net worth 24,083 28,804 33,923 40,657 48,338 Net deferred tax liabilities 1,257 1,482 1,482 1,482 1,482 LT liabilities/provisions 508 538 564 593 622 Short-term loans 6,164 7,194 7,194 7,194 7,194 Long-term loans 4,688 3,176 2,876 2,576 2,276 Total loans 10,851 10,370 10,070 9,770 9,470 Liabilities 36,700 41,193 46,039 52,501 59,912 Gross block 39,290 45,454 52,454 57,454 62,454 Depreciation 19,451 21,736 25,617 29,869 34,490 Net block 19,839 23,719 26,837 27,585 27,964 Capital work-in-progress 623 1,311 1,311 1,311 1,311 Long-term investments 15,880 20,355 20,860 27,010 34,010 Other long-term assets 836 629 398 717 1,290 Inventories 9,670 9,644 10,481 12,424 14,280 Debtors 7,238 9,684 9,402 10,803 12,417 Cash 85 109 156 256 369 Cash and cash equivalents 44 65 113 213 326 Other bank balances 41 44 43 43 43 Other current assets 4,877 6,345 5,961 7,076 8,133 Total current assets 21,869 25,781 26,001 30,560 35,199 Creditors 21,718 29,981 28,682 33,877 38,937 Other current liabilities/provisions 629 620 687 806 926 Total current liabilities 22,347 30,602 29,369 34,682 39,863 Net current assets (478) (4,820) (3,368) (4,122) (4,664) Total assets 36,700 41,193 46,039 52,501 59,912 Source: Company, Nirmal Bang Research Exhibit 6: Cash flow EBIT 7,426 9,353 11,511 14,698 16,451 (Inc.)/dec. in working capital (514) 3,668 (1,405) 855 654 Cash flow from operations 6,912 13,020 10,106 15,553 17,105 Other income 583 535 362 869 1,303 Other expenses (678) (702) - - - Depreciation 2,878 3,387 3,882 4,252 4,622 Tax paid 1,290 2,465 3,292 4,298 4,834 Net cash from operations 7,240 12,705 10,333 14,638 15,590 Capital expenditure (6,122) (7,698) (7,000) (5,000) (5,000) Net cash after capex 1,118 5,008 3,333 9,638 10,590 Other investment activities (1,359) (3,159) (143) (5,600) (6,271) Cash from financial activities (727) (747) (3,296) (3,966) (4,236) Opening cash balance 297 (672) 241 135 207 Closing cash balance* (671) 430 135 207 290 Change in cash balance (968) 1,102 (106) 72 83 *Overdrafts utilised 715 (176) (22) 7 36 Source: Company, Nirmal Bang Research Exhibit 8: Key ratios Y/E March FY17 FY18 FY19E FY20E FY21E Profitability & return ratios EBITDA margin (%) 7.1 7.5 8.2 8.6 8.2 EBIT margin (%) 4.7 5.2 6.1 6.5 6.3 Net profit margin (%) 4.6 4.4 4.2 4.7 4.6 RoE (%) 25.6 25.1 24.5 26.5 25.0 RoCE (%) 20.0 24.5 30.6 32.9 30.9 Working capital & liquidity ratios Receivables (days) 20 21 21 20 20 Inventory (days) 25 24 23 23 23 Payables (days) 86 85 85 85 85 Current ratio (x) 1.0 0.8 0.9 0.9 0.9 Quick ratio (x) 0.5 0.5 0.5 0.5 0.5 Valuation ratios EV/Sales (x) 2.3 1.8 1.5 1.3 1.1 EV/EBITDA (x) 32.0 24.2 18.2 15.1 13.8 P/E (x) 47.2 39.7 34.3 26.6 23.7 P/BV (x) 10.9 9.1 7.8 6.5 5.4 Source: Company, Nirmal Bang Research 4 TVS Motor Company
Apr-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Rating track Date Rating Market price (Rs) Target price (Rs) 26 May 2015 Sell 230 193 9 July 2015 Sell 264 193 22 July 2015 Sell 252 193 9 October 2015 Sell 240 193 28 October 2015 Sell 275 205 11 January 2016 Sell 286 205 1 February 2016 Sell 292 242 4 May 2016 Sell 287 245 27 July 2016 Sell 291 245 28 October 2016 Sell 412 288 25 January 2017 Sell 400 286 3 February 2017 Sell 392 301 28 April 2017 Sell 503 336 14 August 2017 Sell 537 336 2 November 2017 Sell 709 400 31 January 2018 Sell 714 430 17 May 2018 Sell 611 448 8 August 2018 Sell 549 433 24 October 2018 Sell 535 441 Rating track graph 900 800 700 600 500 400 300 200 100 Not Covered Covered 5 TVS Motor Company
DISCLOSURES This Report is published by Nirmal Bang Equities Private Limited (hereinafter referred to as NBEPL ) for private circulation. NBEPL is a registered Research Analyst under SEBI (Research Analyst) Regulations, 2014 having Registration no. INH000001436. NBEPL is also a registered Stock Broker with National Stock Exchange of India Limited and BSE Limited in cash and derivatives segments. NBEPL has other business divisions with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. NBEPL or its associates have not been debarred / suspended by SEBI or any other regulatory authority for accessing / dealing in securities Market. NBEPL, its associates or analyst or his relatives do not hold any financial interest in the subject company. NBEPL or its associates or Analyst do not have any conflict or material conflict of interest at the time of publication of the research report with the subject company. NBEPL or its associates or Analyst or his relatives do not hold beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of this research report. NBEPL 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. NBEPL or its associates have not received any compensation or other benefits from the company covered by Analyst or third party in connection with the research report. Analyst has not served as an officer, director or employee of Subject Company and NBEPL / analyst has not been engaged in market making activity of the subject company. Analyst Certification: I/We, Mr. Gaurant Dadwal, the research analysts and Mr. Vivek Sarin research associates are the authors of this report, hereby certify that the views expressed in this research report accurately reflects my/our personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst(s) principally responsible for the preparation of this research report and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. 6 TVS Motor Company
Disclaimer Stock Ratings Absolute Returns BUY > 15% ACCUMULATE -5% to15% SELL < -5% This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. NBEPL is not soliciting any action based upon it. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any such transaction. In preparing this research, we did not take into account the investment objectives, financial situation and particular needs of the reader. This research has been prepared for the general use of the clients of NBEPL and must not be copied, eit her in whole or in part, or distributed or redistributed to any other person in any form. If you are not the intended recipient you must not use or disclose the information in this research in any way. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. NBEPL will not treat recipients as customers by virtue of their receiving this report. This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject NBEPL & its group companies to registration or licensing requirements within such jurisdictions. The report is based on the information obtained from sources believed to be reliable, but we do not make any representation or warranty that it is accurate, complete or up-to-date and it should not be relied upon as such. We accept no obligation to correct or update the information or opinions in it. NBEPL or any of its affiliates or employees 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. NBEPL or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. This information is subject to change without any prior notice. NBEPL reserves its absolute discretion and right to make or refrain from making modifications and alterations to this statement from time to time. Nevertheless, NBEPL is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries. Before making an investment decision on the basis of this research, the reader needs to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular investment needs, objectives and financial circumstances. There are risks involved in securities trading. The price of securities can and does fluctuate, and an individual security may even become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect the value of the investment. Opinions expressed are subject to change without any notice. Neither the company nor the director or the employees of NBEPL accept any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. Here it may be noted that neither NBEPL, nor its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profit that may arise from or in connection with the use of the information contained in this report. Copyright of this document vests exclusively with NBEPL. Our reports are also available on our website www.nirmalbang.com Access all our reports on Bloomberg, Thomson Reuters and Factset. Team Details: Name Email Id Direct Line Rahul Arora CEO rahul.arora@nirmalbang.com - Girish Pai Head of Research girish.pai@nirmalbang.com +91 22 6273 8017 / 18 Dealing Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com +91 22 6273 8230, +91 22 6636 8833 Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com +91 22 6273 8100/8101, +91 22 6636 8831 Michael Pillai Dealing Desk michael.pillai@nirmalbang.com +91 22 6273 8102/8103, +91 22 6636 8830 Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 301/302, Marathon Innova, Nr. Peninsula Corporate Park, Lower Parel (W), Mumbai-400013. Board No. : 91 22 6273 8000/1; Fax. : 022 6273 8010 7 TVS Motor Company