October 25, 2013 Neutral TVS Motor Industry: Auto and Auto Components Industry View: Neutral l Result Update Cautious on sustainability of outperformance Good quarter, in-line with our expectations In line with a strong volume quarter, TVS reported a growth of 13% qoq and 18% yoy in net sales to Rs19.9bn. This was due to a 4.2% yoy and 2.4% qoq growth in volumes to 5.06 lakh units. TVS s volumes segmentally showed a very strong growth in 3W (85% yoy), followed by motorcycles (18% yoy) and then scooters (3.5% decline). Net realizations grew by 13.3% yoy and 10.1% qoq on the back of price hike taken in the month of May and improvement in product mix in the favor of exports and 3W. RM to sales went up to 72.1% of sales v/s 71.9% qoq due to rupee depreciation, while employee costs as a % of sales declined at 6.02% v/s 6.5% sequentially. The company continues to spend higher on advt. and promotional expenses and garner a bigger pie of market share, as a result of which other expenses as a % of sales went high at 17.2% v/s 17.1% qoq and 15.6% yoy. EBITDA margins increased to 6%, up by 30 bps qoq, while falling by 10 bps yoy from 6.1%. Interest costs are witnessing a downward trajectory as the sale of the subsidiary TVS Energy was used to reduce debt. PAT came in at Rs888 mn which was a 97% growth yoy and 71% qoq. Adjusted PAT was in line with our expectations at Rs586 mn adjusted for the above stated sale of assets. Volume traction seen in Q2, sustainability is a question Q2 witnessed a solid traction in TVS s volumes vis-à-vis industry and after witnessing about six quarters of listless performance. This was owing to the growth seen in the motorcycle as well as 3W segment. Motorcycles saw a growth coming from the launch of Pheonix and a good show from the existing models. Three wheelers saw more than 140% growth in exports as countries like Sri Lanka and those in the African region increased the demand for 3Ws. Scooters were somewhat subdued as competition from Hero and Honda became very intense. TVS launched a new scooter named Jupiter which is very aggressively priced in September and is getting a very warm response (20,000 sold till now). This would help them to increase market share going forward as they are increasing the capacity for Jupiter in the coming months. Also the launch of Jupiter has happened just in north India, while south Indian launch will happen post Diwali. However, we believe that since there is a continued weakness in the southern markets, we are skeptical about the growth there (south is the biggest market is for TVS). In the motorcycle segment with three new launches (including variants) coming up till FY 15, there may be some market share gains but we are cautious about significant headways in this segment as Hero, Bajaj and Honda are offering tough competition to TVS s weak motorcycle franchise. 3W may continue the good show mainly in the exports market, but will contribute <5% in FY 14 as well as FY 15. Therefore, on the 2W side, we are slightly concerned about the sustenance of the splendid performance seen in Q2 going beyond the festive season and in FY 15. We have projected the total volumes to grow at 5.6%/7.2% for TVS in FY14E/15E. Stock Data Current Market Price Rs) 51 Target Price Rs) 51 Potential upside (%) - Reuters TVSM.BO Bloomberg TVSL IN What s Changed 12 month PriceTarget (Rs) From 38 to 51 FY2014E EPS (Rs) From 3 to 3.17 FY2015E EPS (Rs) From 4.8 to 5.12 Key Data Market Cap (Rs bn) 24 52-Week Range (Rs) 53 / 28 Avg Daily Trading Value last 6 mts (Rs.mn) 35 Promoters (%) 57.40 FII Holding (%) 2.51 DII Holding (%) 18.29 Public & Others Holding (%) 21.80 Fiscal YE YE Mar FY12 FY 13 FY 14E FY 15E Revenues (Rs mn) 74,352 74,062 77,000 87,936 EBITDA (%) 6.17 5.92 5.71 5.95 PAT (%) 1.78 1.24 1.95 2.76 EPS (Rs) 2.79 1.94 3.17 5.12 EPS growth (%) 3.4-30.4 62.9 61.7 P/E (x) 18.2 26.1 16.0 9.9 P/B(x) 3.3 2.7 2.3 1.9 EV/EBITDA (x) 7.1 7.6 7.3 6.0 ROE(%) 18.3 10.3 14.1 18.9 Dividend yield (%) 2.7 3.0 1.5 1.6 Relative Price Performance 140 120 100 80 60 40 20 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 TVS Motor S&P Bse Sensex One Year Indexed (%) 1 Month 3 Months 12 Months Absolute 43 57 23 BSE Relative 39 54 13 Ashwin Patil ashwin_patil@lkpsec.com +91 22 6635 1271 Disclaimer: 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 and is for general guidance only. 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Financial Highlights All fig in Rs mn Q2 FY14 Q1 FY 14 % qoq Q2 FY13 % yoy Total Reveunes 19,884 17,602 13% 16,906 18% Raw material costs 14,149 12,518 13% 12,228 16% Employee costs 1,182 1,130 5% 1,077 10% Other expenses 3,382 1,130 199% 2,589 31% EBITDA 1,171 984 19% 1,012 16% EBITDA margins(%) 6.0% 5.7% 30 bps 6.1% (10 bps) Depreciation 314 314 0% 320-2% Other income 77 86-10% 41 86% Interest expenses 52 65-20% 152-66% PBT 1,185 691 72% 582 104% Tax 296 172 72% 130 128% PAT 888 519 71% 452 97% Exceptional items 303 - N/A - N/A Adjusted PAT 586 519 13% 452 30% Margins to improve hereon, but the rate will be slow due to higher ad spend Highest other expenses to sales ratio for TVS (17.2% in the quarter v/s 9.9% of HMCL and 8% of Bajaj Auto) are the worst margin dampener till date. Weak product franchise is leading the company to incur higher marketing spend which is leading them to post weakest EBITDA margins of ~5-6% in the industry. In this quarter, better product mix (higher 3W sales and lower moped sales) led to a slightly better margin performance at 6%. Going forward, with higher 3W sales and price hike taken twice in the last 6 months, margins will see an uptick. Higher exports further coming in the form of TVS s foray into Nigerian 2W market will also lead to margin strength. However, with higher influx of the aggressively priced Jupiter coming in along with its ad spend moving up, and moped sales bouncing back from January in south India (as per the management), we believe that the pace of margin growth will be stunted, though directionally they may move northwards. Also, the company is committed to invest more into their Indonesian subsidiary which is incurring losses on an ongoing basis. We do not believe this subsidiary to post profits in the next one-two years at least and to continue to be a drag on the consol business. We have projected the standalone EBITDA margins at 6.1%/6.3% in FY14E/15E. Per unit parameters(rs) Q3 FY12 Q4 FY12 Q1 FY13 Q2 FY13 Q3 FY 13 Q4 FY13 Q1 FY14 Q2 FY14 Net realizations 32,833 30,353 34,502 34,195 34,366 33,882 35,196 38,758 RM costs 24,099 22,514 25,741 25,163 25,008 24,389 25,318 27,949 Employee costs 1,714 1,797 1,972 2,217 2,012 1,822 2,285 2,334 Other expenses 5,264 4,627 5,268 5,327 5,646 6,282 6,006 6,681 Total costs 31,078 28,938 32,982 32,707 32,667 32,493 33,610 36,965 EBITDA 2,317 1,874 2,072 2,083 2,065 1,841 1,991 2,313 Adjusted PAT 1,072 1,084 985 930 1,012 1,141 1,049 1,157
Outlook and valuation We believe that TVS having performed well in Q2 may see a good volume uptick going forward, supported by the aggressively and newly launched scooter Jupiter, 3W exports and upcoming motorcycle launches. Improved moped sales expectations also may help them to achieve a volume target close to 2mn as guided by the management. At the same time, some inhibitors like competition, weak product franchise, weakness in South India and economic softness may act as dampeners. On the margins front, higher Jupiter sales and marketing spend associated with its launch in south India may pressurize margins. Also with raw material costs firming slightly, there may be some negativity in margins. But at the same time, the couple of price hikes taken by the management and higher exports sales with 3W outperformance, margins may get a fillip and would slightly offset the negative impact of the above mentioned factors. We have increased volume as well as margin estimates for FY14E/15E considering the pros and cons. Furthermore, payback of debt in this quarter via sale of assets will lead to lower interest costs, thus bolstering earnings. While on consol basis, Indonesia will continue to be a drag on the financials in a tough market scenario over there. On an overall basis, we need to wait and watch whether the positivity seen in Q2 gets sustained in the coming quarters. We are raising our target price to Rs 51 (@ 6x consol FY 15E EV/EBITDA) and upgrading the stock from Underperformer to Neutral with a cautious bias.
Financial Summary Income statement YE Mar (Rs.mn) FY12 FY 13 FY 14E FY 15E Total Revenues 74,352 74,062 77,000 87,936 Raw Material Cost 54,025 52,439 54,493 62,008 Employee Cost 4,305 4,739 5,469 6,012 Other Exp 11,431 12,501 13,701 15,947 EBITDA 4,591 4,383 4,397 5,229 EBITDA Margin(%) 6.2 5.9 5.7 5.9 Depreciation 1,583 1,756 1,686 1,766 Interest 883 1034 520 370 PBT 2,126 1,593 2,191 3,092 PBT Margin(%) 2.9 2.2 2.8 3.5 Tax 946 914 1,010 1,091 PAT 1,323 1,849 1,801 2,427 PAT Margins (%) 1.8 2.5 2.3 2.8 Adj PAT 1,323 921 1,501 2,427 Adj PAT Margins (%) 1.8 1.2 1.9 2.8 Key Ratios YE Mar FY12 FY 13 FY 14E FY 15E Per Share Data (Rs) Adj. EPS 2.79 1.94 3.17 5.12 CEPS 6.13 7.61 7.36 8.85 BVPS 15.24 18.95 22.41 27.13 DPS 1.40 1.52 0.74 0.80 Growth Ratios(%) Total revenues 13.6-0.4 4.0 14.2 EBITDA 28.6-4.5 0.3 18.9 PAT 3.4-30.4 62.9 61.7 EPS Growth 3.4-30.4 62.9 61.7 Valuation Ratios (X) PE 18.2 26.1 16.0 9.9 P/CEPS 8.3 6.7 6.9 5.7 P/BV 3.3 2.7 2.3 1.9 EV/Sales 0.4 0.4 0.4 0.4 EV/EBITDA 7.1 7.6 7.3 6.0 Operating Ratios (Days) Inventory days 33.4 31.3 33.0 36.0 Recievable Days 34.5 39.0 42.0 43.0 Payables day 11.7 13.7 15.0 17.0 Net Debt/Equity (x) 1.55 1.09 0.80 0.57 Profitability Ratios (%) ROE 18.3 10.3 14.1 18.9 Dividend payout 50% 78% 23% 16% Dividend yield 2.7 3.0 1.5 1.6 Source: Company, Balance sheet YE Mar (Rs. mn) FY12 FY 13 FY 14E FY 15E Equity and Liabilities Equity Share Capital 475 475 475 475 Reserves & Surplus 6,747 8,508 10,149 12,385 Total Networth 7,222 8,983 10,624 12,860 Total loans 9,889 9,881 8,775 8,375 Total Equity and Liabilities 17,111 18,864 19,399 21,235 Current Liab & Prov Short term borrowings 2,708 719 369 169 Trade payables 7,623 8,668 9,631 11,260 Other current liabilities 5,124 4,728 5,428 6,128 Short term provisions 599 599 659 719 Total liab & shareholder's equity 33,166 33,646 35,553 39,580 APPLICATION OF FUNDS Net block 14,663 15,881 16,695 16,928 Capital WIP 1,857 362 562 862 Intangible assets 60 49 49 49 Non current Investments 3,184 3,477 3,277 3,077 Long term loans and advances 287 395 445 495 Total fixed assets 20,051 20,164 21,027 21,411 Current Assets Cash and Bank 1,375 796 646 1,195 Inventories 6,814 6,358 6,962 8,673 Sundry Debtors 2,233 3,024 3,164 4,096 Loan, Advances & others 1,667 1,928 2,128 2,328 Total Assets 33,166 33,646 35,553 39,580 Cash Flow YE Mar (Rs mn) FY12 FY 13 FY 14E FY 15E PBT 2,270 2,763 2,821 3,527 Depreciation 1,583 1,756 1,686 1,766 Interest (108) (168) 0 0 Chng in working capital 420 494 528 (703) Tax paid (739) (648) (1,010) (1,091) Other operating activities 1,443 508 1,129 450 Cash flow from operations (a) 4,868 4,704 5,155 3,950 Capital expenditure (4,409) (1,130) (2,700) (2,300) Chng in investments (1,096) (590) 200 200 Other investing activities 434 377 150 150 Cash flow from investing (b) (5,071) (1,343) (2,350) (1,950) Free cash flow (a+b) (203) 3,361 2,805 2,000 Equity raised/(repaid) 0 0 0 0 Inc/dec in borrowings 731 (1,584) (1,606) (800) Dividend paid (incl. tax) (663) (718) (350) (380) Other financing activities (424) 105 (420) (270) Cash flow from financing (c) (356) (2,196) (2,376) (1,450) Net chng in cash (a+b+c) (559) 1,165 429 550 Closing cash & cash equiv (948) 217 646 1,195
Team LKP Pratik Doshi Director 98210 47676 pratik_doshi@lkpsec.com S. Ranganathan Head of Research 98212 22510 6635 1270 s_ranganathan@lkpsec.com Ashwin Patil Research Analyst 98195 78395 6635 1271 ashwin_patil@lkpsec.com Chirag Dhaifule Research Analyst 98679 80172 6635 1220 chirag@lkpsec.com Rajeev Gupta Head of Sales 98203 07797 6635 1230 rajeev@lkpsec.com Hardik Mehta Sales 98190 66569 6635 1246 hardik_mehta@lkpsec.com Varsha Jhaveri Sales 93241 47566 6635 1296 varsha_jhaveri@lkpsec.com Hitesh Doshi Sales 93222 45130 6635 1281 hitesh_doshi72@lkpsec.com Bharat Shah Dealing 98337 97256 6635 1210 bharat_shah@lkpsec.com Kaushik Doshi Dealing 93205 23595 6635 1207 kaushik_doshi@lkpsec.com LKP Securites Ltd, 13th Floor, Raheja Center, Free Press Road, Nariman Point, Mumbai-400 021. Tel -91-22 - 66351234 Fax- 91-22-66351249. www.lkpsec.com