Margins trajectory looking up ; Accumulate November 01, 2017 Saksham Kaushal sakshamkaushal@plindia.com +91 22 66322235 Poorvi Banka poorvibanka@plindia.com +91 22 66322426 Rating Accumulate Price Rs709 Target Price Rs750 Implied Upside 5.8% Sensex 33,600 Nifty 10,441 (Prices as on November 01, 2017) Trading data Market Cap. (Rs bn) 336.8 Shares o/s (m) 475.1 3M Avg. Daily value (Rs m) 764.2 Major shareholders Promoters 57.40% Foreign 20.53% Domestic Inst. 11.01% Public & Other 11.06% Stock Performance (%) 1M 6M 12M Absolute 7.7 43.1 75.5 Relative 0.3 30.8 55.0 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2019 25.5 19.9 28.1 2020 34.1 22.7 50.1 Price Performance (RIC: TVSM.BO, BB: TVSL IN) (Rs) 800 700 600 500 400 300 200 100 0 Oct 16 Dec 16 Source: Bloomberg Feb 17 Apr 17 Jun 17 Aug 17 Oct 17 For Q2FY18 TVS motors reported revenue growth of 20% YoY at Rs40.5bn (Ple: Rs42.2bn) on back of ~16% YoY growth in volumes. While gross margins declined 110bps YoY, EBITDA margins surged 50bps YoY (up 240bps QoQ) to 8.6%, vs our expectations of 8.1%, on the back of lower employee costs and other expenses. Despite higher tax rate, finance cost as well as depreciation provision, adjusted profit came in at Rs2.13bn. up 20.2% YoY. Benefits of last year s launches in the Motorcycle and Moped space coupled with an aggressive marketing strategy are now visible in TVS volumes, with market share gains in the premium segment (<200cc segment, up 600bp YoY) and the scooter segment (up 270bps YoY) for H1FY18. The management further reiterated its target of attaining double digit EBITDA margin by FY19 (we build in 10%/11.1% for FY19/20 respectively), which would primarily be a function of higher revenue growth (market share gains), better product mix and cost reduction measures. With increasing market share for both domestic and export markets, we build in volume growth of 12.8%/12.9% for FY19/20 respectively, resulting in an EBITDA margin of 10%/11.1% for FY19/20 respectively. TVS passing on the commodity cost increases unlike earlier (where most of its peers are unable to do so) gives us confidence in the brand positioning of the company s products and management s resolve to attain double digit margins by FY19 (cost increases to be passed on going forward as well). We upgrade our rating to Accumulate with a price target of Rs750 based upon a PE of 25x SEP19e. TVS currently trades at a PER of 40x FY18e EPS and 28x FY19e EPS. Contd...2 Key financials (Y/e March) 2017 2018E 2019E 2020E Revenues (Rs m) 121,353 152,741 178,435 208,697 Growth (%) 9.3 25.9 16.8 17.0 EBITDA (Rs m) 8,571 13,200 18,511 24,234 PAT (Rs m) 5,581 8,277 12,105 16,216 EPS (Rs) 11.7 17.4 25.5 34.1 Growth (%) 10.3 48.3 46.2 34.0 Net DPS (Rs) 2.5 3.0 3.5 4.0 Profitability & Valuation 2017 2018E 2019E 2020E EBITDA margin (%) 7.1 8.6 10.4 11.6 RoE (%) 25.6 30.1 33.5 33.4 RoCE (%) 18.4 22.6 27.6 29.7 EV / sales (x) 2.9 2.3 1.9 1.6 EV / EBITDA (x) 40.6 26.1 18.3 13.6 PE (x) 60.4 40.7 27.8 20.8 P / BV (x) 14.0 10.9 8.1 6.0 Net dividend yield (%) 0.4 0.4 0.5 0.6 Source: Company Data; PL Research Q2FY18 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
TVSL s total revenue grew 20% YoY to ~Rs40.5bn, with volume growth of 16.3% YoY and realisations inching up 2% YoY (PLe: ~Rs42.2bn). EBITDA margin was higher 50bps YoY and 240bps QoQ at 8.6% (PLe: 8%). This was mainly on the back of other expenses as a % of sales being lower 120bps YoY and 50bps QoQ. Gross margins were lower 110bps YoY but higher 120bpsQoQ. Staff costs too were lower 40bps YoY and 70bps QoQ. EBITDA growth was at 26.6% YoY to Rs3.5bn. Contribution per vehicle for the quarter was down 2.2% YoY but was higher 5.6% QoQ while EBITDA per vehicle was higher 8.9% YoY and 40.1% QoQ. With higher depreciation provision, interest cost and tax rates, net profit for the company was at Rs2.1bn, higher 20% YoY (in line with PLe). Conference call highlights: Current inventory for the company is maintained at 30 32 days and is expected to remain at these levels ahead. The company had taken an average price increase of ~Rs250/vehicle in Sep 17. Exports to BMW are expected to remain ~2,000 2,200 units per month. TVS motorcycle on the BMW platform (310cc) for the domestic market will be launched in H2FY18. TVS market share in the premium motorcycles segment has increased from 17% in FY17 to ~23% currently. The management expects H2FY18 to be strong for TVS on the back of improvement in rural demand and new product launches. The company expects to gain market share and outgrow the industry in FY18. Management has reiterated its target to achieve double digit margin by FY19 on the back of higher revenue growth (market share gains), better product mix and cost reduction measures. The management has further said that they expect to reach double digit margins in Q4FY18 itself. Capex guidance for FY18 is at Rs6bn. November 01, 2017 2
Exhibit 1: Q2FY18 Result Overview (Rs m) Y/e March Q2FY18 Q2FY17 YoY gr. (%) Q1FY18 H1FY18 H1FY17 YoY gr. (%) Net Revenues 40,524 34,265 18.3 33,995 74,520 63,074 18.1 Raw Materials 29,736 24,777 20.0 25,355 55,090 45,680 20.6 % of Net Sales 73.4 72.3 74.6 73.9 72.4 Personnel 2,199 1,986 10.7 2,090 4,290 3,800 12.9 % of Net Sales 5.4 5.8 6.1 5.8 6.0 Manufacturing & Other Exp 5,086 4,736 7.4 4,437 9,523 8,824 7.9 % of Net Sales 12.6 13.8 13.1 12.8 14.0 Total Expenditure 37,021 31,498 17.5 31,881 68,902 58,304 18.2 EBITDA 3,503 2,767 26.6 2,114 5,617 4,771 17.7 EBITDA Margin (%) 8.6 8.1 6.2 7.5 7.6 Depreciation 836 724 15.4 783 1,620 1,384 17.0 EBIT 2,667 2,043 30.6 1,330 3,998 3,387 18.0 Interest Expenses 155 94 64.5 107 262 192 36.5 Non operating income 456 392 16.2 571 1,026 754 36.2 PBT 2,968 2,340 26.8 1,794 4,762 3,949 20.6 Tax Total 836 567 47.6 500 1,336 962 38.8 Tax Rate (%) Total 28.2 24.2 16.4 27.9 28.1 24.4 15.1 Reported PAT 2,132 1,774 20.2 1,294 3,426 2,986 14.7 Adj. PAT 2,132 1,774 20.2 1,294 3,426 2,986 14.7 Source: Company Data, PL Research Exhibit 2: Operating Metrics (Rs m) Y/e Mar (Rs.m) Q2FY18 Q2FY17 YoY gr. (%) Q1FY18 H1FY18 H1FY17 YoY gr. (%) Sales Volume (nos) 948,584 815,562 16.3 802,108 1,750,692 1,533,526 14.2 Net Realisation/Vehicle 42,721 42,014 1.7 42,382 42,566 41,130 3.5 Material cost / vehicle 31,347 30,380 3.2 31,610 31,468 29,787 5.6 Gross Profit / vehicle 11,374 11,634 (2.2) 10,772 11,098 11,343 (2.2) Employee cost /vehicle 2,318 2,435 (4.8) 2,606 2,450 2,478 (1.1) Other expenses / vehicle 5,362 5,807 (7.7) 5,531 5,439 5,754 (5.5) EBITDA/vehicle 3,693 3,393 8.9 2,635 3,209 3,111 3.1 Net Profit/vehicle 2,247 2,175 3.3 1,614 1,957 1,947 0.5 Source: Company Data, PL Research November 01, 2017 3
Income Statement (Rs m) Net Revenue 121,353 152,741 178,435 208,697 Raw Material Expenses 88,534 109,518 127,054 147,793 Gross Profit 32,819 43,223 51,381 60,904 Employee Cost 7,456 9,164 10,260 10,644 Other Expenses 16,792 20,859 22,610 26,027 EBITDA 8,571 13,200 18,511 24,234 Depr. & Amortization 2,878 3,242 3,556 3,931 Net Interest (54) (204) (320) (450) Other Income 1,734 1,951 2,200 2,485 Profit before Tax 6,987 11,496 16,812 22,524 Total Tax 1,406 3,219 4,707 6,307 Profit after Tax 5,581 8,277 12,105 16,218 Ex Od items / Min. Int. Adj. PAT 5,581 8,277 12,105 16,216 Avg. Shares O/S (m) 475.1 475.1 475.1 475.1 EPS (Rs.) 11.7 17.4 25.5 34.1 Cash Flow Abstract (Rs m) C/F from Operations 9,015 12,320 16,313 20,784 C/F from Investing (9,564) (7,000) (9,000) (9,000) C/F from Financing 201 (3,338) (4,006) (4,163) Inc. / Dec. in Cash (349) 1,982 3,307 7,621 Opening Cash 327 85 2,067 5,375 Closing Cash (21) 2,067 5,375 12,995 FCFF 4,117 6,285 10,970 15,520 FCFE 5,945 4,785 8,970 13,520 Key Financial Metrics Growth Revenue (%) 9.3 25.9 16.8 17.0 EBITDA (%) 3.7 54.0 40.2 30.9 PAT (%) 10.3 48.3 46.2 34.0 EPS (%) 10.3 48.3 46.2 34.0 Profitability EBITDA Margin (%) 7.1 8.6 10.4 11.6 PAT Margin (%) 4.6 5.4 6.8 7.8 RoCE (%) 18.4 22.6 27.6 29.7 RoE (%) 25.6 30.1 33.5 33.4 Balance Sheet Net Debt : Equity 0.5 0.2 0.1 (0.1) Net Wrkng Cap. (days) (15) (16) (16) (16) Valuation PER (x) 60.4 40.7 27.8 20.8 P / B (x) 14.0 10.9 8.1 6.0 EV / EBITDA (x) 40.6 26.1 18.3 13.6 EV / Sales (x) 2.9 2.3 1.9 1.6 Earnings Quality Eff. Tax Rate 20.1 28.0 28.0 28.0 Other Inc / PBT 24.8 17.0 13.1 11.0 Eff. Depr. Rate (%) 7.3 7.2 7.1 7.2 FCFE / PAT 106.5 57.8 74.1 83.4 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 24,083 30,935 41,377 55,693 Total Debt 11,072 9,572 7,572 5,572 Other Liabilities 1,257 1,257 1,257 1,257 Total Liabilities 36,412 41,764 50,206 62,522 Net Fixed Assets 20,462 22,220 23,664 24,733 Goodwill Investments 15,879 17,879 21,879 25,879 Net Current Assets 72 1,665 4,663 11,910 Cash & Equivalents 85 2,067 5,375 12,995 Other Current Assets 22,621 27,368 31,323 35,919 Current Liabilities 22,634 27,770 32,034 37,004 Other Assets Total Assets 36,412 41,764 50,206 62,522 Quarterly Financials (Rs m) Y/e March Q3FY17 Q4FY17 Q1FY18 Q2FY18 Net Revenue 29,834 28,445 33,995 40,524 EBITDA 2,185 1,615 2,114 3,503 % of revenue 7.3 5.7 6.2 8.6 Depr. & Amortization 720 775 783 836 Net Interest 115 132 107 155 Other Income 348 632 571 456 Profit before Tax 1,698 1,340 1,794 2,968 Total Tax 371 73 500 836 Profit after Tax 1,327 1,268 1,294 2,132 Adj. PAT 1,327 1,268 1,294 2,132 Key Operating Metrics Scooter volume (units) 884,196 1,211,349 1,393,051 1,599,222 Motorcycle volume (units) 1,094,812 1,259,034 1,421,449 1,609,080 Moped volume (units) 878,696 957,779 1,051,641 1,156,805 Total two wheeler volume (units) 2,857,704 3,428,161 3,866,141 4,365,108 Three wheeler volume (units) 69,254 87,953 96,748 106,423 Total volume (units) 2,926,958 3,516,114 3,962,889 4,471,530 Realisation per unit (Rs) 41,029 43,037 44,645 46,313 Gross margin per unit (Rs) 11,213 12,293 12,965 13,620 EBITDA per vehicle (Rs) 2,928 3,754 4,671 5,420 Profit per vehicle (Rs) 1,907 2,354 3,054 3,627 Source: Company Data, PL Research. November 01, 2017 4
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