Institutional Equities

TVS Motor Company

27 July 2015
Reuters: TVSM.BO; Bloomberg: TVSL IN

1QFY16 Result Update

Another Quarter Of Dismal EBITDA Margin; Retain Sell

TVS Motor Companys 1QFY16 performance was disappointing at EBITDA and PAT
levels with margins slipping again, as witnessed since the past few quarters.
EBITDA margin of 6.2% was below our estimate of 7.1%, while EBITDA of Rs1.63bn
was 12% below our estimate . Following lower EBITDA margin, PAT at Rs903mn
was 17% below our estimate. Despite softer commodity prices, gross margin at 28%
witnessed a sharp 197bps QoQ fall, which was the biggest disappointment for the
quarter. It should also be noted that gross margin fall came at a time when
realisation improved 1% sequentially and USD-INR rate (exports) was also higher at
Rs63.4/$ versus Rs62.5/$ in 4QFY15. We have retained Sell rating on the stock as it
currently trades at a premium multiple to historical average as well as its peers,
factoring in further gains in market share and also margin expansion over the next
two years. We, however, are cautious despite the high optimism in respect of the
companys market share gains, likely success of Victor motorcycle slated for
launch in FY16 and EBITDA margin improvement because intense competition will
cap market share gains as well as margin expansion. Our target price stands at
Rs193 (15xFY17E earnings).
Gross margin falls sharply QoQ: TVS Motor Companys gross margin for the quarter fell
sharply by 197bps QoQ, which was the biggest disappointment. Fall in gross margin came
at a time when raw material prices turned soft and realisation stronger. The sharp drop in
gross margin led EBITDA margin to come in at 6.2%, 90bps below our estimate of 7.1%.
New launches and intense competition to cap margin expansion over FY16E/FY17E:
The management indicated that the benefit of lower raw material prices will flow through in
the coming quarters and also retained its 10% EBITDA margin target by FY18E. We
believe the company is likely to disappoint on it ambitious EBITDA margin target because
gaining and defending market share in a rising competitive scenario will restrict significant
EBITDA margin expansion. Also, the company plans to launch two new motorcycles in
FY16, which will result in higher expenses to build these brands across India.
Valuation factoring in blue sky scenario; Retain Sell: TVS Motor Companys stock
price over the past two years has witnessed P/E re-rating after it successfully gained
market share and launched new models. Currently, the stock trades at
24.6x/19.5xFY16E/FY17E earnings, respectively, which is at a significant premium to
historical valuation and also its peers Hero MotoCorp and Bajaj Auto, factoring in further
gains in market share as well as margin expansion over the next two years. We, however,
are cautious despite the high optimism in respect of market share gains, likely success of
Victor motorcycle slated for launch in FY16 and EBITDA margin improvement because
intense competition will cap market share gains as well as margin expansion. We have
retained Sell rating on the stock with a target price of Rs193 (15x FY17E earnings).
Y/E March (Rsmn)
Net revenue
Raw material costs
Staff costs
Other expenses
Total expenditure
EBITDA
EBITDAM (%)
Depreciation
Interest costs
Other income
PBT
Tax
Net profit
NPM (%)
EPS (Rs)

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SELL
Sector: Automobile
CMP: Rs252
Target Price: Rs193
Downside: 23%
Gaurant Dadwal
gaurant.dadwal@nirmalbang.com
+91-22-3926 8145
Key Data
Current Shares O/S (mn)

475.1

Mkt Cap (Rsbn/US$bn)

119.5/1.9

52 Wk H / L (Rs)

322/141

Daily Vol. (3M NSE Avg.)

2,048,196

Price Performance (%)

1M

6M

1 Yr

TVS Motor Co

4.9

(17.9)

58.7

Nifty Index
Source: Bloomberg

1.9

(3.6)

8.8

1QFY15

4QFY15

1QFY16

YoY (%)

QoQ (%)

23,054
16,767
1,402
3,574
21,742
1,312
5.7
336
60
89
1,005
282
723
3.1
1.5

24,569
17,212
1,358
4,497
23,066
1,502
6.1
461
127
92
1,007
101
905
3.7
1.9

26,212
18,879
1,558
4,139
24,575
1,637
6.2
422
130
96
1,181
278
903
3.4
1.9

14
13
11
16
13
25
26
119
8
18
(2)
25
25

7
10
15
(8)
7
9
(8)
2
4
17
174
(0.3)

Source: Company, Nirmal Bang Institutional Equities Research

Please refer to the disclaimer towards the end of the document.

Institutional Equities
Exhibit 1: Financial summary
Y/E March (Rsmn)
Revenue
YoY (%)
EBITDA
EBITDA (%)
Adj. PAT
YoY (%)
FDEPS (Rs)
ROE (%)
ROCE (%)
P/E (x)
EV/EBITDA
EV/Sales

FY13
71,724
0.4
4,000
5.6
1,070
(57.1)
4.2
16.5
14.7
60.3
31.1
1.7

FY14
79,651
11.1
4,717
5.9
2,552
28.4
5.3
19.2
17.5
47.0
26.1
1.5

FY15
100,982
26.8
6,043
6.0
3,479
36.3
7.3
22.7
20.5
34.3
21.2
1.3

FY16E
114,867
13.7
8,075
7.0
4,849
39.4
10.2
26.7
25.8
24.6
15.8
1.1

FY17E
134,071
16.7
10,229
7.6
6,113
26.1
12.9
27.7
29.3
19.5
12.3
0.9

Source: Company, Nirmal Bang Institutional Equities Research

Key conference-call highlights

New launches: The company will launch a new motorcycle called Victor in the executive segment before the
forthcoming festive season. Also, the company will launch a new premium segment motorcycle later in FY16.

Market share: The company expects market share gains to continue and is looking at a 14.5% market share in
two-wheelers by FY16-end.

Three- wheeler sales: The company is looking at selling 150,000 three-wheelers in FY16E.

Exports: Expects exports to grow strongly in future. In 1QFY16, its USD-INR realisation stood at Rs63.4/$
versus Rs62.5/$ in 4QFY16.

EBITDA margin to improve: The company retained its three-year target of achieving EBITDA margin in double
digits at 10% from the existing 6.0%-6.5% backed by market share gains over the next few quarters/ years.

Raw material benefits: Expects lower raw material price benefits to flow in the coming quarters.

Indonesia: Volume in 1QFY16 stood at 2,100 units as the overall industry weakened sharply in Indonesia
following subdued demand.

TVS Motor Company

Institutional Equities
Financials
Exhibit 2: Income statement

Exhibit 3: Cash flow

Y/E March (Rsmn)

FY13

FY14

FY15

FY16E

FY17E

Net sales
% growth
Raw material costs
Staff costs
Other expenses
Total expenditure
EBITDA
% growth
EBITDA margin (%)
Other income
Interest costs
Gross profit
% growth
Depreciation
Profit before tax
% growth
Tax
Effective tax rate (%)
Net profit
% growth
Extra ordinary items
Reported net profit
% growth
EPS (Rs)
% growth
DPS (Rs)
Payout (%)

71,724
0.4
52,130
4,071
11,523
67,724
4,000
(14.8)
5.6
238
480
19,594
4.2
1,304
2,454
(22.5)
476
19.4
1,978
(20.6)
(908)
1,070
(57.1)
4.2
(20.6)
1.2
28.8

79,651
11.1
56,825
4,761
13,348
74,934
4,717
17.9
5.9
302
254
22,826
16.5
1,317
3,449
40.5
909
26.4
2,539
28.4
13
2,552
28.4
5.3
28.4
1.4
26.2

100,982
26.8
72,971
5,854
16,114
94,939
6,043
28.1
6.0
326
274
28,011
22.7
1,533
4,562
32.3
1,083
23.7
3,479
37.0
3,479
36.3
7.3
37.0
1.9
25.9

114,867
13.7
81,837
6,732
18,222
106,791
8,075
33.6
7.0
343
174
33,029
17.9
1,602
6,642
45.6
1,793
27.0
4,849
39.4
4,849
39.4
10.2
39.4
2.5
24.5

134,071
16.7
95,279
7,742
20,822
123,842
10,229
26.7
7.6
360
146
38,792
17.4
2,011
8,432
26.9
2,319
27.5
6,113
26.1
6,113
26.1
12.9
26.1
3.0
23.3

Equity
Reserves
Net worth
Net deferred tax liabilities
LT liabilities/provisions
Short-term loans
Long-term loans
Total loans
Liabilities
Gross block
Depreciation
Net block
Capital work-in-progress
Long-term Investments
Other long-term assets
Inventories
Debtors
Cash
Other current assets
Total current assets
Creditors
Other current liabilities/provisions
Total current liabilities
Net current assets
Total assets

475
11,772
12,247
931
488
517
4,941
5,459
19,124
22,479
12,365
10,115
361
8,688
734
5,097
3,169
175
3,019
11,458
11,654
578
12,232
(773)
19,124

FY14
475
13,678
14,153
1,247
532
335
4,424
4,759
20,690
25,058
13,681
11,377
361
8,959
863
5,482
3,341
826
4,439
14,087
14,277
680
14,957
(870)
20,690

FY15
475
15,979
16,454
1,528
437
3,998
5,190
9,187
27,606
29,043
15,214
13,829
361
10,125
1,437
8,197
5,039
54
7,001
20,290
17,386
1,050
18,436
1,854
27,606

FY16E
475
19,349
19,824
1,528
459
3,998
4,690
8,687
30,498
32,043
16,816
15,227
361
9,425
1,725
11,920
5,233
234
8,358
25,745
20,736
1,247
21,984
3,761
30,498

FY14

FY15

FY16E

FY17E

2,158

3,714

4,836

6,816

8,578

(Inc.)/dec in working capital

643

1,613

(3,496)

(1,728)

595

2,802

5,327

1,341

5,088

9,173

Other income

214

542

326

343

360

Other expenses

972

412

1,304

1,317

1,533

1,602

2,011
2,319

Cash flow from operations

Depreciation
Tax paid

535

1,275

1,083

1,793

Net cash from operations

4,328

5,238

1,464

4,554

8,505

Capital expenditure

(995)

(2,580)

(3,985)

(3,000)

(2,500)

Net cash after capex

3,333

2,658

(2,521)

1,554

6,005

Other investing activities

(78)

(18)

(839)

1,043

(1,440)

(3,211)

(1,988)

2,588

(2,417)

(3,709)

Opening cash balance

130

175

826

54

234

Closing cash balance

175

826

54

234

1,089

44

651

(772)

180

856

Cash from financial activities

Change in cash balance

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit5: Key ratios

FY14

FY15

FY16E

FY17E

EBITDA margin (%)

5.6

5.9

6.0

7.0

7.6

EBIT margin (%)

3.8

4.3

4.5

5.6

6.1

FY17E

Net profit margin (%)

2.8

3.2

3.4

4.2

4.6

475
23,801
24,276
1,528
482
3,998
3,290
7,287
33,573
34,543
18,647
15,896
361
11,225
2,070
12,407
6,036
1,089
9,640
29,172
23,724
1,426
25,150
4,022
33,573

RoE (%)

16.5

19.2

22.7

26.7

27.7

RoCE (%)

14.7

17.5

20.5

25.8

29.3

Receivables (days)

16

16

21

18

18

Inventory (days)

36

37

46

41

37

Exhibit 4: Balance sheet

FY13

FY13

EBIT

FY13

Source: Company, Nirmal Bang Institutional Equities Research

Y/E March (Rsmn)

Y/E March (Rsmn)

Y/E March
Profitability & return ratios

Working capital & liquidity ratios

Payables (days)

81

96

98

98

98

Current ratio (x)

0.9

0.9

1.1

1.2

1.2

Quick ratio (x)

0.5

0.6

0.7

0.6

0.7

1.7
31.1
60.3
9.7

1.5
26.1
47.0
8.4

1.3
21.2
34.3
7.2

1.1
15.8
24.6
6.0

0.9
12.3
19.5
4.9

Valuation ratios
EV/sales (x)
EV/EBITDA (x)
P/E (x)
P/BV (x)

Source: Company, Nirmal Bang Institutional Equities Research

Source: Company, Nirmal Bang Institutional Equities Research

TVS Motor Company

Institutional Equities
Rating track
Date

Rating

Market price (Rs)

Target price (Rs)

26 May 2015

Sell

230

193

9 July 2015

Sell

264

193

TVS Motor Company

Institutional Equities
Disclaimer
Stock Ratings Absolute Returns
BUY > 15%
ACCUMULATE -5% to15%
SELL < -5%
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TVS Motor Company