EPS Growth RONW ROCE EV/ EBITDA PAT EPS. P/E (X) Revenue

Transcription

1 STOCK POINTER TVS Motors Target Price ` 96 CMP ` 69 FY13 PE 8.8x BUY Index Details Sensex 17,705 Nifty 5,327 BSE 100 9,197 Industry 2/3 Wheelers Scrip Details Mkt Cap (` cr) 3,268 BVPS (`) 21.0 O/s Shares (Cr) 47.5 Avg Vol (Lacs) Week H/L 87/44 Div Yield (%) 1.6 FVPS (`) 1 Shareholding Pattern Shareholders % Promoters 59.3 DIIs 16.5 FIIs 4.7 Public 19.5 Total 100 TVS vs. Sensex We initiate coverage on TVS Motor Company Limited (TVS) as a BUY with a Price Objective of ` 96 (target 12x FY13 P/E). At CMP of ` 68.8 the stock is trading at 11.6x and 8.8x its estimated earnings for FY2012E & FY2013E representing a potential upside of ~39.1% over a period of 18 months. While the two wheeler industry expected to sustain its growth over the medium term, we expect TVS Motors to grow faster than the industry. Accordingly, revenues and earnings are expected to grow to ` 9,229 crore (22.2% CAGR) and ` 373 crore (38.3% CAGR) respectively over the period FY Key drivers of this growth are a well diversified product portfolio, strong volume growth from new geographies, better realizations and drawdown of debt. Having established a base in over 50 countries, export revenues (currently 15% of total revenues) are expected to grow at a faster pace and become a significant contributor to the revenues in the long term. Volume growth and diversified product mix augurs well for the company TVS is expected to clock a volume growth of 18.1% CAGR over FY11-13 and reach 28.5 lakh units from the current levels of 20.4 lakh units leading to an overall revenue growth of 22.2% CAGR to ` 9,229 crore. Though the major surge in the volume growth is expected to come from scooters and mopeds, value growth will be contributed by motor cycles and three wheelers. TVS s new product portfolio and distribution network is on par with that of peers and should help ramp up volumes in the long term. Exports strategy to aid in geographical diversification in the medium to long term. Having established a presence in over 50 countries, TVS s exports are expected to gain traction and become a significant contributor to the top line in the long term. It s wholly owned South Asian subsidiary PT TVS Motor Co, Indonesia has helped establish a foothold in the South East Asian markets and is expected to achieve cash breakeven in FY13. Key Financials (` in Cr) Y/E Mar Net EPS Growth RONW ROCE EV/ EBITDA PAT EPS P/E (X) Revenue (%) (%) (%) EBITDA(X) E E of 14 - Tuesday 1st Nov, 2011

2 Margins set to expand over the medium term. TVS has seen consistently improving margins despite cost inflationary pressures (+180 basis points to 4.6% in FY11) on the back of better utilization levels and improved product mix. Even a slight improvement in RM cost (currently at ~75% of total sales) will have a positive impact on the margins. Also its A&P spend being on par with that of its peers is expected to stay at the current levels going forward. While the management has guided to achieve double digit EBITDA margins in the medium to long term, we have not modeled the same and presents an upside risk to our estimates. Lowering of debt to substantially reduce interest costs and improve profitability With the company having ample spare capacity to cater to its long term growth, we do not anticipate any further investment in raising capacities. Further with the company generating significant cash, we expect TVS to repay its entire debt by FY14. This should lead to a sharp improvement in profitability and enhanced share holder return ratios. Valuation At CMP of `69, the stock is trading at 11.6x and 8.8x its estimated earnings for FY2012E & FY2013E, respectively We initiate coverage on TVS Motors Limited as a BUY with a Price Objective of ` 96 (12x FY13 EPS) representing a potential upside of 39.1% over a period of 18 months. We have valued the stock at ~30% discount to one year forward P/E of its peer Hero Moto Corp. We expect the valuation discount to narrow over the medium term as the company consolidates its position in the two wheeler industry and repays debt. - 2 of 14- Tuesday 1 st Nov, 2011

3 Company Background TVS Motor Company Ltd, the flagship company of the TVS Group is the third largest twowheeler manufacturer in India. TVS manufactures a wide range of two-wheelers from mopeds to racing inspired motorcycles and has recently forayed in the three wheeler segment. TVS has manufacturing plants at Hosur in Tamilnadu, Mysore in Karnataka and Solan in Himachal Pradesh. It has a total capacity of 3 mn two wheelers and 90,000 three wheelers. TVS is gradually establishing its presence in the export markets and currently exports to over 50 countries, and even has a manufacturing capacity in Indonesia through its wholly owned subsidiary, PT. TVS Motor Co, Indonesia. TVS has also ventured into other businesses like Auto components, Wind energy and Housing through its subsidiaries. TVS-Company Structure TVS Motor Company Subsidiaries Sundaram Auto Components Limited TVS Energy Limited TVS Wind Power Limited TVS Wind Energy Limited TVS Housing Limited TVS Motor Co (Amsterdam) TVS Motor Pte Ltd, Singapore PT TVS Motor Co, Indonesia Source: TVS Revenue Mix-Volumes 2011 Revenue Mix-Realizations % 8.7% 5.1% 34.6% 40.5% 20.0% 44.5% 22.9% 21.7% Motorcycles Scooters Mopeds Three Wheelers Motorcycles Scooters Mopeds Three Wheelers Spares - 3 of 14- Tuesday 1 st Nov, 2011

4 TVS Product Portfolio standing up to competition!!!. TVS Hero Moto Corp Bajaj Auto Entry Segment Jive, Flame, Star City, Sport CD Dawn, CD Deluxe, Glamour, Glamour Fi, Splendor Plus Discover, Platina Premium Segment Apache RTR 160, Apache RTR 180, Apache RTR 180 ABS Hunk, Karizma, Karizma ZMR Pulsar 180, Pulsar 20, Avenger, Ninja Scooters TVS Wego, Scooty Streak, Scooty Pep+ Pleasure - Three Wheelers TVS King - RE 2S (CNG/LPG), RE 4S (CNG/LPG) Source: Ventura Research Estimates Key Investment highlights Volume growth and diversified product mix augurs well for the company TVS is expected to clock a volume growth of 18.1% CAGR over FY11-13 and reach 28.5 lakh units from the current levels of 20.4 lakh units leading to an overall revenue growth of 22.2% CAGR to ` 9,229 crore. Though the major surge in the volume growth is expected to come from scooters and mopeds, value growth will be contributed by motor cycles and three wheelers. TVS s new product portfolio and distribution network is on par with that of peers and should help ramp up volumes in the long term. Scooter sales to boost volumes TVS Motors s revenue mix is well diversified across motor cycles (45%), scooters & mopeds (41%) and three wheelers (5%). In the main stay segment - scooters, the company enjoys a 22% market share and is the second largest player after Honda Motors and Scooters Ltd (HMSL). On the back of strong showing of TVS Wego it recorded a sharp spurt of ~ 50% in volumes in FY11 outgrowing the industry growth of 42%. The strong traction in volumes is expected to continue over the next couple of years in which we expect volumes to grow by 26.5% CAGR over FY11-13 and contribute 25% to the overall FY13 revenues. The growth momentum in the scooter segment is expected to continue on the back of increasing female population of riders, well positioned unisex products, increasing per capita GDP. - 4 of 14- Tuesday 1 st Nov, 2011

5 units in lacs units in lacs Market share of various Scooter players TVS Scooters-Volumes and growth 8 60% 11% 8% 22% % 40% 4 30% 17% 43% FY09 FY10 FY11 FY12E FY13E 20% 10% 0% TVS HMSI Hero Moto Corp Suzuki Mahindra Scooters % Growth (RHS) Source: IAS, Ventura Research Estimates Monopoly in the moped segment Post exit of Kinetic Motors and Majestic Auto from the moped segment, TVS has become the sole market player. The volumes in this segment are expected to grow at 16.5% CAGR over FY11-13, and contribute 20% to the overall revenues by FY13. TVS is expected to further consolidate its position in the segment aided by the launch of electric scooters in the near term. TVS Mopeds-Volume and Growth FY09 FY10 FY11 FY12E FY13E 35% 30% 25% 20% 15% 10% 5% 0% Mopeds % Growth (RHS) Buoyant three wheeler sales expected on the back of new state permits The bulk of the revenue growth is expected to come from the three wheelers and motor cycles segments. With new permits expected to be issued by the states of Karnataka, the 3 wheeler segment is expected to clock a growth of 16.5% CAGR over FY11-13 in volume terms leading to 21% growth in net revenue to ` 1,804 crore. Within 2 years of launch of three wheelers, TVS has already captured a 5% market share and currently contributes 6% of total revenues of TVS. As the contribution from this segment to total sales increases, profitability is expected to further enhance as three wheelers is a high margin product. - 5 of 14- Tuesday 1 st Nov, 2011

6 units in lacs Market share of various Three wheeler players TVS Three wheelers-volumes and growth 22.80% 5.70% 9% 62.20% Bajaj Auto TVS Piaggio Vehicles Others Source: IAS, Venturaa Research Estimates 0.00 FY10 FY11 FY12E FY13E Three Wheelers Motorcycles to contribute towards healthy realizations Motorcycle products - Jive, Star City, Apache 160 and Apache 180 are well received by the market and this segment is expected to experience a volume growth of 14.5% CAGR to 10.9 lakh units over FY11-13 leading to a healthy net revenue growth of 19% CAGR. The company currently faces competition from Hero Moto Corp and Bajaj Auto Ltd in the Entry and Premium Segment of motorcycles. Market share of various Motorcycle players TVS Motorcycles-Volumes and growth 12 35% 32% 5% 48% % 25% 20% 15% 7% 8% % 5% 0% Hero Motocorp Ltd. HMSI Others T V S Bajaj Auto Ltd. 0 FY09 FY10 FY11 FY12E FY13E Motor cycles % Growth (RHS) -5% Source: IAS, Ventura Research Estimates Strong dealer network, increasing geographical presence and flurry of new product launches to aid volume growth TVS which was earlier thought of as a regional player (on account of its concentration in south India) has rapidly established a national footprint by aggressively expanding its dealer network in the north Indian markets. Currently North India accounts for 44% if its total network of 650 dealers. This dealer network (aptly supported by more than 2000 sales and service points) is on par with that of its peers Hero Motors and Bajaj Auto. Having established a Pan India presence, we expect this network to substantially aid TVS to ramp up volumes in the long term. - 6 of 14- Tuesday 1 st Nov, 2011

7 Dealer Network Dealers Dealer Network dealers % % % % % % North & East South West North & East South West Dealer Network of the major players Bajaj Auto TVS Hero Moto Corp Dealer Network Exports strategy to aid in geographical diversification in the medium to long term. TVS has been steadily establishing its presence in the global markets and currently exports to over 50 countries worldwide. It exported 2.23 lakh vehicles in FY11 (+37% yoy) driven by improved sales to South Asian Markets, Africa, Brazil and new forays into Mexico. Indonesian Subsidiary on the growth track With a view to having a manufacturing presence in the South East Asian markets, TVS has set up a wholly owned subsidiary PT TVS Motor Company Indonesia at a capital investment of $27.6 million. While the company is currently making losses, it hopes to achieve cash break even in FY13. The company s recent product launches TVS Neo, TVS Rockz and a double disc version of Apache have received an encouraging response. While overall sales in FY2011 stood at 19,000 units, they were up 32% yoy, while Q1FY12 sales were up 22% yoy at 7,000 units clearly - 7 of 14- Tuesday 1 st Nov, 2011

8 EBITDA indicating that the growth momentum continues. We expect the subsidiary to post volume growth of ~30% to 25,000 units in FY12. Margins set to expand over the medium term TVS has seen consistently improving margins despite cost inflationary pressures (+180 basis points to 4.6% in FY11) on the back of better utilization levels and improved product mix. Even a slight improvement in RM cost (currently at ~75% of total sales) will have a positive impact on the margins. Also its A&P spend being on par with that of its peers is expected to stay at the current levels going forward. While the management has guided to achieve double digit EBITDA margins in the medium to long term, we have not modeled the same and presents an upside risk to our estimates. Margins to enhance on the back of a well blended portfolio TVS has been gradually improving its margins and they were recorded at 4.6% in FY11 (+ 180 bps). The company has been improving its margins in spite of the increasing prices of raw material and inflationary pressures. While its peers, Hero Moto Corp and Bajaj Auto have seen erosion in margins, TVS has not only maintained margins but also enhanced them. We expect further improvement in margins through reduction in fixed costs and miscellaneous expenses and a judicious portfolio offering which will raise overall realizations. TVS has hinted at enhancing margins to double digits in the medium to long term, however we have not built the same in our model and this can surprise positively. EBITDA (%) of the major players 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% FY08 FY09 FY10 FY11 TVS Bajaj Auto Hero Moto Corp Since, RM costs are ~75-77% of total expenditure, even a slight softening of commodity prices in H2FY12 will directly result in improvement of margins and subsequently enhance the bottom line. Sensitivity of EPS to RM Costs -1% Base Case +1% RM Cost 6, , ,832.5 FY13 EPS Change in EPS +13.6% % - 8 of 14- Tuesday 1 st Nov, 2011

9 Rs in crore Advertising spends to remain firm at current levels TVS s A&P spend at ` 367 crore is on par with that of its much larger peers Hero Moto Corp (` crore in FY11) and Bajaj Auto (` 82 crore in FY11). Having established a firm presence in the two wheeler space we do not expect the company to significantly raise its advertising expenses from the current level. Subsequently, with increasing volumes, we expect the A&P spend per unit cost to decrease sharply resulting in higher profitability. Absolute ad spend as a % of revenues TVS Bajaj Hero 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Advertising expenses Ad spend as % of revenue Thus, volume growth and improvement in the commodity prices will be the triggers for margin expansion. We expect the margins to expand by 90 basis points to 5.5% in FY13 from the 4.6% posted in FY11. 6% 5% 4% 3% 2% 1% Improving EBITDA and PAT 0% FY08 FY09 FY10 FY11 FY12E FY13E EBITDA (%) PAT (%) Lowering of debt to substantially reduce interest costs and improve profitability With the company having ample spare capacity to cater to its long term growth, we do not anticipate any further investment in raising capacities. Further with the company generating significant cash, we expect TVS to repay its entire debt by FY14. This should lead to a sharp improvement in profitability and enhanced share holder return ratios. - 9 of 14- Tuesday 1 st Nov, 2011

10 TVS Motors standalone debt equity ratio of 0.80:1 is in sharp contrast to that of its peers which are debt free. The company s current capacity stands at 3 mn units for two wheelers and 90,000 three wheelers units. Its current capacity utilization of 67% in FY11 clearly indicates that the installed capacity is adequate to cater to growth in the medium term. Hence, we do not expect the company to incur major capex. With the company generating significant cash flows, we expect it to become debt free by FY14. Improving D/E FY10 FY11 FY12E FY13E 2.0% 1.5% 1.0% 0.5% 0.0% D/E Interest as a % of Revenues (RHS) Financial Performance (Standalone) On the back of higher volumes and realizations, TVS posted a revenue growth of 25.3% to ` 1,746 crore in Q1FY12. Operating profit was higher by 20% and stood at ` 79.1 crore over the same period. Increase in the operating profit was attributable to reduction in other expenses and higher realizations. EBITDA margins were recorded at 4.6% (-20 bps yoy) due to cost inflation. PAT showed a robust increase of 45.7% and was reported at ` crore. Net sales for FY11 stood at ` crore higher by 41.6% yoy. Sales volumes were recorded at 20.4 lakhs in FY11 clocking a growth of 33% on account of higher scooter sales. EBITDA margins showed an improvement of 180 basis points and stood at 4.6%. Margins improved on account of substantial reduction in selling and distribution and miscellaneous expenses. Subsequently, net profit margins showed an improvement of 110 basis points and were reported at ` crore higher by 121% of 14- Tuesday 1 st Nov, 2011

11 Quarterly Financial Performance Particulars Q1FY12 Q1FY11 FY11 FY10 Net Sales Growth % Total Expenditure EBDITA EBDITA Margin % Depreciation EBIT (EX OI) Other Income EBIT Margin % Interest Exceptional items PBT Margin % Provision for Tax PAT PAT Margin (%) Financial Outlook Aided by higher volumes, and improved portfolio mix we expect revenues to grow at a CAGR of 22.2% to ` crore by FY13 from ` crore posted in FY11. Higher realizations and reduction in miscellaneous expenses should enhance the EBITDA margins of the company to 5.5% in FY13 (+90 basis points from FY11). Consequently, we expect the the PAT to grow at a CAGR of 38.3% to ` crore as compared to ` crore in FY11. Valuation At CMP of ` 69, the stock is trading at 11.6x and 8.8x its estimated earnings for FY2012E & FY2013E, respectively We initiate coverage on TVS Motors Limited as a BUY with a Price Objective of ` 96 (12x FY13 EPS) representing a potential upside of 39.1% over a period of 18 months. We have valued the stock at ~30% discount to one year forward P/E of its peer Hero Moto Corp. We expect the valuation discount to narrow over the medium term as the company consolidates its position in the two wheeler industry and repays debt of 14- Tuesday 1 st Nov, 2011

12 Peer Comparison (` in crore) TVS* Bajaj Auto* Hero Moto Corp # FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E Net Revenue 6, , , , , , , , ,227.8 EBITDA , , , , , ,754.8 PAT , , , , , ,730.2 EPS EPS Growth (%) 121.1% 44.5% 32.3% 96.0% -10.8% 14.8% -13.6% 21.2% 16.4% RONW (%) 19.5% 23.0% 24.3% 68.0% 52.2% 45.8% 65.2% 68.6% 66.2% P/E (X) EV/EBITDA (X) Source: *Ventura Research Estimates, #Bloomberg Estimates P/E Bands Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 CMP 11.5X 15.25X 19X 22.75X 26.5X P/B Bands Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 CMP 1X 2X 3X 4X 5X - 12 of 14- Tuesday 1 st Nov, 2011

13 EV/EBITDA Bands Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 EV 6X 10X 14X 18X 22X - 13 of 14- Tuesday 1 st Nov, 2011

14 Financials and Projections Y/E March, Fig in Rs. Cr FY 2010 FY 2011 FY 2012e FY 2013e Y/E March, Fig in Rs. Cr FY 2010 FY 2011 FY 2012e FY 2013e Profit & Loss Statement Per Share Data (Rs) Net Sales EPS % Chg Cash EPS Total Expenditure DPS % Chg Book Value EBDITA Capital, Liquidity, Returns Ratio EBDITA Margin % Debt / Equity (x) Other Income Current Ratio (x) PBDIT ROE (%) Depreciation ROCE (%) Interest Dividend Yield (%) Exceptional items Valuation Ratio (x) PBT P/E Tax Provisions P/BV Reported PAT EV/Sales PAT Margin (%) EV/EBIDTA Raw Materials / Sales (%) Efficiency Ratio (x) Manpower cost / Sales (%) Inventory (days) Other opr Exp / Sales (%) Debtors (days) Tax Rate (%) Creditors (days) Balance Sheet Cash Flow statement Share Capital Profit After Tax Reserves & Surplus Depreciation Minority Interest Working Capital Changes Total Loans Others Deferred Tax Liability Operating Cash Flow Total Liabilities Capital Expenditure Gross Block Change in Investment Less: Acc. Depreciation Cash Flow from Investing Net Block Proceeds from equity issue Capital Work in Progress Inc/(Dec) in Debt Investments Dividend and DDT Net Current Assets Cash Flow from Financing Deferred Tax Assets Net Change in Cash Misc Expenses Opening Cash Balance Total Assets Closing Cash Balance Ventura Securities Limited Corporate Office: C-112/116, Bldg No. 1, Kailash Industrial Complex, Park Site, Vikhroli (W), Mumbai This report is neither an offer nor a solicitation to purchase or sell securities. The information and views expressed herein are believed to be reliable, but no responsibility (or liability) is accepted for errors of fact or opinion. Writers and contributors may be trading in or have positions in the securities mentioned in their articles. Neither Ventura Securities Limited nor any of the contributors accepts any liability arising out of the above information/articles. Reproduction in whole or in part without written permission is prohibited. This report is for private circulation of 14- Tuesday 1 st Nov, 2011