TVS Motor Company -...

COMPANY

REPORT

August 5, 2016

TVS Motor Company Modest fundamentals; Luxurious valuations

Source: Capitaline

SELL Nifty: 8,683; Sensex: 28,078

COMPANY

OUTLOOK

Table: Financial snapshot (Rsmn)

Year Revenue EBITDA EBITDA (%) Adj. PAT EPS (Rs) P/E

(x)

EV/EBITDA (x) RoE (%) RoCE (%)

FY15 100,423 6,066 6.0 3,478 7.3 39.5 23.6 22.7 18.9

FY16 112,439 7,507 6.7 4,321 9.1 31.8 18.6 24.1 20.1

FY17E 126,905 9,130 7.2 4,884 10.3 26.2 14.2 23.2 21.3

FY18E 144,379 11,212 7.8 6,175 13.0 20.7 11.3 24.8 24.6 Source: Company; IDBI Capital Research*This marks the transfer of coverage from Ashish Poddar to Pranoy Kurian

Summary

Q1FY17 Results: Revenues grew 12% YoY to Rs28.8bn (vol. growth of 12.5%, with domestic growth of 18% and exports falling by 13%. Motorcycles and scooters rose 11% and 19%, respectively, while mopeds increased by 18%. Turmoil in key export markets continued impacting demand, with 3W exports down 46%). As a result, realizations were subpar, falling 0.5% YoY and 6% QoQ as the lower share of exports and 3W hurt ASP’s. Margins rose 24bps YoY to 7%, but this was partly due to certain raw material costs being classified under depreciation under IND-AS. PAT rose 21% to Rs1bn.

Near Term Outlook: TVS should continue reporting strong domestic volume growth over FY16-18E on the back of aggressive pricing, robust demand for scooters & mopeds and near term favourable tailwinds such as GST/7PC/normal monsoons. The TVS Victor, 200cc Apache and a new moped model are now available nationwide and are likely to maintain domestic sales momentum for F17. Volumes from the TVS-BMW tie-up are likely to contribute to topline in H2FY17. We estimate revenue growth of 13% over FY16-18E, primarily driven by volumes (10% est.), with realizations likely to remain muted due to export pressure. Management’s aim to raise margins to ~10% seems unrealistic however, and we expect margins to stay capped at the 8% mark given the price sensitivity of TVS’ moped/scooter segments and rising gross margins. Thus, we estimate EPS growth of 20% over FY16-18E.

Valuation: TVS remains a stable company with decent fundamentals – presence in high growth segments, RoEs of ~25% despite OPM margins of just ~7%, a well-established brand and improving cash flow. However, TVS is likely to continue facing heightened competition in the slowing 2W segment. At CMP, TVS trades at a premium valuation of 15x on an EV/EBIT basis and 21x on an FY18 P/E basis, expensive when compared to better placed peers such as MSIL (22x) and at a substantial premium to BJAUT/HMCL. We assign the stock a 12X multiple on FY18E/EV/EBIT (16x standalone FY18 P/E) and add Rs34/a share for investments/JVs. We value the stock at Rs244 and recommend a SELL.

Outlook and View 2W long term growth holds lower potential than PV’s: India’s 2W penetration has increased

enormously over the past decade (~13% now vs. ~8% in 2010). However, while comparing penetration rates of 2W and PV’s in India vs other economies, we believe that the growth potential for 2Ws remains substantially below PVs (~2.5% penetration). Given the large existing base, the scope for doubling or even tripling 2W penetration rates within a decade remains far more of a challenge than it is for PV penetration rates (from ~3% to ~5% or ~8%). While scooterization will boost TVS’ short term revenue growth, industry growth is likely to moderate on the back of potential uptrending and saturation among the female workforce. Thus, for the overall 2W industry, we expect a lower growth trajectory ~7-8%+ volume growth over the next decade as compared to PVs (~10-12%+).

The Ever Elusive Margin Expansion:One of the oft-cited investment rationales for TVS has been the possibility of a structural improvement in margins. Given the low base of current margins (7%), a shift towards 10% would yield a sharp rise in profitability (a 100bps margin increase boosts EPS by ~20-25%). However, TVS’ long term track record doesn’t offer much comfort, as margins have stubbornly stuck to 6-7% over the past decade. Key challenges to margin expansion include 1) High Ad/promotion spend relative to peers 2) Core segments of TVS’ revenue (mopeds, scooters) are inherently price sensitive and lower margin 3) Recent margin expansion was driven by declining commodity costs rather than structural changes, and this trend is reversing 4) Exports (higher margin) are seeing deep declines in volumes on macro-economic issues and 5) Rising competitive intensity in the scooter segment is likely to leave TVS little room for price increases.

CMP Rs303

Target Price Rs244

Potential Upside/Downside (19)%

Sector Automobiles

Bloomberg / Reuters TVSL IN/TVSM.BO

Shares o/s (mn) 475

Market cap. (Rsmn) 143,949

Market cap. (US$ mn) 2,147

3-m daily average vol. 161,240

Key Stock Data

52-week high/low Rs341/201

-1m -3m -12m

Absolute (%) (1) 3 29

Rel to Sensex (%) (4) (9) 30

Price Performance

Promoters 57.4

FIIs/NRIs/OCBs/GDR 15.5

MFs/Banks/FIs 14.5

Non Promoter Corporate 1.5

Public & Others 11.1

Shareholding Pattern (%)

Relative to Sensex

708090

100110120130140150

May

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TVSL Sensex

2

Company Outlook – TVS Motor Company

Near term growth brisk

GST/7th Pay Commission/Above normal monsoon: Implementation of GST would result in TVS’ products

seeing a 5-7% lower price, while also ensuring an offset of safety/emission norms related costs for BS-IV.

Higher consumer spending due to other macro-economic factors should see domestic growth continuing to

outpace exports for FY17. A boost to consumer spending would add buoyancy to FY18 revenues for TVS.

Scooters could see a boost in first time buyers in rural geographies (45% of volumes), as spending recovers on

the back of normal/above average monsoon.

New launches successful: The TVS Victor is now available nation-wide which should help the company gain

marketshare in the Executive Segment. The Executive segment has always been a weak spot for TVS (low

marketshare), thus incremental growth from the Victor would contribute meaningfully to the topline.

Increasing traction for recent models such as the Jupiter and Starcity models are continuing to help TVS’s see

robust growth. The upgrade to the Apache has been flourishing in the premium segment.

Near term share gains to continue: With the recent launches (Victor, Apache) TVS’ Q1FY17 market share in

motorcycles has increased 60ps YoY to Q1FY17. For FY17, the company has guided for a ~20K monthly run rate

for Victor and ~50K monthly run rate for its Jupiter scooter. This would gain significant market share in the

overall 2W segment, from 13.5% now to 16-17% for FY17.

Exports volatility likely: TVS has a strong presence in volatile markets in Africa such as Egypt and Nigeria. Egypt

continues to face political instability, while Nigeria’s currency has been in free fall as result of the steep decline

in Oil prices (principal commodity export). While there could be some stabilization in FY17 with regards to forex

issues, the underlying demand in these nations is likely to remain weak. We expect TVS’ to see some QoQ

growth recovery, but for the year we continue to expect a 20% decline.

Mopeds rebounding on XL100: TVS, which is the only player in the segment, is seeing a revival in growth on the

back of is XL100 model. For Q1FY17, growth stood at 19, while we estimate 8% moped volume growth over

FY16-18E.

Fig.: Market share seeing an uptick after a long

Fig.:period of:decline

Fig.: 3 wheeler share gains (mainly exports) -

Fig.:a:significant boost to realizations & margins

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

0%

5%

10%

15%

20%

25%

30%

FY00 FY02 FY04 FY06 FY08 FY10 FY12 FY14 FY16

TVS Scooter Market Share

TVS Motorcycle Market Share

-5%

0%

5%

10%

15%

20%

25%

FY01 FY03 FY05 FY07 FY09 FY11 FY13 FY15

TVS Domestic 2W Market Share

TVS Total 3W Market Share


3

Fig.: TVS Product mix: Scooterization benefiting TVS Fig.: Quarterly growth- Domestic growth

Fig.:powering up, offsetting weakness in exports

Source: SIAM; IDBI Capital Research Source: Company; IDBI Capital Research

Longer term growth picture less rosy

2W segment long term growth profile uncertain: India’s 2W penetration has increased enormously over the

past decade (13% now vs 8% in 2010). However, while comparing penetration rates of India vs other emerging

nations, there remain doubts as to the long term growth potential of the 2W industry.

Well Penetrated given income level: Unlike the PV industry where ownership is extremely low, 2W’s (especially

motorcycles) are reasonably well penetrated given India’s GDP per capita.

Future of 3W uncertain: Other segments such as 3W could see lower than expected growth if 1) The

transportation industry continues up-trending towards PVs and 2) Higher share of goods are transported by

larger CV’s as fleets consolidate.

8+%+ Volume growth unlikely: Thus, for overall 2W/3W industry, we believe 8%+ volume growth over the next

decade would remain a challenge, giving the industry a lower long term growth trajectory than PVs or premium

motorcycles (350cc +).

Figure: Indian 2W industry has room for growth, but

Figure:gap between peers not extraordinary

Figure: PV’s highly underpenetrated, still at the

Figure:bottom of emerging market ladder

Source: World Bank, SIAM; IDBI Capital Research Source: World Bank, SIAM; IDBI Capital Research

0%

20%

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100%

Dec/12 Jun/13 Dec/13 Jun/14 Dec/14 Jun/15 Dec/15 Jun/16

Motorcycle Scooter Moped 3-Wh

-20.0

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Mar/13Sep/13Mar/14Sep/14Mar/15Sep/15Mar/16

EBITD

A M

argins

Domestic (% YoY, RHS)

Exports (% YoY, RHS)

China

Brazil

IndonesiaIndiaVietnam

Japan

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2W Vehicles/Thousand People

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Russia

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Indonesia

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0 50 100 150 200 250 300 350 400 450 500 550 600

GD

P P

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pri

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PV Vehicles/Thousand People

4


Figure: Total Registered Motor vehicles – 2W have

Figure:seen robust growth in past decade

Figure: Growth for 2W now on a higher base

Figure:compared to PVs

Source: World Bank, SIAM; IDBI Capital Research Source: World Bank, SIAM; IDBI Capital Research

The Ever Elusive Margin Expansion

Historically low-margin profile offers little confidence: TVS has historically had low EBITDA margins, as the

company has exhibited a singular focus on growth by aggressively pricing its products in comparison to peers

such as Hero/Hero Honda, Bajaj and now Honda. Over the last 18 years, margins have averaged 7%, while the

last 10/5 year averages have been 5.5/6.2% respectively. As a result, the company’s earnings tend to be volatile,

and its earnings tend to crater in bad years. Thus, we believe management’s target of 10% margins in FY19

seems difficult, especially given its continued intent to gain marketshare.

However, given low base, margin expansion could offer sizeable rewards: From a base of 7%, a 100bps

expansion in margins would boost PAT by ~20-25%. Thus, if the company did manage to get to 10% margins,

EPS growth would skyrocket. However, current consensus estimates already factor in somewhat higher

margins, with most estimates ranging between 8-8.5%.

Exports, New products crucial for better profitability: Key to margin expansion will remain export segments,

3W and premium motorcycles, where TVS enjoys a better margin profile. However, it should be noted that

even in the past when exports have risen as a share of sales, margins have flat lined.

Figure: Rise in share of exports having no impact

Figure:on margins

Figure: Margins flat, as lower share of

motorcyclesFigure:partially restricting margins

Source: Company, SIAM; IDBI Capital Research Source: Company, SIAM; IDBI Capital Research

0

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March/16March/11March/06March/01

Mill

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Veh

icle

s)

Number of 4W Registered Number of 2W Registered

0%

5%

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25%

1996 2001 2006 2011 2016

Ve

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%)

2W Penetration rate PV Penetration rate

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Motorcycle Share of Volumes (RHS)


5

Employee Costs/R&D/Gross Margins and ASP’s cause of lower margins: As shown below, compared to peers

Bajaj and Hero, TVS’ margins have historically been lower due to higher expenses across the board. Further,

the recent decline in commodity prices did not benefit TVS as much as it did peers, given TVS’ more aggressive

focus on growth rather than margins.

Fig.: Elevated R&D Expenses (% of sales) as compared

Fig.:to peers, Hero spike post Honda era

Fig.: TVS hasn’t benefited from recent

Figucommodity decline as compared to peers


Figure: Employee Costs significantly higher Figure: TVS ASP spends at high levels


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

FY03 FY05 FY07 FY09 FY11 FY13 FY15

Bajaj Hero TVS

25

27

29

31

33

35

FY12 FY13 FY14 FY15 FY16

Gross Margins (%)

Bajaj Hero TVS

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%


Employee Costs

Bajaj Hero TVS

1%

3%

5%

7%

9%

11%

FY03 FY06 FY09 FY12 FY15

Ad/Marketing Share of Sales

Bajaj Hero TVS

6


Other Challenges

Competitive profile of industry high; Additional growth levers limited

Honda a formidable competitor: Currently, TVS has been seeing gradual share gains in recent times on the

back of new launches and heavy ad spends. However, despite robust growth in recent times, overall market

share hasn’t changed significantly when seen over a longer period of time. Honda remains the dominant player

in scooters, with market share essentially flat over 10 years, despite continuing attempts by TVS and Hero to

gain share. Further, motorcycle share has been flattish, with recent upticks on the back of newer launches.

Honda’s track record in other Asian markets suggest that it will remain formidable in the years to come.

3W at long term risk of obsolescence: also risk Other segments such as 3W could see lower than expected

growth if 1) The transportation industry continues up-trending towards PVs and 2) Higher share of goods are

transported by larger CV’s as fleets consolidate.

Exports likely to remain unstable as a growth driver: Indian 2W and 3W have made strong inroads in Africa

and Latin America. However, macro-economic turbulence is a key risk for these markets, making them not

particularly attractive. African nations that are big markets for these exports are facing severe fiscal pressures,

as a steep fall in commodities impact government revenues. Political instability in a country like Egypt is an

additional risk. More lucrative markets such as Philippines and Indonesia are mostly dominated by Japanese 2-

W manufacturers, making it difficult for Indian players.

Fig.: Honda the primary gainer in overall Motorcycle

Fig.:market share since 2011

Fig.: Honda dominance in Scooters unchanged;

Fig.:TVS recent gains more of a ‘recovery’ of share

Source: Company, SIAM; IDBI Capital Research, Data includes exports Source: Company, SIAM; IDBI Capital Research, Data includes exports

Fig.: Export weakness leading to share loss

Fig.:despitegrowth

Fig.: Lower exports and 3W share recently

Fig.:impacting margins

Source: Company, SIAM; IDBI Capital Research, Data includes exports Source: Company; IDBI Capital Research

-10%

10%

30%

50%

Mar/11 Mar/12 Mar/13 Mar/14 Mar/15 Mar/16

TVS Motorcycle MS Bajaj Motorcycle MS

Hero Motorcycle MS Honda Motorcycle MS

0%

20%

40%

60%

80%

Mar/07 Mar/09 Mar/11 Mar/13 Mar/15

TVS Scooter Market Share Others Scooter MS

Hero Scooter MS Honda Scooter MS

0%

5%

10%

15%

20%

Jun/13 Dec/13 Jun/14 Dec/14 Jun/15 Dec/15 Jun/16

Total Motorcycle Market ShareTVS Total 3W Market ShareTotal Scooter Market Share

0%

5%

10%

15%

20%

30,000

35,000

40,000

45,000

Mar/13 Dec/13 Sep/14 Jun/15 Mar/16

(Rs)

Realisation / Vehicle (LHS)

Share of Exports (RHS)

Share of 3 W sales (RHS)


7

Return ratios decent for Auto segment, but pales in comparison to 2W OEMs

While TVS’ current margin profile of ~24% is decent for a manufacturing firm (especially an OEM), when compared

to 2W peers, its RoE profile appears mediocre.

Further, in past downcycles, TVS lower margin fundamentals mean that its profitabilty fell significantly more than

Bajaj and Hero.

Fig.: RoEs (3 Year rolling average) lower than key

Fig.:rivals throughout cycles

Fig.: TVS profitability far weaker than peers during a

Fig.:downturn due to low margins

Source: Company; IDBI Capital Research, Figures use Adjusted PAT Source: Company; IDBI Capital Research

Estimates

We estimate revenue growth of 13% over FY16-18E, primarily driven by robust scooter revenue growth (19% est.)

and motorcycle volume growth of 10% .

We expect a 15%/9% increase in domestic/export volumes. At higher operating leverage and new initiatives in

exports, we expect margins to expand to 7.8% in FY18E.

Stable fixed costs along with low margin base should drive Adj.EPS of 20% CAGR over FY16-18E.

Table: Segmental Mix – FY13-18E (%)

Sales Volumes Mix FY13 FY14 FY15 FY16 FY17E FY18E

Motorcycles - Domestic 27 28 26 26 27 27

Motorcycles - Exports 9 11 12 12 11 11

Total Motorcycle Share 37 38 38 38 38 38

Scooters - Domestic 21 22 27 29 30 31

Scooters - Exports 1 1 1 1 2 2

Total Scooter Share 22 23 28 30 32 33

Mopeds - Domestic 39 35 29 27 27 26

Mopeds - Exports 0 0 0 0 1 1

Total Moped Share 39 35 30 28 27 26

Total 2W Share 98 96 96 96 97 97

3-W - Domestic 1 1 1 1 1 1

3-W - Exports 2 3 4 4 3 3

Total 3W 2 4 4 4 3 3

Source: Company; IDBI Capital Research

0

20

40

60

80


RoEs (%) (3 Year Rolling AVG

Bajaj Hero TVS

0

2

4

6

8

10

12

14

16

18


Adj. PAT margins (%)

Bajaj Hero TVS

8


Fig.: We expect margins of 8+% by FY18 (Ex-BMW)

Fre:to be unlikely

Fig.: FY16-18E Volume Growth estimated at

Figur10.5%, realizations held back at 2.6% due to mix


BMW Motorrad Tie-up holds potential

TVS alliance with BMW (BMW Motorrad)would provide incremental growth: Asper management, this tie-up

would will release its first product (expected to be the ~300cc BMW G 310 R) in H2FY17. All products would be

manufactured by TVS in Tamil Nadu, making TVS a contract manufacturer. Certain prodcuts could also be

launched under a TVS brand name (plans not yet finalized, but an “Akula 310” is likely to be launched first).

Technology benefits a postive:Over the long term, this would be a positve for TVS as it would gain technical

experience in higher-end motorcycles. products, particularly premium ones. While sales volumes are likely to

be small initially, the higher price tags (rumoured to be in the region of EUR 4,000-4,500) would amount to a

significant pie of revenue. The TVS launched products would also boost its brand image and product

perception.

Near Term ramp up a key monitorable:However, it remains to be seen whether the venture will be profitable

(EUR 20 Mn already invested for TVS), and at what margins TVS can operate on, given that its status in the

venture is akin to a contract manufacturer

Estimates: Given uncertainty as to timeline of ramp up and order flows, we conservatively estimate the JV

would be able to generate ~40,000 volumes (7K domestically, 33K via exports) in FY18E, based on broad

guidance and BMW’s market share in the segment. We conservatively estaimte Rs1.2bn in FY18E turnover

(Rs0.3mn blended realizations). Assuming a 4% PAT margin (JV is expected to have higher margins than stand

standalone basis), we estimate Rs1/Share in earnings from this JV. Given its potential for ramp up, we assign

Rs20/share in value for the venture.

70 79 100 112 127 144

5.8 6.0 6.06.7

7.27.8

-

20

40

60

80

100

120

140

160

0

2

4

6

8

10

FY13 FY14 FY15 FY16 FY17E FY18E

(%)

Net Sales (LHS) EBITDA Margin (RHS)

20.3 20.8 25.2 26.8 29.7 32.7

34 38

40 42 43 44

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9

Valuation

Overall, TVS possesses decent fundamentals within the auto segment – RoEs of 24-26%, good growth potential on

the back of rising scooterization and the possibility of strong growth via the BMW alliance. However, there exist

certain key risks that could impact the stock. Continued weakness in the high realization exports market could

lower margins and reduce longer term growth visibility.

The 2W market (especially motorcycles) is also unlikely to grow at rates seen in the previous decade, given the

much higher penetration rate and the possibility of uptrending on the parts of consumers. TVS’ razor thin margins,

that have historically been at the ~6-7% mark, increase the volatility of earnings and uncertainty. Given market

expectations of significant margin expansion (FY18 consensus margins is at 8.3%), there remains little room for

error.

Valuation: We value TVS at 12X its FY18E EV/EBIT (25% discount to Maruti multiple) (~16x standalone P/E),

and add Rs34/share to account for the value of its subsidiary investments as well as the BMW alliance

(Rs20/share). At CMP, the stock trades at 21X its FY18E earnings (after accounting for investments/BMW

alliance) and 15X on FY18E EV/EBIT. We recommend a SELL with a target price of Rs244, given the steep

valuations.

Upside Risk to estimates: 1) Higher than expected revenue/margins for BMW alliance; 2) Robust recovery in

export markets in Africa combined with strong domestic volumes and 3) Higher than expected margins (8%+)

on product improvement.

Table: Valuation method

SoTP INR

FY18E standalone EBIT 8,213

Target EV/EBIT multiple 12

Target EV 98,562

Add Value of cash &Non. Operational investments in FY18E 7,435

Less FY18E Total Debt 6,085

Add Value of Subsidiaries & other Operational investments (+ current value of

BMW JV at 20/share) 16,188

FY17E Target M.Cap 116,100

1 Year Target Price 244

CMP 303

Upside/(downside) (19%)

Implied FY18E P/E at Target Price 16.2 Source: BloombergConsensus; IDBI Capital Research Estimates - Maruti, Ashok Leyland, TVS

Table: IDBI vs Consensus

Financial Estimates (INR Bn) IDBI Estimate FY18E Bloom Consensus Deviance from Consensus

Revenue 144 149 (3)

EBITDA 11.2 12.4 (9)

EBITDAMargin (%) 7.8 8.3 (51)bps

EPS (Rs) 13.0 16.3 (21) Source: BloombergConsensus; IDBI Capital Research

10


Relative Valuation

Table: OEM Comparison on fundamentals

Company Growth(%) OPM(%) OPM(%) RoE (%) RoE(%)

FY16-18E FY16 FY18E FY16 FY18E

TVS Motor 13.3 6.7 7.8 24.1 24.8

MARUTI 15.5 15.9 14.8 18.0 20.3

TATA 11.0 13.3 14.9 17.7 17.8

M&M 15.2 11.6 12.3 15.1 16.8

BAJAJ 12.5 20.6 20.8 28.9 29.1

EICHER 14.6 17.3 20.1 35.0 38.9

HERO 12.2 15.8 15.3 43.2 36.7

Ashok Leyland 13.0 11.5 11.2 20.9 21.9

Median 13.3 6.7 7.8 24.1 24.7

Source: BloombergConsensus; IDBI Capital Research Estimates - Maruti, Ashok Leyland, TVS

Fundamentals average at best: While TVS’ growth trajectory has been impressive in recent times, we do not see the company possessing sustainable competitive advantages over Hero and Bajaj. Market-share trends evolve and shift, and thus, a slowing trend in scooterization would imperil TVS.

Figure: RoEs vs. EBITDA MarginsGrowth (size of bubble)– TVS stands out with its poor margins

Source: Bloomberg Consensus; IDBI Capital Research

MARUTI

TATA

BAJAJ

EICHER

HERO

Ashok Leyland

TVS

M&M

10

15

20

25

30

35

40

45

5 10 15 20

Ro

Es F

Y1

8E

(%)

OPM (%) FY18E


11

Table: Key Fundamentals as compared to Auto Ancillary peers

Company M.CAP Net Debt/Equity PE(x) PE (x) EV/EBIT(x) EV/EBIT(x) EV/EBITDA(X)

(INR bn) FY16 FY16 FY18E FY16 FY18E FY18E

TVS Motor 142 0.1 31.7 20.7 24.8 15.3 11.2

MARUTI 1,436 -0.7 32.5 22.3 21.2 15.2 10.7

TATA 1,607 0.2 13.2 8.6 9.0 6.7 3.6

M&M 892 1.0 28.9 19.7 21.4 14.2 13.3

BAJAJ 793 -0.1 22.7 16.9 16.1 10.8 13.3

EICHER 582 -0.3 53.7 26.6 30.8 18.1 16.7

HERO 653 -0.4 20.8 16.9 15.2 11.9 11.4

Ashok Leyland 246 0.1 20.6 14.8 13.5 9.7 7.7

Median 793 -0.1 22.7 16.9 16.1 11.9 11.4

Source:BloombergConsensus; IDBI Capital Research

Valuations unjustified relative to peers: We continue to expect PV’s to significantly outperform the 2 industry over

a long term horizon. At current multiples, TVS trades near market leader Maruti Suzuki and at a significant premium

over Bajaj Auto and Hero Motocorp.

Figure: PEvs.EV/EBIT – Valuations close to Maruti Suzuki – Unreasonable given fundamentals

Source: Bloomberg consensus; IDBI Capital Research, Size of sphere signifies EV/EBITDA (FY18E)

MARUTI

TATA

BAJAJ

EICHER

HERO

Ashok Leyland

TVS

M&M

7

12

17

22

27

32

6 8 10 12 14 16 18 20

P/E

FY

18

E (%

)

EV/EBIT (%) FY18E

12


Q1FY17 – Export volatility dents expectations

Table: Quarterly Snapshot

Q1FY17 Q1FY16 % YoY Q4FY16 % QoQ

Volume analysis (nos.)

Total sales 7,17,938 6,38,115 12.5 6,60,569 8.7

Realizations 40,128 40,339 (0.5) 42,620 (5.8)

Financial analysis (Rsmn)

Total revenues 28,809 25,741 11.9 28,154 2.3

Raw material 20,903 18,798 11.2 19,775 5.7

Staff costs 1,814 1,549 17.1 1,643 10.4

Other expenses 4,088 3,667 11.5 4,950 (17.4)

Total expenses 26,806 24,013 11.6 26,368 1.7

EBITDA 2,004 1,728 16.0 1,785 12.2

Other income 362 210 72.2 243 49.2

Interest 98 130 (24.9) 131 (25.1)

Depreciation 660 504 30.9 518 27.4

PBT 1,608 1,304 23.4 1,380 16.5

Total tax 396 303 30.7 202 95.6

Adj. PAT 1,213 1,001 21.2 1,178 3.0

E/o item - -

-

Reported PAT 1,213 1,001 21.2 1,178 3.0

As a % net sales

YoYVar (bps)

QoQVar (bps)

Raw material 72.6 73.0 (47) 70.2 232

Staff costs 6.3 6.0 28 5.8 46

Other expenses 14.2 14.2 (6) 17.6 (339)

Total expenses 93.0 93.3 (24) 93.7 (61)

Gross margin 27.4 27.0 47 29.8 (232)

EBITDA margin 7.0 6.7 24 6.3 61

Depreciation 2.3 2.0 33 1.8 45

PBT 5.6 5.1 52 4.9 68

Effective tax rate 24.6 23.2 138 14.7 994

Adj. PAT 4.2 3.9 32 4.2 3


Favourable mix powers realizations: Revenues grew 12% (vol. growth of 12.5%, with domestic growth of 18%

and exports falling 13%. Motorcycles and scooters rose 11% and 19%, respectively, while mopeds increased by

18%. Turmoil in key export markets continued impacting demand, with 3W sales falling 42% (3W exports down

46%).As a result, realizations were subpar, falling 0.5% YoY and 6% QoQ as the lower share of exports and 3W

hurt ASP’s.

Boost by other income/depreciation method change:Margins rose 24bps YoY to 7%, but this was partly due to

certain raw material costs being classified under depreciation under IND-AS.PAT rose 21% to Rs1bn.


13

Financial summary

Profit & Loss Account (Rsmn)

Year-end: March FY15 FY16 FY17E FY18E

Net sales 100,423 112,439 126,905 144,379

Growth (%) 26.1 12.0 12.9 13.8

Operating expenses (94,357) (104,931) (117,775) (133,167)

EBITDA 6,066 7,507 9,130 11,212

Growth (%) 26.0 23.8 21.6 22.8

Depreciation (1,533) (1,898) (2,648) (2,998)

EBIT 4,533 5,609 6,482 8,213

Interest paid (274) (462) (425) (390)

Other income 303 513 633 753

Pre-tax profit 4,562 5,660 6,690 8,577

Tax (1,083) (1,338) (1,806) (2,401)

Effective tax rate (%) 23.7 23.6 27.0 28.0

Net profit 3,478 4,321 4,884 6,175

Adjusted net profit 3,478 4,321 4,884 6,175

Growth (%) 32.0 24.2 13.0 26.4

Shares o/s (mnnos) 475 475 475 475

Balance Sheet (Rsmn)


Net fixed assets 14,190 16,238 18,090 19,091

Investments 6,686 6,686 6,686 6,686

Other non-curr assets - - - -

Current assets 25,170 26,701 31,537 36,684

Inventories 8,197 8,260 9,735 11,140

Sundry Debtors 5,039 5,787 7,001 7,908

Cash and Bank 54 328 254 2,026

Marketable Securities 3,438 5,160 5,160 5,410

Loans and advances 8,443 7,167 9,388 10,201

Total assets 46,047 49,626 56,313 62,462

Shareholders' funds 16,454 19,368 22,681 27,022

Share capital 475 475 475 475

Reserves & surplus 15,979 18,893 22,206 26,547

Total Debt 9,187 7,585 7,585 6,085

Secured loans 2,979 4,942 4,942 3,942

Unsecured loans 6,208 2,642 2,642 2,142

Other liabilities 10,715 9,341 9,341 7,841

Current liabilities 18,878 20,916 24,290 27,598

Total liabilities 29,593 30,258 33,631 35,439

Total equity & liabilities 46,046 49,626 56,313 62,462

Book Value (Rs) 35 41 48 57


Cash Flow Statement (Rsmn)


Pre-tax profit 4,562 5,660 6,690 8,577

Depreciation 1,455 1,149 2,648 2,998

Tax paid (803) (1,109) (1,806) (2,401)

Chg in working capital - - - -

Other operating activities 49 699 (208) (363)

CF from operations (a) 1,373 9,557 5,787 8,993

Capital expenditure (3,907) (3,197) (4,500) (4,000)

Chg in investments - - - -

Other investing activities 303 513 633 753

CF from investing (b) (4,770) (4,405) (3,867) (3,497)

Debt raised/(repaid) 3,911 (1,602) - (1,500)

Dividend (incl. tax) (812) (2,045) (1,570) (1,834)

Other financing activities (274) (462) (425) -

CF from financing (c) 2,824 (4,110) (1,995) (3,334)

Net chg in cash (a+b+c) (573) 1,042 (75) 2,162

Financial Ratios


Adj EPS (Rs) 7.3 9.1 10.3 13.0

Adj EPS growth (%) 32.0 24.2 13.0 26.4

EBITDA margin (%) 6.0 6.7 7.2 7.8

Pre-tax margin (%) 4.5 5.0 5.3 5.9

RoE (%) 22.7 24.1 23.2 24.8

RoCE (%) 18.9 20.1 21.3 24.6

Turnover & Leverage ratios (x)

Asset turnover 2.5 2.4 2.4 2.4

Leverage factor 2.7 2.7 2.5 2.4

Net margin (%) 3.5 3.8 3.8 4.3

Net Debt/Equity 0.3 0.1 0.1 0.0

Working Capital & Liquidity ratios

Inventory days 30 27 28 28

Receivable days 18 19 20 20

Payable days 57 54 59 59

Valuations


PER (x) 39.5 31.8 26.2 20.7

Price/Book value (x) 8.3 7.1 5.6 4.7

PCE (x) 27.4 22.1 17.0 13.9

EV/Net sales (x) 1.4 1.2 1.0 0.9

EV/EBITDA (x) 23.6 18.6 14.2 11.3

Dividend Yield (%) 0.6 0.8 0.9 1.1

14


Notes

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