TVS Motor Equity Research

Date of Research – 21 January 2016

Price – Rs. 274.20

About the Company

Establishes in 1980, TVS Motor Company Limited (“TVS Motor” or the “Company”) is the third largest two-wheeler manufacturer in India. The company’s product portfolio includes:

Motorcycles – Apache Series RTR, Phoenix 125, MAX4R, Star City, Sport;

Variomatic Scooters – Jupiter, Wego, Scooty Streak, Scooty Pep+;

Mopeds – TVS XL Super, TVS XL Heavy Duty.

STRENGTHS

India’s Demographic Advantage

India’s two-wheeler industry will continue to experience increase in demand, for many reasons. Firstly, the country’s aspirational youth and their high disposable income is a significant growth driver. Secondly, growing rural income across India has increased the two-wheeler sales. Finally, poor public transport and an urgent need to avoid urban congestion have increased need for a quicker and more affordable mode of transport.

New Product Launches

The company has diversified its presence from motorcycles to scooters in FY 2015; this will help the Company to increase its market share in two wheeler segment. Also the company has launched its 110cc Scooty Zest (in the girl’s scooter segment) which has helped to increase the sale of scooters by 48.9%. Also a tie up with BMW Motorrad to develop and manufacture motor cycle below 500cc will further strengthen its product portfolio.

CHALLENGES

Stiff Competition in Two-Wheeler Segment

TVS Motor faces stiff competition from new and existing players. New product launches by Hero Motor Corp, Honda, Yamaha and Bajaj Auto are expected over the medium term and this could put pressure on the domestic market share of the company.

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2013FY 2014FY 2015FY 2016 FY 2017
Total Income from Operations7,406.228,379.0110,311.6811,516.34 13,573.89 
Expenses6,967.887,892.069,708.7510,758.66 12,705.13  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit)438.34486.95602.93757.68 868.76
Depreciation175.60148.96178.59216.29 316.82
Finance Costs103.4180.0962.1167.51 59.62  
Other income24.1726.6623.6638.54 165.44
Exceptional items(92.78)(17.95)(58.27)– – 
PBT276.28302.51444.16512.42 657.76  
Tax91.36118.57123.94147.97 148.67  
Extraordinary items(13.43)(2.94)– – 
PAT (before Minority Interest and share of Associates)198.35186.88320.22364.45 509.09  
Profit/ (loss) attributable to Minority Interest0.961.17– – 
Share of profit / (loss) of Associates(0.33)(0.59)(8.04)(4.88) (0.20) 
Consolidated Profit / (Loss) for the year197.72186.30328.26369.33 509.29  

Profitability Analysis

Consolidated(%)
ParticularsFY 2013FY 2014FY 2015FY 2016 FY 2017
Operating Profit Margin Ratio5.925.815.856.58  6.40 
Net Profit Margin Ratio2.682.233.113.16  3.75 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Share Capital47.5147.5147.5147.5147.51 
Share application money pending allotment– 
Reserves & Surplus674.73850.771,113.321,277.121,535.37 
Net worth (shareholders funds)722.24898.281,160.831,324.631,582.88 
Minority Interest5.966.89– 
Long term borrowings874.46845.68517.76560.29508.72 
Current liabilities1,605.391,471.341,757.092,470.972,596.48 
Other long term liabilities and provisions53.4560.6162.5953.2348.69 
Deferred Tax Liabilities55.0681.80133.31160.22184.81 
Total Liabilities3,316.563,364.603,631.584,569.344,921.58 

 

Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Fixed Assets1,657.941,629.181,565.391,729.591,996.90 
Noncurrent Investments318.43347.71438.65539.34648.40 
Current assets1,311.491,348.231,583.452,198.052,183.22 
Long term advances and other noncurrent assets28.7039.4844.09102.3693.06 
Total assets3,316.563,364.603,631.584,569.344,921.58 

Efficiency Analysis

 
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
ROCE28.6525.0429.0131.9936.22 
ROE / RONW18.2322.0116.0524.7823.02 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
ParticularsFY 2013FY 2014FY 2015FY 2016 FY 2017
Total Income from Operations (Rs. Cr.)7,406.228,379.0110,311.6811,516.34 13,573.89 
Growth (%)(0.18 %)13.13 %23.07 %11.68 % 17.87 % 
PAT (Rs. Cr.)198.35186.88320.22364.45 509.09  
Growth (%)49.89 %(5.78 %)71.35 %11.02 % 39.69 % 
Earnings Per Share – Basic (Rs. )3.883.926.917.77 10.76 
Earning Per Share – Diluted (Rs. )3.883.926.917.77 10.76 
Price to Earnings8.3630.0331.2841.53 49.21 

Dividend History

The Company has maintained an average dividend yield of 2.21 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. TVS Motor’s average current ratio over the last 5 financial years has been 0.89 times which indicates that the Company is comfortably placed to pay for its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high long term debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

TVS Motor’s average long term debt to equity ratio over the last 5 financial years has been 0.83 times which indicates that the Company operates with considerable level of debt.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

TVS Motor’s average interest coverage ratio over the last 5 financial years has been 6.04 times which indicates that the Company can meet its debt obligations without any difficulty.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, TVS Motor reported a promoter holding of 57.40 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 29.07 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.