Auto & Auto Ancillaries April 05, 2013 TVS Motor Company Bloomberg: TVSL IN EQUITY Reuters: TVSM.NS Accounting: AMBER Predictability: AMBER Earnings momentum: AMBER Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision. Please refer to the Disclaimers at the end of this Report. BUY Going north on a German bike? With the market speculating about TVS Motor’s (TVSM) potential tie-up with BMW Motorrad, we highlight in our initiation note the other levers that this company can crank up to re-establish its place in the motorcycle market. With its balance sheet in good shape, with new product launches on the anvil and with Hero MotoCorp in the midst of a tricky transition, TVSM is an attractive investment which is trading at a 50% discount to its larger peers. Competitive position: WEAK Changes to that position: POSITIVE Plugging the product loopholes: Our primary data sources indicate that TVSM’s market share in the motorcycle segment has slipped from 19.5% in FY03 to 5.5% in YTD FY13, owing to: (a) a smaller product portfolio; (b) lower frequency of launches vs peers; and (c) product related issues. However, going forward, the company could regain its market share through the new launches in the ‘executive segment’ (60% of the motorcycle market) and more frequent launches/refreshes (enabled by a now well-established product platform straddling across all motorcycle segments). Also, the market leader, Hero MotoCorp is going through a transition phase (after its split with Honda), thus creating an opportunity for TVSM. Contrary to consensus expectations of market share loss, we expect TVSM to gain 46bps share over FY14-15. Improving product mix and margin: TVSM’s margin has declined from 10.2% in FY03 to 6.1% in YTD FY13, due to a 2,000bps rise in the share of low-margin products (such as mopeds and low cc scooters). However, going forward, we expect the sales mix to improve, owing to: (a) the increasing revenue share of motorcycle & 3Ws (due to new launches) from 45% in FY13 to 48% by FY15; (b) margin increase in the motorcycle segment due to the share of entry-level motorcycles dropping from 72% in FY13 to 56% by FY15. We expect EBITDA margin to improve from 6.0% in FY13 to 6.8% by FY15. Investments outside of standalone business remain a key risk: The management expects the Indonesian 2W business to achieve cash break-even in FY14 on improved volumes. It also expects limited investment in the housing/energy ventures going forward. We factor in total investments of `2.9bn over FY13-15E in Indonesia and other ventures. We highlight these investments as key risks/concerns to our valuation and stance. Valuation: Our DCF model values the standalone entity at `54/share, implying 8.0x FY15 EPS, a discount of 40% to Hero/Bajaj Auto’s multiples but higher than TVSM’s current consensus one-year forward multiple of 6.6x, because we expect TVSM to regain market share in domestic motorcycles. We deduct the investments to be made into the Indonesia 2W subsidiary and other entities to arrive at a TP of `52/share (54% upside from CMP). An upturn in industry demand, market share gains in the motorcycles segment and a potential tie-up with BMW Motorrad are the key positive catalysts. Key financials (standalone) Year to March (` mn) FY11 FY12 FY13E FY14E FY15E Revenues 62,880 71,262 70,183 79,013 89,700 EBITDA 3,921 4,694 4,194 5,242 6,136 EBITDA margin 6.2% 6.6% 6.0% 6.6% 6.8% Adjusted EPS (`) 4.10 5.24 4.07 5.64 6.81 Debt: Equity (x) 0.74 0.69 0.54 0.48 0.35 RoE (%) 20.9% 23.0% 15.8% 19.4% 20.4% P/E 8.3 6.5 8.4 6.0 5.0 Source: Company, Ambit Capital research INITIATING COVERAGE Ashvin Shetty Tel: +91 22 3043 3285 [email protected]Recommendation CMP: `34 Target Price (April 2014): `52 Upside (%) 54 EPS (FY14): `5.6 Variance from consensus (%) 9 Stock Information Mkt cap: `16.2bn/US$298mn 52-wk H/L: `50/31 3M ADV: `38mn/US$0.7mn Beta: 0.9x BSE Sensex: 18,510 Nifty: 5,575 Stock Performance (%) 1M 3M 12M YTD Absolute (10) (25) (20) (19) Rel. to Sensex (8) (18) (26) (14) Performance (%) 15,000 16,000 17,000 18,000 19,000 20,000 21,000 Mar-12 May-12 Jun-12 Aug-12 Sep-12 Nov-12 Dec-12 Jan-13 Mar-13 30 34 38 42 46 50 Sensex TVS Source: Bloomberg, Ambit Capital research P/E band chart 4 9 14 19 24 29 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 P/E P/E 6 year average 4 year average Source: Bloomberg, Ambit Capital research
Transcript
Auto & Auto Ancillaries April 05, 2013
TVS Motor Company Bloomberg: TVSL IN EQUITY Reuters: TVSM.NS
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Please refer to the Disclaimers at the end of this Report.
BUY
Going north on a German bike? With the market speculating about TVS Motor’s (TVSM) potential tie-up with BMW Motorrad, we highlight in our initiation note the other levers that this company can crank up to re-establish its place in the motorcycle market. With its balance sheet in good shape, with new product launches on the anvil and with Hero MotoCorp in the midst of a tricky transition, TVSM is an attractive investment which is trading at a 50% discount to its larger peers.
Competitive position: WEAK Changes to that position: POSITIVE
Plugging the product loopholes: Our primary data sources indicate that TVSM’s market share in the motorcycle segment has slipped from 19.5% in FY03 to 5.5% in YTD FY13, owing to: (a) a smaller product portfolio; (b) lower frequency of launches vs peers; and (c) product related issues. However, going forward, the company could regain its market share through the new launches in the ‘executive segment’ (60% of the motorcycle market) and more frequent launches/refreshes (enabled by a now well-established product platform straddling across all motorcycle segments). Also, the market leader, Hero MotoCorp is going through a transition phase (after its split with Honda), thus creating an opportunity for TVSM. Contrary to consensus expectations of market share loss, we expect TVSM to gain 46bps share over FY14-15.
Improving product mix and margin: TVSM’s margin has declined from 10.2% in FY03 to 6.1% in YTD FY13, due to a 2,000bps rise in the share of low-margin products (such as mopeds and low cc scooters). However, going forward, we expect the sales mix to improve, owing to: (a) the increasing revenue share of motorcycle & 3Ws (due to new launches) from 45% in FY13 to 48% by FY15; (b) margin increase in the motorcycle segment due to the share of entry-level motorcycles dropping from 72% in FY13 to 56% by FY15. We expect EBITDA margin to improve from 6.0% in FY13 to 6.8% by FY15.
Investments outside of standalone business remain a key risk: The management expects the Indonesian 2W business to achieve cash break-even in FY14 on improved volumes. It also expects limited investment in the housing/energy ventures going forward. We factor in total investments of `2.9bn over FY13-15E in Indonesia and other ventures. We highlight these investments as key risks/concerns to our valuation and stance.
Valuation: Our DCF model values the standalone entity at `54/share, implying 8.0x FY15 EPS, a discount of 40% to Hero/Bajaj Auto’s multiples but higher than TVSM’s current consensus one-year forward multiple of 6.6x, because we expect TVSM to regain market share in domestic motorcycles. We deduct the investments to be made into the Indonesia 2W subsidiary and other entities to arrive at a TP of `52/share (54% upside from CMP). An upturn in industry demand, market share gains in the motorcycles segment and a potential tie-up with BMW Motorrad are the key positive catalysts.
Profit and Loss (standalone) (` mn) Year to March FY12 FY13E FY14E Net sales 71,262 70,183 79,013 Optg. Exp (Adj for OI.) 66,568 65,989 73,772 EBITDA 4,694 4,194 5,242 Depreciation 1,175 1,293 1,380 Interest Expense 571 532 478 PBT 3,165 2,481 3,501 Tax 674 546 823 Adj. PAT interest 2,491 1,935 2,678 Profit and Loss Ratios EBITDA Margin % 6.6% 6.0% 6.6% Adj Net Margin % 3.5% 2.8% 3.4% P/E (X) 6.5 8.4 6.0 EV/EBITDA (X) 4.9 5.5 4.4
Company Background
TVS Motor (TVSM) is one of the flagship companies of theSundaram Group which has wide-ranging interests in sectors such as automobiles, logistics and finance. TVSM has carvedout a niche for itself in the two-wheeler (2W) segment with apresence in motorcycles, scooters as well as mopeds. Nearly adecade ago, the company ended its joint venture with Suzuki Motor Corporation. Since then, whilst TVSM has maintained asteady pace of innovation, it has been less than successful inthe motorcycle segment, with its market share declining from19.5% in FY03 to 5.5% in YTD FY13. The company is, however, relatively better placed in mopeds (100% marketshare in YTD FY13) and scooters (14.8% market share inYTDFY13).
Balance Sheet (standalone) (` mn) Year to March FY12 FY13E FY14E Total Assets 31,405 31,732 34,889 Net Fixed Assets 10,781 10,988 11,108 Current Assets 11,315 11,185 12,522 Other Assets 9,309 9,559 11,259 Total Liabilities 31,405 31,732 34,889 Networth 11,693 12,855 14,705 Debt 8,248 7,148 7,148 Current Liabilities 10,489 10,722 12,029 Deferred Tax Liability 976 1,007 1,007 Balance Sheet Ratios RoE % 23.0% 15.8% 19.4% RoCE % 29.2% 24.3% 31.7% Net Debt/Equity 0.69 0.54 0.48 Equity/Total Assets 37% 41% 42% P/BV (X) 1.4 1.3 1.1
Cash Flow (standalone) (` mn) Year to March FY12 FY13E FY14E PBT 3,165 2,481 3,501
Depreciation 1,175 1,293 1,380
Tax & others (557) (95) (462)
Change in Wkg Cap 626 16 (134)
CF from Operations 4,409 3,696 4,285
Capex (1,768) (1,500) (1,500)
Investments & others (2,040) (138) (1,582)
CF from Investing (3,809) (1,638) (3,082)
Debt (867) (1,100) -
Interest (571) (532) (478)
Dividends (659) (387) (773)
CF from Financing (2,097) (2,018) (1,251)
Change in Cash (1,497) 39 (49) Source: Company, Ambit Capital research
Explanation for our flags on the cover page
Segment Score Comments
Accounting AMBER
TVS Motor’s accounting score is in line with the sector average accounting score. However, rising investments outside of the standalone business, particularly in unrelated ventures such as housing and energy, are causes for concern. Recently, objections were raised by an investor advisory firm on the promotion of Mr Sudarshan Venu (son of the Chairman and Managing Director, Mr Venu Srinivasan) to executive director, for his lack of adequate operating experience. Mr Sudarshan Venu‘s appointment was, however, subsequently approved by the shareholders.
Predictability AMBER Given that automobile companies publish their volume numbers on a monthly basis, generally no positive/negative surprises are seen in revenues. However, the margins tend to be less predictable and are generally the source for actual results coming in above/below consensus expectations.
Earnings momentum
AMBER No significant consensus upgrades/downgrades in the recent few weeks.
Source: Bloomberg, Ambit Capital research
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Ambit Capital Pvt Ltd 3
Company overview TVS Motor (TVSM) is one of the flagship companies of Sundaram Group which has wide-ranging interests in sectors such as automobiles, logistics and finance. TVSM has carved out a niche for itself in the two-wheeler (2W) segment with a presence in motorcycles, scooters as well as mopeds. Nearly a decade ago, the company ended its joint venture with Suzuki Motor Corporation. Since then, whilst TVSM has maintained a steady pace of innovation, it has been less than successful in the motorcycle segment with its market share declining from 19.5% in FY03 to 5.5% in YTD FY13. The company is, however, relatively better placed in mopeds (100% market share in YTD FY13) and scooters (14.8% market share). In recent years, the company has also sought to diversify into three-wheelers (3Ws), international markets (exports as well as through a separate 2W entity in Indonesia) and some unrelated businesses such as housing and energy. Whilst CFO generation from the core standalone 2W/3W business has been encouraging, the increasing investment in the non-core businesses has impacted FCF generation (please see exhibit below).
Exhibit 2: Revenues and EBITDA have improved at the standalone level, but they still significantly lag that of its peers
5,00015,00025,00035,00045,00055,00065,00075,000
FY08 FY09 FY10 FY11 FY12
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
Revenues (LHS) EBITDA margin (RHS)
(Rs mn)
Source: Company, Ambit Capital research
Exhibit 3: Whilst CFO generation has been encouraging, rising non-core investments have impacted FCF generation
(2,000)
-
2,000
4,000
6,000
FY08 FY09 FY10 FY11 FY12
0%
50%
100%
150%
200%
250%
EBITDA (Rs mn) CFO before tax (Rs mn)
FCF (Rs mn) CFO to EBITDA% (RHS)
(Rs mn)
Source: Company, Ambit Capital research; Note: FCF considered post investments
Mopeds 21% XL Super, XL HD Domestic: 100%, Exports: 100%
None 24%
3Ws (passenger) 5% TVS King Domestic: 3.7%, Exports: 10.2%
Bajaj Auto, Piaggio NA
Spare parts 10% 25%
Total standalone 100% 13%
Source: Company, Ambit Capital research
Exhibit 1: Timeline of key events
Year Event 1982 Formed as a JV between
Sundaram Clayton and Suzuki Motor Corporation
1984 Initial Public Offer
1986 Acquired the moped division of Sundaram Clayton
1990-91 Declares lockout for three months due to labour issues
1994 India's first indigenous scooter, TVS Scooty, launched
2001 India's first indigenous four-stroke motorcycle 'Victor' launched; end of the JV with Suzuki
2005-06 Foray into Indonesian 2Ws
2007-08 Launch of 3W, ‘TVS King’
Source: Company, Ambit Capital research
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Ambit Capital Pvt Ltd 4
Exhibit 5: Overview of TVSM’s key investments outside of the standalone business
Key financial data (FY12) (` mn) % stake
Cumulative inv. by TVSM
as at FY12
% of standalone networth as at
FY12 Rev. EBITDA PAT Nature of business
PT TVS Indonesia 100.0% 4,742 41% 1,074 (494) (1,083) Manufacture and sale of 2Ws in Indonesia
Sundaram Auto Components
100.0% 609 5% 10,669 246 51
Supply of interior and exterior plastic parts and rubber products such as diaphragms, hoses and air cleaner ducts for automobiles
TVS Motor Services 19.0% 2,464 21% 1,140 20 2 Largely in financing of TVS Motor's vehicles, small part of the business is focused on used car/tractor financing
TVS Energy 94.5% 768 7% 140 107 (73) Manufacture and sale of wind energy TVS Housing 100.0% 1 - - - -
Focusing on low and affordable housing projects
Emerald Haven Realty Ltd
48.8% 400 - - - - Focusing on low and affordable housing projects
Total 8,983 77%
Source: Company, Ambit Capital research
Industry dynamics and competitive positioning Demand trends and projections The 2W industry recorded a strong 26% volume CAGR over FY10-11; however, volume growth has moderated to 14% YoY in FY12. The volume growth rate has further slipped in FY13 to 3% YoY in YTD FY13, with the latest published industry volume data for the month of February 2013 showing a decline of 3% YoY. Our dealer checks also suggest that the average 2W inventory with dealers is currently high, at an average level of six weeks vs the normalised level of four weeks.
Our discussions with the management of two-wheeler companies, vehicle financing companies and automobile dealers indicate that the demand is being impacted by: (a) Weak macro-economic factors (GDP growth has declined by 170bps to 4.5% in
3QFY13 from 6.2% in FY12); (b) Adverse effects of drought in some states such as Maharashtra and Karnataka; (c) Increase in fuel prices over the past couple of years (petrol price has increased
by about 50% in the past three years); and (d) Increase in the vehicle financing rates.
Whilst we expect the above factors to pose a challenge to the 2W industry growth in the near term (two-wheeler companies are also likely to take production cuts in March and April to normalise the inventory levels), we continue to have a favourable view on the 2W volume growth over the longer term. Our belief is underpinned by the following factors:
(i) Most of the current slowdown is attributable to the deferment of discretionary
purchases by the customers. The ‘ability to purchase’ has, not however, being significantly impaired.
(ii) The perception of a 2W as a ‘non-discretionary product’ is increasing, helped
by an inadequate public transport system and rising income levels, particularly in the rural areas.
(iii) Easing interest rates (cut in repo rates by 100bps in the past 12 months and
our expectation of a further cut of 50-75bps in CY13) should help ease the concerns around the high interest rate scenario.
TVS Motor Company
Ambit Capital Pvt Ltd 5
(iv) Given 2W’s high mileage (50km-60km/litre), the increases in fuel prices does
not have a significant impact on the running cost for a 2W. Also, petrol prices, after rising continuously for the past three years, have remained relatively stable in the past 6-8 months.
(v) The current market penetration level of 2Ws reflects strong long-term growth
opportunities.
As a result, we expect a 9% volume CAGR over the next two years for the domestic two-wheeler industry. Scooters offer greater convenience as compared to motorcycles, and this should help the scooter market to expand faster than the motorcycle market, albeit at a lower pace than that in the past three years. We expect mopeds to underperform the two-wheeler growth average due to improved choices in motorcycles and scooters.
Increasing competition in the two-wheeler space a) Domestic motorcycles
The domestic motorcycle market is currently dominated by local players such as Hero MotoCorp (53% market share) and Bajaj Auto (25% market share). Honda Motorcycles Scooters India (HMSI) (the 100% Indian subsidiary of Honda Motors, Japan) currently dominates the domestic scooter segment with a 48% market share but has a lower 12% share in the much-higher-volume motorcycle segment.
The split in the Hero-Honda joint venture between Honda Motors and the Hero Group has triggered significant competition in the Indian motorcycles space. Honda currently has only a 12% market share in the Indian motorcycles market versus other emerging markets (Brazil, Thailand, Vietnam and Indonesia), wherein it commands a leadership position with a substantial market share. The company, after its split with the Hero Group, has already made its intention clear to achieve a leadership position in the Indian motorcycles space by FY2020. India is a key market that is missing from Honda’s portfolio. HMSI has announced significant capacity expansion plans for India. Furthermore, it plans to launch one motorcycle/scooter every quarter going forward.
Overall, the split of the Hero-Honda joint venture and HMSI’s subsequent aggressive posturing has triggered a significant change in the competitive dynamics of the domestic motorcycles space. In the exhibit below, we have mapped various players on competitive standings using multiple parameters.
Exhibit 7: HMSI’s expansion plan
Time frame Installed capacity
As of May 2011 1.6 mn
As of July 2011 2.2 mn
As of March 2012 2.8 mn
1H2013 4.0 mn
Source: Company, Ambit Capital research
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Ambit Capital Pvt Ltd 6
Exhibit 8: Competitive mapping in the domestic motorcycles space
(b) Brand failures in the past two years 1 (Impulse)
2 (Boxer, XCD)
1 (Unicorn Dazzler)
2 (Flame, Jive)
Rank c) A&P as a percentage of net sales 1.6% 0.9% 1.2% 5.0%
Rank Overall brand rank (using average of market share, brand failure and ad spends)
Whilst Hero MotoCorp scores heavily on brand name particularly for its Splendor and Passion models, Bajaj Auto benefits from strong brand loyalty for its Pulsar and Discover models and relatively low level of advertisement spends vs its peers. HMSI scores well consistently across all parameters. TVSM scores modestly on all parameters.
Hero MotoCorp’s domestic motorcycle mix is dominated by the <125cc category and thus is the most exposed to the risk of competition.
(3) Diversified portfolio (a) Exposure to the highly competitive domestic motorcycle space (percentage of sales in the domestic motorcycle segment)
92% 47% 47% 41%
Rank
Hero MotoCorp’s concentration of revenues in the domestic motorcycles segment makes it particularly vulnerable to HMSI’s likely aggressive pursuit in this segment.
4) Technological capability (a) Based on discussions with industry
participants
Our discussions with industry participants indicate that whilst Hero currently enjoys a strong brand name and distribution network, there is a lot of uncertainty with regard to its technological capability after its separation from Honda. Hero MotorCorp has an R&D strength of 150 employees but currently it does not have an indigenously developed product. TVSM’s lack of market-winning brands is a negative but an R&D strength of 400 engineers and indigenous technology are key positives. Honda, followed by Bajaj Auto, is ranked high on technology by industry participants, owing to their successful indigenously developed products.
Overall rank (using equal weightage to all four parameters)
Source: Company, SIAM, Ambit Capital research; Note: - Strong; - Relatively Strong; - Average; - Relatively weak; market share figures are for YTD FY13; other numbers are based on FY12
Based on the above analysis, we believe TVSM is attractively placed to increase the market share given its low base. Also, the market leader, Hero MotoCorp’s technological uncertainty and high exposure to the most competitive segment make it highly vulnerable to market share loss.
b) Competition in the domestic scooters space
Given the strong volume growth seen in the scooters segment over FY09-12, many players like Piaggio and Yamaha have entered the scooter segment in FY13. Also, an aggressive set of launches have been planned by several companies over the next 6-12 months. This together with HMSI’s fourth plant, which is soon likely to be operational, could increase the level of competition in the scooter industry. We believe smaller players will continue to challenge the dominance of HMSI in the scooters space.
Exhibit 9: Market share movement in domestic scooters % share
FY10 FY11 FY12 YTD
FY13
HMSI 50.6 43.1 47.8 48.3
Hero 14.3 16.5 16.3 18.6
TVSM 20.5 21.6 19.4 14.8
Suzuki 9.6 11.1 11.3 11.5
Others 5.0 7.7 5.2 6.8
Source: SIAM, Ambit Capital research
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Ambit Capital Pvt Ltd 7
Exhibit 10: SWOT analysis for TVSM Strengths Weaknesses
TVSM is an established and long-standing player in the 2W industry with a presence across all 2W categories (motorcycles, scooters and mopeds) and a rich history of innovation.
The company has a strong brand name in the south Indian markets especially in the states of Tamil Nadu and Karnataka.
It has a strong dealer network across India (behind only Hero MotoCorp and Bajaj Auto) in terms of the number of dealers and total touch points.
TVSM has a well-established presence in most major export markets (it is the second-largest exporter of 2Ws from India after Bajaj Auto).
The company lacks a popular product in the domestic motorcycles segment (similar to the Splendor, Passion or Discover models of its peers).
Several product issues in the past (Victor, Jive and Flame) in the motorcycle space have hurt the brand image.
Lack of products across all the key price points in the motorcycle space has impacted the market share.
The company lacks strong brand equity beyond south India.
Opportunities Threats
Market leader, Hero MotoCorp is going through a transitional phase of indigenous product development, which presents an opportunity for TVSM to gain market share in the domestic motorcycle space.
Tie-up with any global players can increase the company’s technological capability and positively help its brand image.
Stellar consumer response to even a single product can lead to a disproportionate gain for the company given the low base.
Rising competition in the Indian 2W market is particularly a cause for concern for smaller players like TVSM.
Indonesian ventures continue to incur huge loss, necessitating equity infusion from the parent.
Higher investments outside of the core automobile business can wipe out the free cash flow and keep debt at elevated levels.
Source: Company, Ambit Capital research
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Ambit Capital Pvt Ltd 8
Plugging the product loopholes Our primary data sources indicate that TVSM has lost market share in the motorcycles segment from 19.5% in FY03 to 5.5% in YTD FY13, owing to: (a) a smaller product portfolio; (b) lower frequency of launches vs peers; and (c) product related issues. However, going forward, the company could regain its market share through the new launches in the ‘executive segment’ (60% of the motorcycle market) and more frequent launches/refreshes (enabled by a now well-established product platform straddling across all motorcycle segments). Also, the market leader, Hero MotoCorp is going through a transition phase (after its split with Honda), which could be an opportunity for TVSM. Contrary to consensus expectations of market share loss, we expect TVSM to gain 46bps share over FY14-15. We also expect the new launches in the scooters and 3W segments to help TVSM‘s market share in these segments.
Domestic motorcycles Nearly a decade ago, the company ended its joint venture with Suzuki Motor Corporation. Since then, whilst the company has maintained a steady pace of innovation, it has been less than successful in its 2W business, particularly the domestic motorcycle space, where its market share declined from 19.5% in FY03 to 5.5% in YTD FY13.
Exhibit 11: TVSM’s market share has declined in key product categories - motorcycles and scooters over the years Domestic segment
Feedback from dealers/experts/users on TVSM’s market share loss Our discussions with primary data sources (2W experts, dealers and motorcycle enthusiasts) and our analysis indicate that TVSM steadily lost market share in the domestic motorcycles space, due to its: a) Smaller portfolio vs peers: Compared to the three larger players (Hero
MotoCorp, Bajaj Auto and HMSI), TVSM has had a relatively smaller motorcycle portfolio, with key product gaps in its portfolio. Our primary data sources highlight that nearly 50-55% of entry-level motorcycle users look for the same brand whilst upgrading to a higher segment. Whilst TVSM has had a meaningful presence in the entry-level motorcycle segment (average volumes of 30,000 units/month), the lack of a presence in the executive segment (which accounts for 60% of total motorcycle industry volumes) meant that the company lost out on its entry-level consumers looking at upgrading to the executive segment. Its two products in the executive segment viz. Flame and Jive were impacted by product-specific issues (discussed in the section below) and could not garner meaningful traction.
Exhibit 12: TVSM’ productgaps in the key mid-pricesegment ` 35-45k (20% of market)
` 45-65k (60% of market
>65k 20% of market)
Hero (2) Hero (9) Hero (5)
Bajaj (1) Bajaj (5) Bajaj (8)
HMSI (0) HMSI (5) HMSI (7)
TVSM (3) TVSM (1) TVSM (3)
Source: Company, Ambit Capital research. Figures in bracket represent number of products
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Ambit Capital Pvt Ltd 9
Exhibit 13: Smaller product portfolio for TVSM as compared to its peers
Hero MotoCorp Bajaj Auto Honda Motorcycles TVS Motor >75cc and less than equal to 110cc (64% share in industry volumes) Market share 69.4% 19.0% 4.8% 5.9% Number of products 7 3 2 4 Products HF Dawn (100cc); HF
Deluxe (100cc); Splendor+ (100cc); Splendor NXG (100cc);Splendor Pro
(100cc); Passion Pro (100 cc); Passion Xpro (110 cc)
>110cc and less than equal to 125cc (20% share in industry volumes) Market share 33.8% 26.8% 26.8% 2.6% Number of products 3 2 2 1 Products Super Splendor (125cc);
Glamour (125cc); Ignitor (125cc)
Discover 125 (125cc); Discover 125 ST (125cc);
CB Shine (125cc);CB Stunner (125cc)
Phoenix (125cc)
>125cc and less than equal to 150cc (11% share in industry volumes) Market share 13.9% 45.3% 20.0% 0.0% Number of products 4 3 3 - Products Impulse (150cc); Achiever
(150cc); Xtreme (150cc); Hunk (150cc)
Pulsar 135 LS (135cc);Pulsar 150 DTSi (150cc); Discover 150
Pulsar 135 LS (135cc); Pulsar 150 DTSi (150cc);
>150cc (5% volume in industry volumes) Market share 8.8% 40.4% 1.1% 25.1% Number of products 4 6 5 2 Products Karizma (225cc); Karizma
ZMR (225cc) Pulsar 180 DTSi (180cc);
Pulsar 220 DTSi (220cc);Pulsar 200 NS (200cc); 200 KTM Duke
Total number of products 18 14 12 7 Overall market share in motorcycles 53.3% 24.5% 11.6% 5.5%
Source: SIAM, Company, Ambit Capital research
b) Lower frequency of launches vs peers: TVSM’s new launches and upgrades to the existing products have not kept pace with that of its competitors (see the exhibit below). This also impacted TVSM’s market share.
Exhibit 14: Lower frequency of product launches/upgrades from TVSM as compared to its peers
Year Hero MotoCorp Bajaj Auto TVS Motor
CY2005 CD Deluxe; Super Splendor Discover, Avenger Victor Edge (125 cc); Apache (150 cc)
CY2006 Glamour; Achiever, CBZ Extreme Platina
CY2007 Splendor NXG, CD Deluxe, Passion Plus, Hunk
XCD 125, Pulsar 220, Pulsar 200 Star Sport; Star City (110cc); Apache 160 RTR
CY2008 Passion Pro, CBZ Xtreme, Glamour, Glamour FI
CY2012 Ignitor, Passion X-Pro KTM Duke 200, Kawasaki Ninja 650R, Pulsar 200 NS, Discover 125 ST
Phoenix 125cc
Total number of launches since CY05
20 22 12
Source: Company, Ambit Capital research
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Ambit Capital Pvt Ltd 10
c) Product-specific issues:
Exhibit 15: Primary data view on some of TVSM’s past product related issues
Brand/Model Reasons for failure
Victor
Victor was the first indigenously developed motorcycle by the company launched in August 2001 just before the termination of the JV with Suzuki. The brand was promoted through Sachin Tendulkar as the brand ambassador and through the ’More Smiles Per Hour‘ campaign. The model performed well initially, clocking a monthly average of 35-40k units before faltering significantly owing to product glitches. Furthermore, a lack of timely upgrades/refreshes to the model and issues surrounding product positioning (the original 110cc Victor was re-launched with a 125cc engine in 2004). TVSM’s inability to sustain Victor’s massive initial success and strong brand following still remains a mystery among many bike experts.
Flame
This 125cc bike had an inauspicious start. Just before the launch of the model, Bajaj Auto filed a petition against TVSM alleging that the motorcycle used a ‘twin-spark-plug’ technology patented by it. The Court restricted TVSM from selling the motorcycle. To avoid the revenue loss, the company decided to tweak the design and launch Flame in March 2008, with a single-spark-plug ignition system. The single-spark Flame never gained popularity. The company re-launched the model with a twin-spark ignition (after winning the case against Bajaj Auto in the Supreme Court) in November 2009. But by then, the damage to the brand had already been done.
Jive Jive was an experimental bike model with an ‘auto-clutch’ technology (though there was a precedent in the form of Hero Honda ‘Street’ launched in 1997 which had not performed well). However, the bike did not find takers because many riders were not enthusiastic about the clutch-free concept of Jive.
Source: Ambit Capital research, Press articles
We expect TVSM to gain market share going forward Whilst TVSM’s market share has been impacted in the past few years due to the factors mentioned above, we expect the company to gain market share, owing to the following factors:
a) New launches in the executive segment:
As discussed above, the lack of a meaningful presence in the executive segment hurt the company’s market share. However, the company has recently test launched an executive motorcycle, Phoenix 125 (a 125cc bike), priced at `53,000 ex-showroom Delhi. The initial response to the model has been good. Phoenix’s volumes have averaged close to 10,000 units/month for the past two months and the model has gained a market share of 2% in the executive segment. The management expects the monthly run rate to increase to 15,000 units by June 2013 and further to 20,000 units by the festival season. Our primary data sources suggest that unlike Flame (which was aggressive in styling) and Jive (which was an experimental product), the company has stuck to a conventional/safe approach whilst developing/designing Phoenix. Although it is too early to gauge any serious gaps, there has been no significant customer complaint/adverse feedback on the product so far. The company also plans to launch a new motorcycle in the executive category in FY14. Our discussions with industry participants indicate that ‘Victor’ continues to command a strong legacy, and the new executive segment motorcycle could be branded as ‘Victor’. This could further help the company to gain market share in the crucial executive segment. Our primary data sources point that nearly 50-55% pf the entry level motorcycle users look at the same brand while upgrading to the higher segment. Given TVSM’s meaningful presence in the entry level motorcycles (average monthly volumes of 30,000 units), strengthening of executive segment can help TVSM tap its entry level motorcycle users looking at upgrading to the higher segment.
Exhibit 16: Comparison of TVS Phoenix with competitor brands on key parameters
Source: Press articles, Bike magazines/websites, Ambit Capital research
Unlike Flame (which was aggressive in styling) and Jive (which was an experimental product), the company has stuck to its conventional/safe approach whilst developing/designing Phoenix.
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b) Market leader in a transition phase – an opportunity for TVSM: The market leader, Hero MotoCorp has a strong 53% market share in the domestic motorcycle space and the company is going through a transitional phase of developing its technological capability as well as re-branding. This provides an opportunity to incumbents like TVSM to increase market share in the domestic motorcycle space. Hero MotoCorp, through its Splendor and Passion brands, commands a market share of 62% in the key executive segment. The recent launch of Phoenix in the executive segment and a new launch in the executive segment planned in FY14 are likely to help TVSM gain market share in the executive segment.
c) More frequent refreshes/upgrades of existing products After the split with Suzuki Motorcycles in 2002, the company’s R&D bandwidth was constrained due to the need to develop indigenous technology (four-stroke engine and product platforms). As a result, the company could not bring in timely upgrades/refreshes to its existing product portfolio. However, the company has now developed a credible portfolio of platforms straddling the premium, executive and commuter segments (with Apache, Phoenix and Star City/Sport respectively) and hence it is easier for the company to make timely refreshes/upgrades now.
Whilst the competition in the domestic motorcycle space is likely to further intensify, we expect the above factors to help TVS in arresting the market share decline and in fact help in increasing it marginally over the next two years. We expect TVS Motors to gain a market share of 46bps over FY13-15E. This, together with our expectation of industry volume CAGR of 8.5% over FY13-15E, should enable TVS to clock a volume CAGR of 12.9% in the domestic motorcycle space over FY13-15E.
Domestic scooters
HMSI’s entry impacted TVSM’s market share: Traditionally, TVS has performed better in the domestic scooters space (vs motorcycle segment), clocking a volume growth of 15% over FY03-11. TVSM was also one of the early entrants in the domestic scooter space and one of the first to introduce scooters that were specifically targeted at the female population through its Scooty brand. The company enjoyed enormous success in the scooters space until the arrival of HMSI. The company lost its edge after HMSI’s strong thrust in the scooter space in FY04/05. However, TVSM continued to command a decent market share, averaging 23% over FY05-11. However, the company has lost market share of 680bps in the past two years. This was a result of several new entrants and launches in the domestic scooters space. Also, TVSM has only one scooter brand (‘Wego’) in the >90cc scooters space (which accounts for nearly 90% of the total domestic scooters market) as compared to peers that have 2-3 products in higher cc scooters. New launches to arrest market share decline: The company plans to launch a new scooter in the >90cc segment in FY14 to arrest the decline in market share. It is also looking at upgrades to its existing ‘Scooty’ model. We expect these launches to arrest the market share decline for TVSM in the scooters space and help it expand in line with the industry growth in the next two years. Note that similar to the domestic motorcycle space, the competition is also increasing in the scooters space, with significant capacity expansion by the leader HMSI, new launches by several players, and new entrants such as Yamaha. However, we believe that the upgrade of the existing Scooty brand, the launch of a new scooter in the higher cc segment, and TVSM’s strong brand name in the domestic scooters space should help it to retain its market share in the domestic scooters space.
Exhibit 18: Domestic scooter market share expectations for TVSM
FY12 FY13E FY14E FY15E
19.4% 14.7% 14.6% 14.5%
Source: Ambit Capital research, SIAM
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We expect TVSM to retain its market share in the domestic scooters owing to new launches/upgrades. We expect TVSM to lose a nominal 23bps over FY13-15E. This, together with our expectation of industry volume CAGR of 11% over FY13-15E should enable TVSM to clock a volume CAGR of 10.1% in the domestic scooters space over FY13-15E.
Three-wheelers Lack of presence in diesel 3W impacted volumes: The company entered into the three-wheeler passenger segment in 2008 with the launch of the 3W model, TVS King. TVS King is priced at a premium of 2-5% as compared to the competitor models from Bajaj Auto and Piaggio, because of its higher engine capacity and more features. The company garnered a market share of 5.3% in FY11. However, the company’s market share declined to 3.5% in FY12, due to:
a) Shift in the domestic demand towards diesel 3Ws (due to the significant
difference in petrol and diesel prices). TVSM lacked a diesel 3W in its portfolio and was thus impacted by this shift.
b) Slowdown in new 3W permit issues in the past 2-3 years, which impacted
TVSM more than other players because it has a higher share in purchases emanating from new permit issues rather than replacement of old 3Ws.
New diesel 3W to help volumes: Going forward, the company plans to launch a diesel 3W in the next 4-5 months. Further, the company is looking at increasing its penetration in the key states of Maharashtra and Gujarat.
We expect TVSM’s 3W export volumes to remain strong: In the export market, the company’s 3W volumes have seen an upturn, increasing 27% YoY in YTD FY13 as against a decline of 18% in industry export volumes. In fact, the company’s 3W exports, at an average of 2,700/units, have significantly surpassed its domestic run rate of 1,300 units per month. According to the company, there is strong demand and repeat orders for its 3Ws from Africa. Bajaj Auto exports nearly 22,000 units/ month of 3Ws, which indicates an enormous opportunity for 3W exports for TVSM. The company has indicated that it does not have significant 3W export exposure to Sri Lanka and hence it should be relatively insulated from the ongoing political tension between India and Sri Lanka.
The new diesel 3W and the export markets continuing to perform well would help TVSM to record a CAGR of 15% in 3W volumes over FY13-15E.
Exhibit 19: 3W volume expectations for TVSM Units in ‘000
FY12 FY13E FY14E FY15E
Domestic 14.2 15.7 18.9 23.4
Exports 25.6 32.2 36.1 40.4
Total 39.7 48.0 55.0 63.8
Source: Company, Ambit Capital research
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Improving product mix and margin going forward TVSM’s standalone margin has been significantly lower than that of its peers. TVSM’s margin for FY12 was at 6.6% as compared to 15.4% for Hero MotoCorp (before royalty to Honda Motors) and 20.2% for Bajaj Auto. Its EBITDA margin has also sharply declined over the years from 10.2% in FY03 to 6.6% in FY12.
Exhibit 20: Key reasons for TVSM’s lower margin vs peers - high selling expenses and employee costs as a percentage of sales
TVS Motor Bajaj Auto Hero MotoCorp Divergence between
TVSM and peer group average
Expense item as a % of revenues
FY11 FY12 FY11 FY12 FY11 FY12 FY11 FY12
Raw material costs 73.4% 73.8% 71.0% 71.2% 72.7% 73.3% 1.5% 1.6%
We believe TVSM’s margins have declined and the company has recorded lower margin vs its peers as well owing to the following reasons: a) TVSM’s 2W volumes are significantly lower (at 2.2mn in FY12) as compared to
Hero (6.2mn units) and Bajaj Auto (3.8mn units). As a result, TVSM’s selling and general administration expenses are significantly higher as compared to Hero MotoCorp and Bajaj Auto.
b) The company’s product mix is skewed in favour of the lower value/margin
products such as mopeds and low-end scooters. This has also adversely affected the company’s EBITDA margin.
Exhibit 21: Revenue skew towards mopeds and low-end scooters have impacted margins over the years % share in revenues
However going forward, we expect the sales mix to improve, because: a) Within the motorcycle segment, we expect the share of the entry-level
motorcycle to decline from 72% in FY13 to 56% by FY15 helped by the company plugging the product gaps in the key executive segment of the motorcycle segment. This is likely to improve the margins within the motorcycle segment.
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Ambit Capital Pvt Ltd 14
b) The revenue share from motorcycles, three-wheelers, and spare parts would
likely increase from 57% in FY13 to 59.4% by FY15. The company is well past its break-even level of 1,500 units/month in the 3W business (YTD FY13 average is 4,000units/month). Whilst the company has not disclosed the margins in its 3W business, it competitor Bajaj Auto has indicated that it earns nearly 30% margin in its 3W business. This leads us to believe that the 3W business is margin-accretive for TVS Motor.
As a result of the above factors, we expect the company’s EBITDA margin to improve from 6.0% in FY13 to 6.8% by FY15.
Exhibit 22: Revenue mix projections for TVSM % share in revenues FY12 FY13E FY14E FY15E
Motorcycle 41.4% 39.1% 40.3% 41.6%
Scooters 23.2% 20.8% 20.8% 20.7%
Mopeds 20.9% 22.2% 21.1% 19.9%
3Ws 4.6% 5.9% 6.1% 6.4%
Spare parts 9.9% 12.0% 11.7% 11.4%
Total net sales 100.0% 100.0% 100.0% 100.0%
EBITDA margin 6.6% 6.0% 6.6% 6.8%
Source: Company, Ambit Capital research
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Key risks and concerns for TVS Motor
Investments into TVS Indonesia TVSM ventured into the Indonesian 2W market in FY07 through its 100% subsidiary PT TVS Motor Company Indonesia (held indirectly through TVS Motor Company (Europe) B.V. and TVS Motor (Singapore) Pte. Limited) with a capacity of 300,000 units p.a. Unlike the Indian market, the Indonesian market was, at that time, dominated by ‘Bebeks’, which are motorcycles with a ‘step-through’ frame. TVSM launched the TVS Neo, a bebek exclusively developed for the Indonesian market in FY08. The company then launched new products (new bebeks namely 125cc TVS RockZ in FY10 and 150cc Tormax in FY12 and the introduction of its Indian Apache bike in the sports category in FY08). The subsidiary has increased the distributor network to 150 currently from 25 in FY08. However, the venture has been less than successful having accumulated losses of `4.3bn until end-FY12. The subsidiary continued to make EBITDA losses, with a loss of `0.5bn in FY12. Its volumes, at 2,000-2,500 units per annum, continue to be significantly lower as compared to the break-even level of 5,000 units per month. TVSM has so far infused equity of `4.7bn from FY07 to FY12 in the Indonesian venture (41% of the standalone net worth as at end-FY12).
Exhibit 23: PT TVS Indonesia snapshot and investments by TVSM standalone over the years
Investments by TVSM (` mn) 1,386 1,993 2,928 3,524 4,742
Inv. as % of standalone networth 17% 25% 34% 35% 41%
Source: Company, Ambit Capital research
We believe the Indonesian venture has been impacted by: a) Shift in the product mix in the Indonesian market: The popular Bebeks
category, which constituted close to 80% of the Indonesian 2W market five years back, has now declined to 40%, owing to strong growth from the scooters (skubeck) category. The scooters offer greater convenience and imagery over the Bebeks and hence they have emerged as a preferred choice amongst the Indonesian consumers. PT TVSM has three brands in the Bebek category and one brand in the Sports category and is still unrepresented in the Scooters category. This has impacted the company’s market share and volumes in the Indonesian 2W market.
b) Strong competition in the Indonesian market: Competition has intensified
in the Indonesian two-wheeler market in recent years. After leading the Indonesian two-wheeler market for nearly 30 years, Honda lagged Yamaha in market share for the first time during the initial few months of 2010. This led to Honda Motor Company turning aggressive, stepping up its production capacity and introducing new models. As a result, Honda was able to expand its market share to 53% in CY11 and further to 58% in CY12 (from 43% in early 2010). As of now, the Japanese players (Honda, Yamaha and Suzuki) together constitute 98% of the total Indonesian two-wheeler market. Given that nearly 90% of the Indonesian 2Ws are purchased through retail financing, these top players are helped by the backing of strong 2W financing companies
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Ambit Capital Pvt Ltd 16
such as PT Federal International Finance and PT WOM Finance in the Indonesian market. This has made the going tough for Indian players such as TVSM and Bajaj Auto that do not command the same degree of brand and financing advantages in the world’s third-largest two-wheeler market.
c) Weakening demand trends: The Indonesian 2W market has slowed down in
the past one year due to economic sluggishness (GDP growth of 6.2% in 2012 vs 6.5% in 2011), increase in fuel prices as well as enhancement in the down-payment requirement from 5% to 25% imposed by the Indonesian central bank wef 15 June 2012. This has impacted marginal players, like TVSM, more than its larger peers.
The company has not invested any equity into the Indonesian venture in FY13 so far and it expects to make a maximum investment of `4bn-5bn into the Indonesian venture. The limited investment into the Indonesian venture is guided by following factors:
a) The company plans to introduce a new scubek model in 1QFY14. The company
expects this to help increase its volume growth.
b) Indonesia may be used as an export hub by the company for catering to the ASEAN region.
The company expects the above factors to help its market share and volumes in the Indonesian 2W market. The company expects to achieve cash break-even in FY14. Whilst we have factored in `500mn of further capital infusion into the Indonesian venture over FY13-15, any significant delay in the turnaround of this venture may pose risks to our target price and stance.
Exhibit 24: Sensitivity analysis for investments in TVS Indonesia
(` mn) Base case scenario Worst case scenario
EBITDA loss over FY08-12 3,290 3,290
Further EBITDA loss 500 3,000
Equity infusion from TVSM 500 3,000
Target price 52 47
Upside/ downside to CMP 54 38
Source: Press articles, Bike magazines/websites, Ambit Capital research
Investment in other ventures In recent years, the company has invested in some unrelated businesses such as housing and energy. As at end-FY12, the company has invested `4.2 bn (36% of the standalone net worth) in these entities (ex-Indonesia). TVSM’s management has indicated that they will not make any significant investments in the housing and energy ventures going forward. The company has made investments in these ventures to leverage the TVS brand name. However, the company will continue to invest in TVS Motor Services Limited, which provides financing for TVS Motors’ products. Whilst we have factored in `2.4bn of further capital infusion into these entities over FY13-15, any significant capital infusion into these entities may pose risks to our target price and stance.
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Exhibit 25: TVSM’s likely investments outside of the standalone business (` mn)
TVSM’s stake as
at end-FY12 FY12 FY13E FY14E FY15E Remarks
Indonesian 2W venture
TVS Motor Co. (Europe) B.V. 1,265 TVS Motor (Sing.) Pte. Ltd. 2,012 PT.TVS Motor Co. Indonesia 1,465 Total
100%
4,742 4,742 5,242 5,242
See the preceding section for details.
Energy ventures
TVS Energy Ltd.
94.5% (balance held by
Sundaram Clayton)
768 768 1,118 1,468
The company is engaged in the business of manufacture and sale of wind energy. We expect a further investment of `700mn over FY13-15E.
Focus on low and affordable housing projects. Whilst TVS Housing is owned entirely by TVSM. We expect a further investment of `700mn over FY13-15.
Vehicle Financing ventures
TVS Motor Services Ltd 19.0%
(balance held by promoter entities)
2,464 2,710 3,210 3,460
The company is engaged in the business of financing TVSM two-wheelers (currently financing 25,000 units per annum). A small portion of the business is also from financing of used cars and tractors. TVSM intends to scale the financing of TVSM wheelers and thus its may resort to some equity infusion. The TVS Group intends to take the company public in a few years. We expect a further investment of `1,000mn over FY13-15E.
Auto component ventures
Sundaram Auto Comp. Ltd. 100% 609 609 609 609
Engaged in the business of supply of interior and exterior plastic parts and rubber products such as diaphragms, hoses and air cleaner ducts for automobiles. The company also distributes a small portion of TVSM vehicles to avail the sales tax benefits from the Tamil Nadu Government.
Total 8,983 9,229 10,929 11,879
As a percentage of standalone net worth 77% 72% 74% 70%
Source: Company, Ambit Capital research
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Key assumptions and estimates Exhibit 26: Key assumptions and estimates for TVSM (standalone)
(` mn) FY12 FY13E FY14E FY15E Remarks
Motorcycles (domestic + exports) volume growth
1% -11% 12% 13%
FY13 volumes impacted by the industry slowdown (flat volume growth) and market share loss of 70bps for TVSM. We expect domestic motorcycle industry volumes to increase by 7% YoY and TVSM to gain a market share of 30bps YoY in FY14 due to new launches. We expect industry growth at 10% and TVSM to gain market share of 20bps for FY15.
Scooters (domestic + exports) volume growth
13% -15% 9% 11%
FY13 scooter volumes impacted by market share loss of 470bps. We expect new launches/upgrades to existing products to arrest the market share loss in FY14 and FY15.
Mopeds (domestic + exports) volume growth
12% 1% 5% 5% We expect the moped segment's volumes to trail that of motorcycles and scooters due to consumer choices moving to motorcycles and scooters.
New launch in the 3W diesel segment to help market share gains and sustain double-digit volume growth in the 3W passenger segment.
Revenues (` mn) 71,262 70,183 79,013 89,700
YoY growth 13% -2% 13% 14%
Revenue growth to be helped by volume growth (see above) and increase in net realisation due to higher share of the executive segment and 3Ws in the product mix.
EBITDA (` mn) 4,694 4,194 5,242 6,136
EBITDA margin 6.6% 6.0% 6.6% 6.8%
EBITDA margin to improve in FY14 and FY15 due to the improved product mix (higher share of motorcycles and 3Ws).
EBITDA YoY growth 20% -11% 25% 17% We expect strong EBITDA growth in FY14 and FY15 on the back of strong revenue growth as well as improvement in EBITDA margin.
Adjusted PAT (` mn) 2,491 1,935 2,678 3,236
Adjusted PAT margin 3% 3% 3% 4%
Adjusted EPS (`) 5.24 4.07 5.64 6.81
Adjusted EPS YoY growth 28% -22% 38% 21%
We expect interest costs to moderate in FY14 and FY15 on the back of moderation in debt levels. This leads to net earnings and EPS increasing faster than EBITDA in FY14 and FY15.
Working capital days (ex cash) - closing
6 6 6 6
Working capital days (ex cash) - average
9 6 5 5 Working capital maintained at FY12 levels.
CFO (` mn) 4,409 3,696 4,285 4,773 CFO generation to remain strong on the back of increase in net earnings and stable working capital.
Capex (` mn) 1,768 1,500 1,500 1,500
We expect a modest level of capex in the standalone business given that the capacity utilisation is currently low at 67% in the 2W space and 53% in the 3W space. As a result, we have taken capex in line with the depreciation charge for FY13-15.
Investment in Indonesia 2W and other entities (made during the year)
2,815 250 1,700 950 We expect investments of `2.9bn over FY13-15 into the Indonesia subsidiary and other entities based on management guidance.
FCF (` mn) (post the above investments)
(175) 1,946 1,085 2,323 Despite investments outside of the standalone business, FCF to remain positive due to CFO generation.
Net debt (` mn) 8,117 6,978 7,027 5,887 Positive FCF to be used to bring down the net debt.
Source: Company, Ambit Capital research
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Exhibit 27: Ambit vs consensus (standalone)
(` mn) Ambit Consensus % div Reasons for divergence
Revenues
FY13E 70,183 71,343 -2%
FY14E 79,013 80,719 -2%
FY15E 89,700 88,448 1%
The recent industry volume trend across all 2W categories has been weaker than consensus expectations. We believe this has not been factored in the consensus volume growth assumption.
EBITDA
FY13E 4,194 4,257 -2%
FY14E 5,242 4,974 5%
FY15E 6,136 5,492 12%
We expect TVSM’s revenue mix to improve in FY14 on the back of higher share of motorcycle and 3Ws. This should help TVSM to improve its margin and record non-linear growth in EBITDA. We believe this aspect of margin gain is not adequately captured in the consensus estimates.
EPS (`)
FY13E 4.07 4.19 -3%
FY14E 5.64 5.16 9%
FY15E 6.81 6.11 11%
Financial leverage causes higher divergence at the net earnings level
Source: Bloomberg, Ambit Capital research
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Valuation and stance Our DCF model values the standalone entity at `54/share, implying 8.0x FY15 EPS, which is at a discount of 40% to Hero/Bajaj Auto’s multiples but higher than TVSM’s current one-year forward multiple of 6.6x, because we expect TVSM to regain market share in domestic motorcycles. We deduct the investments to be made into the Indonesia 2W subsidiary and other entities to arrive at a TP of `52/share (54% upside from CMP). An upturn in industry demand and market share gains in the motorcycles segment are key positive catalysts.
SOTP-based valuation Standalone business (` 54/share) Given our expectations of TVSM gaining market share in the motorcycle business (46bps over FY14E and FY15E) and 3W business (93bps over FY14E and FY15E), we expect TVSM to clock revenue CAGR of 13% over FY13-15E. We also expect EBITDA margin to improve by 87bps over FY14 and FY15 owing to the improvement in the product mix (higher share of revenues from motorcycles and three wheelers). As a result, we expect TVSM’s standalone return ratios to improve in the medium term. In the long term, we expect increasing competition to provide headwinds to further market share gains. As a result, we expect TVSM’s market share in the domestic motorcycle space to stabilise at 6.6% over the long term (which is an improvement from the level of FY13E but significantly lower than the market share of 19.5% commanded by the company in FY03). That said, we believe our long-term market share assumption of 6.6% takes into account both: (a) the opportunities available to TVSM from making up for key product gaps; and (b) the risks to the market share emanating from the ever-increasing competition in the domestic motorcycle space. We factor in a revenue growth of 4% and EBITDA margin of 6.4% in the terminal forecast year (FY24).
Using the FCF approach, we arrive at a one-year forward (April 2014) fair value of `54/share for the standalone business using a WACC of 14% (cost of equity: 14%) and terminal growth rate of 4%. The fair value so arrived at implies a multiple of 5.4x FY15 EBITDA and P/E multiple of 8.0x FY15 net earnings which is at a discount of 40% to the multiples commanded by Hero MotoCorp and Bajaj Auto. The discount to Hero MotoCorp and Bajaj Auto is justified on account of lower size, lower margins and return ratios. However, given the low capital-intensive nature of the business, we expect RoICs to remain healthy and trend above the WACC throughout the explicit forecast period (FY15-24).
Exhibit 28: TVSM’s medium-term projections
FY13E FY14E FY15E
Volume growth
(6.9%) 8.5% 9.6%
Revenue growth
-1.5% 12.6% 13.5%
Margin 6.0% 6.6% 6.8%
RoE 15.8% 19.4% 20.4%
Source: Company, Ambit Capital research
Exhibit 29: TVSM’s long-termprojections
FY13-15
FY15-24
Terminal
Vol. growth 9.1% 5.5% 4.0%
Rev. growth 13.1% 7.1% 4.0%
Avg. Margin 6.7% 6.7% 6.4%
RoE 19.9% 15.4% 11.4%
Source: Company, Ambit Capital research
Exhibit 30: TVSM v/s domestic peers
FY12 Hero Bajaj TVSM
2W volume (mn units)
6.2 3.8 2.2
Margin 11.8% 20.2% 6.6%
RoE 66% 57% 23%
Source: Company, Ambit Capital research
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Exhibit 31: FCF profile (standalone)
500
1,000
1,500
2,000
2,500
3,000FY
14E
FY15E
FY16E
FY17E
FY18E
FY19E
FY20E
FY21E
FY22E
FY23E
FY24E
10%
15%
20%
25%
30%
35%
40%
PVFF (LHS) (Rs mn) WACC (RHS) RoIC (
Source: Ambit Capital research
Exhibit 32: FCF assumptions (standalone)
PV of FCF for forecasting period (FY15- FY24E) (` mn) 19,612
Terminal value (` mn) 13,299
Enterprise value (` mn) 32,911
Less: net debt/ (cash) at 31st March 2014 (` mn) 7,027
Implied equity value (` mn) 25,884
Fully diluted equity shares (mn) 475.1
Implied equity value (`/share) 54
Source: Ambit Capital research
Accounting for future equity infusions into subsidiaries/other entities We expect TVSM to infuse further equity of `2.9bn over FY13-15E into its Indonesian 2W entity and other ventures such as vehicle financing, housing and energy. Given the weak financial health of these entities, we are not ascribing any value made by TVSM so far in these entities. In fact, we do not ascribe any value to the investments to be made in these entities going forward. As a result, we believe the investments of `2.9bn to be made by TVSM from FY13 to FY15E should be reduced from the FCF generated by the standalone entity. Whilst the investments made/to be made in FY13 and FY14 has been accounted for as debt in the standalone business valuation (debt taken for arriving at the standalone business valuation is as at 31 March 2014 and hence investments in these entities in FY14 is already accounted for in the debt figures), we reduce `950mn (`2/TVSM share) towards investment to be made in FY15. However, we are not reducing the net debt outstanding of `3,552mn at the subsidiaries, namely PT TVS Indonesia (net debt outstanding of `2,138mn as at end-FY12) and TVS Energy (net debt outstanding of `1,414mn as at end-FY12), because we believe the assets at these entities can take care of the debt outstanding.
Overall, we arrive at a sum-of-the-parts (SOTP) based valuation of `52/share, which implies 54% upside from the current levels. We initiate coverage on the stock with a BUY stance.
Exhibit 34: SOTP-based valuation for TVSM % share in revenues Methodology Equity value (` mn) Value/TVSM share
Standalone DCF 25,884 54
Investments in other entities (Indonesia, housing, energy and finance ventures)
Investments in FY15 considered as outflows and reduced from standalone business value 950 (-) 2
Total/Net 52
Source: Company, Ambit Capital research
We reduce the investments made/to be made by TVSM outside of the standalone business into Indonesia and other entities.
Exhibit 33: Indonesia andenergy ventures – debt andassets As at FY12-
end PT TVS
Indonesia TVS Energy
Net Debt o/s 2,138 1,414
Net fixed assets
1,430 1,465
Other assets 353 -
Total assets 1,783 1,465
Source: Company, Ambit Capital research
TVS Motor Company
Ambit Capital Pvt Ltd 22
Relative valuation a) TVSM standalone: On relative valuation, TVSM (standalone) trades at a
significant discount to its domestic as well as international peers on both P/E and EV/EBITDA multiples. Compared to its domestic peers, TVSM (standalone) trades at a discount of 50% to the peer group average on FY14 EV/EBITDA and P/E multiples. Whilst some part of the discount to these larger domestic peers appears warranted due to its lower size, lower margins and return ratios, we believe the discount of nearly 50% is too high given that consensus expectation of EBITDA and net earnings CAGR over FY13-15E is similar to the peer group average. The EV/EBITDA and P/E multiples implied by our fair valuation for the standalone business are 5.4x one-year forward EBITDA and 8.0x EPS, respectively, which implies a discount of around 40% to the peer group EV/EBITDA and P/E multiple. Compared to the international players too, TVSM (standalone) trades at a discount of 43% on FY14 EV/EBITDA and at a discount of 50% on FY14 P/E.
b) TVSM consolidated: On relative valuation, TVSM (consolidated) trades at a
significant discount to its domestic as well as international peers on both P/E and EV/EBITDA multiples. Compared to its domestic peers, TVSM (consolidated) trades at a discount of 46% to the peer group average on FY14 EV/EBITDA and P/E multiples even though consensus estimates for EBITDA and net earnings CAGR over FY13-15E are higher than that of the peer group average. Compared to the international players too, TVSM (consolidated) trades at a discount of 41% on FY14 EV/EBITDA and P/E.
Source: Bloomberg, Ambit Capital research. Note: The above numbers are based on Bloomberg consensus estimates.
TVS Motor Company
Ambit Capital Pvt Ltd 23
Cross-cycle valuation On a cross-cycle EV/EBITDA multiple comparison, TVSM (standalone) trades at a discount of 30% compared to its four- and six-year average EV/EBITDA multiple. On a cross-cycle P/E comparison, TVSM (standalone) trades at a discount of 40% to its four- and six-year averages. Given our expectation of market share gains (albeit marginal) in the domestic motorcycle and three-wheelers and consequent improvement in revenue growth, EBITDA margin and return ratios, we believe such a huge discount to the historical average is unjustified. The EV/EBITDA and P/E multiples implied by our fair valuation for the standalone business are 5.4x one-year forward EBITDA and 8.0x EPS, respectively, which though at a discount to the historical averages are higher than the multiples implied by the current stock price. We believe the market share gains coming from the new/recent launches and consequent positive impact on revenues and margin can result in a re-rating of the multiples to the levels implied by our valuation.
Exhibit 36: Cross-cycle EV/EBITDA band
4
9
14
19
24
29
Apr
-05
Apr
-06
Apr
-07
Apr
-08
Apr
-09
Apr
-10
Apr
-11
Apr
-12
P/E
EV/EBITDA 6 year average 4 year average
Source: Bloomberg, Ambit Capital research; Note: EV/EBITDA bands arrived at using Bloomberg consensus estimates for respective periods
Exhibit 37: Cross-cycle P/E band
4
9
14
19
24
29
Apr
-05
Apr
-06
Apr
-07
Apr
-08
Apr
-09
Apr
-10
Apr
-11
Apr
-12
P/E
P/E 6 year average 4 year average
Source: Bloomberg, Ambit Capital research Note: P/E bands arrived at using Bloomberg consensus estimates for respective periods
TVS Motor Company
Ambit Capital Pvt Ltd 24
Key catalysts Upturn in demand in the 2W industry: The 2W industry’s volume growth has significantly slowed down, with a 3% YoY increase in YTD FY13 and a decline of 3% YoY in February 2013. This has impacted the financial performance (9MFY13 net earnings declining 22% YoY) and consequently the share price performance (23% decline in the past three months). Whilst we expect the 2W industry growth in the near term to be subdued (2W companies are also likely to take production cuts in March and April to normalise the inventory levels), we continue to have a favourable view on the 2W volume growth over the longer term. We expect industry volumes to recover in 2HFY14. Any upturn in the industry demand owing to the improvement in the macro sentiment can be a significant catalyst to the financial performance as well as the share price of the company (note that in FY12, when the 2W industry volumes increased by 12% YoY, the company traded at an average P/E multiple of 9.0x vs the current one-year forward P/E multiple of 6.2x).
Market share gain in motorcycle segment: TVS regaining its market share on the back of product launches could be a significant catalyst to the financial performance as well as the share price of the company. We expect the company to gain market share in the domestic motorcycle space in 2HFY13, given that the volumes of Phoenix has been scaled up to 15-20k from the current levels of 10k/month and one more new motorcycle is being launched in the executive segment.
A potential tie-up with BMW Motorrad: Whilst the company has confirmed that it is in talks with BMW’s motorcycle division, BMW Motorrad, for a technology tie-up, no further details and timeline has been disclosed. Whilst we have not factored in any impact of the potential tie-up with BMW in our earnings estimates, we believe an association with BMW of any meaningful contour may have a significantly positive impact on TVSM’s earnings and share price.
TVS Motor Company
Ambit Capital Pvt Ltd 25
Balance sheet (standalone) Year to March (` mn) FY11 FY12 FY13E FY14E FY15E
Shareholders' equity 475 475 475 475 475
Reserves and surpluses 9,519 11,218 12,380 14,230 16,583
Total net worth 9,994 11,693 12,855 14,705 17,058
Debt 7,615 8,248 7,148 7,148 7,148
Deferred tax liability 957 976 1,007 1,007 1,007
Total liabilities 18,566 20,916 21,010 22,860 25,212
(over 12-month period from date of initial rating)
Buy >5%
Sell <5%
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