TVS Motors: Where do you go?

TVS Motors is the third largest company in the two-wheeler industry with a market share of 16%. Infact, it is the only Indian company without a foreign collaboration in the two-wheeler industry. When the company opted out of the collaboration with Suzuki in 2002, many believed that TVS was headed towards extinction. But the company proved the doomsayers wrong and came out with a very successful `TVS Victor'. However, since then growth has slowed. We take a look whether the company will weather this storm also or not.

Background
Originally incorporated in 1982 to manufacture two-wheelers in collaboration with Suzuki Motors of Japan, TVS was one of the leaders in two-wheeler industry. However, disagreement on several aspects including development of TVS brand and exports lead to severance of ties with the joint venture partner in 2002. This forced the company to develop its own R&D expertise and commit itself to sizeable investment. It has presence in all the segments viz. motorcycle, scooterettee and moped. TVS Scooty (scooterettee) and TVS Victor (Executive segment - motorcycle) are its key brands. The company has also launched 2 new fuel-efficient bikes - `Centra' and `Star'.

Performance vis-à-vis competitors
With rise in per capita income, lowering of interest rates, changes in consumer preference towards trendier two-wheelers, there was a conscious shift in the composition of two-wheeler industry led by increase in the demand of motorcycle as against scooters and moped. In FY04, out of the total two-wheeler industry of 5.6 m units, the share of motorcycles was 77%, as against 42% in FY99. During the period FY97 to FY04, while two-wheeler industry grew CAGR of 10%, the demand for motorcycle grew at 27% CAGR. However, TVS managed to achieve a CAGR of 11%. Thus while competitors were cashing on this boom, TVS' market share was declining due to lack of a 4 stroke model in its stable. This fall has been somewhat restricted with the introduction of `Victor' in 2003.

Financial performance
The company achieved a CAGR of 16.3% in sales and 12.6% in earnings (see table below). Though the results appear to be decent, when compared with the performance of peers, the company's performance is somewhat disappointing. During the same period, Hero Honda (HROH.BO, news) achieved a CAGR of 27% in revenues and 39% in profits. Further, despite substantial reduction in interest cost (CAGR of negative 20%), the net profit margin has fallen from 5.6% in FY00 to 4.9% in FY04.

	FY00	FY01	FY02	FY03	FY04
Units sold
Motor cycle	313,446	354,517	450,497	718,447	706,558
Scooterrette	122,947	142,458	144,135	152,472	189,238
Moped	364,598	366,471	271,683	248,190	251,065
Total	800,991	863,446	866,315	1,119,109	1,146,861
(Rs m)
Net sales	15,418	18,210	19,305	27,045	28,202
Operating profit	1,686	1,286	1,297	2,624	2,594
PAT	862	626	539	1,280	1,385
Operating profit margin	10.9%	7.1%	6.7%	9.7%	9.2%
Net profit margin	5.6%	3.4%	2.8%	4.7%	4.9%
Number of shares (m)	23.1	23.1	23.1	23.1	237.5
Face Value per share	10	10	10	10	1
EPS	37.3	27.1	23.3	55.4	5.8
Fully Diluted EPS	3.6	2.6	2.3	5.4	5.8

Fundamentals
As evident from the table below, the company has comparatively a weaker financial position. Not only returns are low, but also the assets are not optimally utilised. One of the reason for the same can be continuous thrust on R&D (post the severance of ties with Suzuki Motors), the fruits of which yet to be reaped, which is clearly evident from the fact that capex as a percentage of sales is rising.

	TVS	Hero Honda
	FY04**	FY04*
RONW	24.7%	64.0%
ROCE	17.3%	55.5%
D/E (x)	0.2	0.2
Interest coverage ratio (x)	179.9	527.2
Payout	22.6%	54.8%
BVPS	24	57
Sales per employee	6.4	14.2
Sales to NFA (x)	4.0	9.9
Capex to sales	11.6%	2.5%

Going forward
Going forward, the road for TVS appears to be bumpy. Automobile industry is the most competitive industry with competition on all fronts viz. pricing, innovations, supply chain, efficiency etc. The situation is further aggravated by rise in raw materials like steel, rubber, plastics etc, as the company is not able to increase the selling price in proportion, thereby affecting the net profit growth. This is evident from the fact that though in FY04 sales grew by 4%, operating profit fell by 1%. Though the raw material prices have cooled off from their peaks, we expect margins to remain under pressure in near future.

Riding on significant growth in the two-wheeler segment over the years, coupled with strong cash position and expectation of buoyant economy, two wheeler companies have been planning capacity expansions. Hero Honda has embarked on a green field expansion plan (initial investment of Rs 2.5 bn). Bajaj Auto (BJAT.BO, news) is expected to increase its capacity by 33% by June 2005. Similarly Honda Motors and Scooters (SCOO.BO, news) India Ltd, 100% subsidiary of Honda Motors Japan is expected to double its capacity in FY06. These developments are likely to create a significant increase in supply of two wheelers, changing the demand supply scenario and thus putting pressure on margins. As compared to TVS, its competitors are sitting with on a huge pile of cash. Hero Honda generated close to Rs 9 bn from operations, where as Bajaj Auto generated Rs 15 bn from operation in FY04, thereby are in a better position to execute expansion plans. TVS generated Rs 2 bn from operations in FY04.

National Council for Applied and Economic Research (NCAER), in its report has projected that the demand for motorcycles will be almost 10 times of that of the scooters by 2011-12. TVS, traditionally is considered to be a regional player with a strong hold in Southern region. As per NCAER report, major demand for Scooters is expected to come from northern region, which will account for 50% of the total demand. Similarly the major demand for motorcycle is expected to be from Western region, which will account for 40% of the total demand. Thus it will require considerable effort on part of the management to significantly improve their presence in these regions. This may have an adverse impact on profits due to additional expenditure on account of advertising and publicity.

What to expect?
The performance of the company will be largely volume based, dependent on its ability to garner increasing share in motorcycle market and exports to South East Asian countries. At Rs 69, it is trading at price to earnings ratio of 11.3 times and price to cash flow of 10x our FY07 estimates, which appears to be expensive in comparison to its peers in light of its erratic past performance, especially in motorcycle segment. However, if the company continues to bring out new models continuously and is able to expand its non-south horizons, things could look different. But till then, based on current scenario we prefer Bajaj Auto in this segment.

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