TVS Motor Company

August 5, 2016
COMPANY
COMPANY
TVS Motor Company
REPORT
OUTLOOK
Summary
Nifty: 8,683; Sensex: 28,078
CMP
Rs303
Target Price
Rs244
Potential Upside/Downside
(19)%
Key Stock Data
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
Price Performance
52-week high/low
Rs341/201
-1m
-3m
-12m
(1)
3
29
Rel to Sensex (%) (4)
(9)
30
Absolute (%)
SELL
Modest fundamentals; Luxurious valuations
Shareholding Pattern (%)
Promoters
57.4
FIIs/NRIs/OCBs/GDR
15.5
MFs/Banks/FIs
14.5
Non Promoter Corporate
Public & Others
1.5
11.1
Relative to Sensex
150
140
130
120
110
100
90
80
70
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.
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Dec-15
Jan-16
Feb-16
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Table: Financial snapshot
TVSL
Source: Capitaline
Sensex
(Rsmn)
Year
Revenue
EBITDA
EBITDA (%)
Adj. PAT
EPS (Rs)
RoE (%)
RoCE (%)
100,423
6,066
6.0
3,478
7.3
P/E
(x)
39.5
EV/EBITDA (x)
FY15
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
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
30%
25%
25%
20%
20%
15%
10%
15%
5%
10%
0%
5%
-5%
0%
FY00 FY02 FY04 FY06 FY08 FY10 FY12 FY14 FY16
TVS Scooter Market Share
TVS Motorcycle Market Share
Source: Company; IDBI Capital Research
2
Fig.: 3 wheeler share gains (mainly exports) Fig.:a:significant boost to realizations & margins
FY01 FY03 FY05 FY07 FY09 FY11 FY13 FY15
TVS Domestic 2W Market Share
TVS Total 3W Market Share
Source: Company; IDBI Capital Research
Company Outlook – TVS Motor Company
Fig.: TVS Product mix: Scooterization benefiting TVS
Fig.: Quarterly growth- Domestic growth
Fig.:powering up, offsetting weakness in exports
50.0
100%
40.0
30.0
20.0
60%
10.0
40%
0.0
20%
-10.0
EBITDA Margins
80%
-20.0
0%
Mar/13Sep/13Mar/14Sep/14Mar/15Sep/15Mar/16
Dec/12 Jun/13 Dec/13 Jun/14 Dec/14 Jun/15 Dec/15 Jun/16
Motorcycle
Scooter
Moped
Domestic (% YoY, RHS)
Exports (% YoY, RHS)
3-Wh
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
48000
47000
Japan
Japan
43000
42000
37000
33000
28000
23000
18000
Brazil
13000
China
8000
3000
-2000
-20
Indonesia
India
80
180
280
2W Vehicles/Thousand People
Source: World Bank, SIAM; IDBI Capital Research
Vietnam
380
GDP Per Capita in 2010 $ prices
GDP Per Capita in 2010 $ prices
38000
32000
South Korea
27000
22000
17000
Brazil
12000
7000
China
Russia
Indonesia
India
2000
-3000
0
50 100 150 200 250 300 350 400 450 500 550 600
PV Vehicles/Thousand People
Source: World Bank, SIAM; IDBI Capital Research
3
Company Outlook – TVS Motor Company
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
25%
160
Million Vehicles)
140
120
100
80
60
40
20
Vehicle Penetration (%)
180
20%
15%
10%
5%
0
March/01
March/06
Number of 4W Registered
March/11
0%
March/16
1996
Number of 2W Registered
Source: World Bank, SIAM; IDBI Capital Research
2001
2006
2W Penetration rate
2011
2016
PV Penetration rate
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
20%
13%
15%
9%
10%
5%
Source: Company, SIAM; IDBI Capital Research
4
40%
7%
30%
5%
20%
FY16
FY14
FY12
0%
FY10
10%
-1%
FY08
1%
0%
FY06
3%
FY04
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
EBITDA margin (%) (LHS)
Exports Share of Volumes (RHS)
50%
9%
5%
1%
-1%
60%
11%
FY02
3%
70%
13%
FY00
7%
15%
FY98
11%
EBITDA Margins
EBITDA Margins
15%
Figure: Margins flat, as lower share of
motorcyclesFigure:partially restricting margins
EBITDA margin (%) (LHS)
Motorcycle Share of Volumes (RHS)
Source: Company, SIAM; IDBI Capital Research
Company Outlook – TVS Motor Company

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
3.5%
Fig.: TVS hasn’t benefited from recent
Figucommodity decline as compared to peers
35
3.0%
Gross Margins (%)
33
2.5%
31
2.0%
1.5%
29
1.0%
27
0.5%
25
0.0%
FY03
FY05
FY07
FY09
Bajaj
FY11
Hero
FY13
FY13
Bajaj
TVS
Source: Company; IDBI Capital Research
FY14
FY15
Hero
FY16
TVS
Source: Company; IDBI Capital Research
Figure: Employee Costs significantly higher
7.0%
FY12
FY15
Figure: TVS ASP spends at high levels
11%
Employee Costs
6.0%
Ad/Marketing Share of Sales
9%
5.0%
7%
4.0%
3.0%
5%
2.0%
3%
1.0%
0.0%
1%
FY03
FY05
FY07
FY09
Bajaj
Source: Company; IDBI Capital Research
Hero
FY11
FY13
TVS
FY15
FY03
FY06
Bajaj
FY09
Hero
FY12
FY15
TVS
Source: Company; IDBI Capital Research
5
Company Outlook – TVS Motor Company
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 2W manufacturers, making it difficult for Indian players.
Fig.: Honda the primary gainer in overall Motorcycle
Fig.:market share since 2011
50%
Fig.: Honda dominance in Scooters unchanged;
Fig.:TVS recent gains more of a ‘recovery’ of share
80%
60%
30%
40%
10%
20%
Mar/11
-10%
Mar/12
Mar/13
Mar/14
Mar/15
Mar/16
0%
Mar/07
TVS Motorcycle MS
Hero Motorcycle MS
Bajaj Motorcycle MS
Honda Motorcycle MS
Source: Company, SIAM; IDBI Capital Research, Data includes exports
Fig.: Export weakness leading to share loss
Fig.:despitegrowth
Mar/09
Mar/11
Mar/13
Mar/15
TVS Scooter Market Share
Others Scooter MS
Hero Scooter MS
Honda Scooter MS
Source: Company, SIAM; IDBI Capital Research, Data includes exports
Fig.: Lower exports and 3W share recently
Fig.:impacting margins
20%
45,000
15%
20%
15%
40,000
10%
(Rs)
10%
5%
5%
30,000
0%
Jun/13 Dec/13 Jun/14 Dec/14 Jun/15 Dec/15 Jun/16
Total Motorcycle Market Share
TVS Total 3W Market Share
Total Scooter Market Share
Source: Company, SIAM; IDBI Capital Research, Data includes exports
6
35,000
0%
Mar/13 Dec/13 Sep/14 Jun/15 Mar/16
Realisation / Vehicle (LHS)
Share of Exports (RHS)
Share of 3 W sales (RHS)
Source: Company; IDBI Capital Research
Company Outlook – TVS Motor Company
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
80
Fig.: TVS profitability far weaker than peers during a
Fig.:downturn due to low margins
18
RoEs (%) (3 Year Rolling AVG
Adj. PAT margins (%)
16
14
60
12
10
40
8
6
20
4
2
0
0
FY03
FY05
FY07
FY09
Bajaj
FY11
FY13
Hero
FY15
FY03
FY05
TVS
FY07
FY09
Bajaj
Source: Company; IDBI Capital Research, Figures use Adjusted PAT
FY11
FY13
Hero
FY15
TVS
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
Motorcycles - Exports
Total Motorcycle Share
Scooters - Domestic
Scooters - Exports
Total Scooter Share
Mopeds - Domestic
Mopeds - Exports
Total Moped Share
27
9
37
21
1
22
39
0
39
28
11
38
22
1
23
35
0
35
26
12
38
27
1
28
29
0
30
26
12
38
29
1
30
27
0
28
27
11
38
30
2
32
27
1
27
27
11
38
31
2
33
26
1
26
Total 2W Share
3-W - Domestic
3-W - Exports
Total 3W
98
1
2
2
96
1
3
4
96
1
4
4
96
1
4
4
97
1
3
3
97
1
3
3
Source: Company; IDBI Capital Research
7
Company Outlook – TVS Motor Company
Fig.: We expect margins of 8+% by FY18 (Ex-BMW)
Fre:to be unlikely
160
10
140
120
100
5.8
6.0
6.0
6.7
7.2
7.8
35
30
8
25
6
4
60
(%)
80
34
38
40
42
43
44
50
40
20
30
15
20
10
40
20
Fig.: FY16-18E Volume Growth estimated at
Figur10.5%, realizations held back at 2.6% due to mix
2
70
79
100
112
127
144
-
0
FY13
FY14
FY15
Net Sales (LHS)
Source: Company; IDBI Capital Research
FY16
5
10
20.3
20.8
25.2
26.8
29.7
32.7
FY13
FY14
FY15
FY16
FY17E
FY18E
0
FY17E FY18E
0
Volumes (Mn Units)
EBITDA Margin (RHS)
Realizations (RHS) (INR '000)
Source: Company; IDBI Capital Research
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.
8
Company Outlook – TVS Motor Company
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)
7.8
8.3
(51)bps
13.0
16.3
(21)
EBITDAMargin (%)
EPS (Rs)
Source: BloombergConsensus; IDBI Capital Research
9
Company Outlook – TVS Motor Company
Relative Valuation
Table: OEM Comparison on fundamentals
Growth(%)
OPM(%)
OPM(%)
RoE (%)
RoE(%)
FY16-18E
13.3
FY16
6.7
FY18E
7.8
FY16
24.1
FY18E
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
Company
TVS Motor
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
45
EICHER
HERO
RoEs FY18E (%)
40
35
BAJAJ
30
TVS
MARUTI
25
Ashok Leyland
20
TATA
M&M
15
10
5
Source: Bloomberg Consensus; IDBI Capital Research
10
10
15
OPM (%) FY18E
20
Company Outlook – TVS Motor Company
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
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
TVS Motor
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
32
P/E FY18E (%)
27
EICHER
MARUTI
22
M&M
BAJAJ
17
TVS
HERO
Ashok Leyland
12
TATA
7
6
8
10
12
14
EV/EBIT (%) FY18E
16
18
20
Source: Bloomberg consensus; IDBI Capital Research, Size of sphere signifies EV/EBITDA (FY18E)
11
Company Outlook – TVS Motor Company
Q1FY17 – Export volatility dents expectations
Table: Quarterly Snapshot
Q1FY17
Q1FY16
% YoY
Q4FY16
7,17,938
40,128
Total revenues
Raw material
% QoQ
6,38,115
12.5
6,60,569
8.7
40,339
(0.5)
42,620
(5.8)
28,809
25,741
11.9
28,154
2.3
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
2,004
1,728
16.0
1,785
12.2
362
210
72.2
243
49.2
Volume analysis (nos.)
Total sales
Realizations
Financial analysis (Rsmn)
EBITDA
Other income
Interest
Depreciation
PBT
98
130
(24.9)
131
(25.1)
660
504
30.9
518
27.4
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
21.2
1,178
E/o item
-
-
1,213
1,001
72.6
73.0
(47)
70.2
232
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
Reported PAT
As a % net sales
Raw material
Staff costs
YoYVar (bps)
3.0
QoQVar (bps)
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
Effective tax rate
Adj. PAT
5.6
5.1
52
4.9
68
24.6
23.2
138
14.7
994
4.2
3.9
32
4.2
3
Source: Company; IDBI Capital Research
 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.
12
Company Outlook – TVS Motor Company
Financial summary
 Profit & Loss Account
(Rsmn)
Year-end: March
Net sales
EBITDA
FY15
FY16
FY17E
FY18E
Year-end: March
FY15
FY16
FY17E
FY18E
112,439
126,905
144,379
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)
26.1
12.0
12.9
13.8
(94,357)
(104,931)
(117,775)
(133,167)
6,066
7,507
9,130
11,212
Growth (%)
Depreciation
EBIT
26.0
23.8
21.6
22.8
(1,533)
(1,898)
(2,648)
(2,998)
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
(1,083)
(1,338)
(1,806)
(2,401)
23.7
23.6
27.0
28.0
Net profit
3,478
4,321
4,884
6,175
Adjusted net profit
Tax
Effective tax rate (%)
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)
Year-end: March
Net fixed assets
Chg in working capital
-
-
-
-
49
699
(208)
(363)
1,373
9,557
5,787
8,993
Capital expenditure
(3,907)
(3,197)
(4,500)
(4,000)
Chg in investments
-
-
-
-
Other operating activities
CF from operations (a)
Other investing activities
303
513
633
753
(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)
CF from investing (b)
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
Year-end: March
Adj EPS (Rs)
FY15
FY16
FY17E
FY18E
7.3
9.1
10.3
13.0
FY15
FY16
FY17E
FY18E
Adj EPS growth (%)
32.0
24.2
13.0
26.4
14,190
16,238
18,090
19,091
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
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
Investments
Other non-curr assets
Current assets
(Rsmn)
100,423
Growth (%)
Operating expenses
 Cash Flow Statement
6,686
6,686
6,686
6,686
-
-
-
-
25,170
26,701
31,537
36,684
Turnover & Leverage ratios (x)
Inventories
8,197
8,260
9,735
11,140
Sundry Debtors
5,039
5,787
7,001
7,908
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
Working Capital & Liquidity ratios
Total assets
46,047
49,626
56,313
62,462
Inventory days
30
27
28
28
Receivable days
18
19
20
20
Shareholders' funds
16,454
19,368
22,681
27,022
Payable days
57
54
59
59
Cash and Bank
Share capital
475
475
475
475
15,979
18,893
22,206
26,547
Total Debt
9,187
7,585
7,585
6,085
Year-end: March
FY15
FY16
FY17E
FY18E
Secured loans
2,979
4,942
4,942
3,942
PER (x)
39.5
31.8
26.2
20.7
Unsecured loans
6,208
2,642
2,642
2,142
Price/Book value (x)
8.3
7.1
5.6
4.7
Other liabilities
10,715
9,341
9,341
7,841
PCE (x)
27.4
22.1
17.0
13.9
Current liabilities
18,878
20,916
24,290
27,598
EV/Net sales (x)
Total liabilities
29,593
30,258
33,631
35,439
EV/EBITDA (x)
Total equity & liabilities
46,046
49,626
56,313
62,462
Dividend Yield (%)
35
41
48
57
Reserves & surplus
Book Value (Rs)
 Valuations
1.4
1.2
1.0
0.9
23.6
18.6
14.2
11.3
0.6
0.8
0.9
1.1
Source: Company; IDBI Capital Research
13
Company Outlook – TVS Motor Company
Notes
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14
Company Outlook – TVS Motor Company
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15