tvs motor -...

Jinesh Gandhi ([email protected]); +91 22 3982 5416

Chirag Jain ([email protected]); +91 22 3982 5418

18 March 2014

Update | Sector: Automobiles

TVS Motor CMP: INR87 TP: INR120 Buy

Signs of recovery in 2Ws; Share of Scooters rising TVSL gaining share in Scooters; South recovery augurs well

Our analysis of the state-wise and product segment-wise two-wheeler (2W) sales for the last four years up to 3QFY14 indicates initial signs of demand recovery. October-February sales grew 9.1% against 3.5%/3.2% in 1HFY14/FY13. The weak performing South region too has stabilized, registering 2.9% growth in 3QFY14 against 10.3% decline in 1HFY14.

Scooter volumes grew 18%, outpacing Motorcycle volume growth across regions. The share of Scooters has increased from 21.3% in FY13 to 23.7% in 9MFY14. Post the launch of Jupiter in September 2013, TVSL’s market share in Scooters has increased.

In non-South markets, growth in Moped volumes has remained strong at 18%. In Uttar Pradesh, the largest non-South market for Mopeds, volumes grew 20%. TVSL is the only company currently operating in the Mopeds segment in India.

Recovery in South markets augurs well for TVSL, which derives 56% of its volumes from this region. Over the next 12-18 months, TVSL plans to launch multiple products across segments to reinforce its product portfolio. We expect EPS to grow at a CAGR of 34% over FY14-16. Maintain Buy, with a target price of INR120 (12x FY16E EPS).

Initial signs of recovery in 2Ws; North and East driving growth Initial signs of demand recovery are evident in the domestic two-wheeler

(2W) industry. October-February sales have grown 9.1% v/s 3.5%/3.2% in 1HFY14/FY13.

The North (13.2% growth) and East (17.1% growth) have been the key growth drivers during the period.

The South has been the weakest performer, with volume decline of 6.5%, largely due to 19.4% decline in the largest market, Tamil Nadu.

However, signs of recovery are visible in the South as well, with marginal growth of 2.9% in 3QFY14 (v/s 10.3% decline in 1HFY14)

Scooters outperform across regions; Jupiter helps TVSL gain share Scooter volumes grew 18%, outpacing Motorcycle growth across regions.

The share of Scooters has risen from 21.3% in FY13 to 23.7% in 9MFY14. Post the launch of Jupiter in September 2013 in the non-South markets,

TVSL has witnessed healthy improvement in its market share in Scooters. Mopeds register 18% growth in non-South markets Moped volumes declined 10.6% in 9MFY14 due to 31% decline in the

largest market, Tamil Nadu, which contributes 47% of volumes. In non-South markets, growth in Moped volumes has remained strong at

18%. In Uttar Pradesh, the largest non-South market for Mopeds, volumes grew 20%.

BSE Sensex S&P CNX 21,810 6,504

Stock Info Bloomberg TVSL IN

Equity Shares (m) 475.1

52-Week Range (INR) 90/28

1, 6, 12 Rel. Per (%) -2/159/123

M.Cap. (INR b) 41.0

M.Cap. (USD b) 0.7

Financial Snapshot (INR Million) Y/E March 2014E 2015E 2016E Net Sales 80,007 96,330 110,661

EBITDA 4,720 6,117 7,436

Adj PAT 2,861 3,765 4,741

EPS (INR) 5.5 7.9 10.0

Growth (%) 45.5 42.9 25.9

BV/Sh (INR) 30.0 35.6 42.7

RoE (%) 19.9 24.1 25.5

RoCE (%) 20.1 25.4 28.0

P/E (x) 15.6 10.9 8.7

P/BV (x) 2.9 2.4 2.0

Shareholding pattern (%)

As on Dec-13 Sep-13 Dec-12

Promoter 57.4 57.4 57.4

Dom. Inst 17.7 18.3 18.1

Foreign 3.7 2.9 2.3

Others 21.2 21.4 22.2

Stock Performance (1-year)

Investors are advised to refer through disclosures made at the end of the Research Report.

TVS Motor

18 March 2014 2

TVSL is the only company currently operating in the Mopeds. TVSL gaining share in Scooters, South recovery augurs well; Buy Post Jupiter launch, TVSL’s market share in Scooters has increased in non-

South markets. Launch in the South market in 4QFY14 would further boost TVSL’s share.

Recovery in South markets augurs well for TVSL, given its high dependence on this region (South India, which contributed 31% of industry volumes in FY13, accounted for 56% of TVSL’s volumes).

Over the next 12-18 months, TVSL plans to launch multiple products across segments to reinforce and fill gaps in its product portfolio.

We expect EPS to grow at a CAGR of 34% and FCF to grow at a CAGR of 25% over FY14-16, with RoE improving from 19.9% to 25.5%.

Sustained strength of the Scooter industry and TVSL’s market share gains, coupled with initial signs of recovery in the South, increase our confidence in TVSL’s ability to deliver strong volume-led earnings growth. We now value TVSL at 12x (v/s 10x earlier) FY16E EPS of INR10.

Maintain Buy, with a target price of INR120.

TVS Motor

18 March 2014 3

Initial signs of recovery in 2Ws North and East driving growth, South stabilizing

Initial signs of demand recovery are evident in the domestic two-wheeler (2W) industry. October-February sales have grown 9.1% v/s 3.5%/3.2% in 1HFY14/FY13.

The North (13.2% growth) and East (17.1% growth) have been the key growth drivers during the period.

The South has been the weakest performer, with volume decline of 6.5%, largely due to 19.4% decline in the largest market, Tamil Nadu.

However, signs of recovery are visible in the South as well, with marginal growth of 2.9% in 3QFY14 (v/s 10.3% decline in 1HFY14).

North and East driving two-wheeler industry growth Two-wheeler (2W) industry growth has improved from 3.2% in FY13 to 5.8% in

9MFY14, driven by strong growth in the North and the East. 2W volumes grew 13% in the North and 17% in the East during 9MFY14. Growth in the West also improved from 1.1% in FY13 to 7.6% in 9MFY14. The South has been the weakest performer, with volume decline of 6.5%, largely

due to 19.4% decline in the largest market, Tamil Nadu.

Domestic 2W industry recovering over past two quarters

12.4

3.2

7.1

(1.9)

13.8

8.9 9.7

FY12 FY13 1QFY14 2QFY14 3QFY14 Jan-14 Feb-14

Domestic YoY (%)

Source: Company, MOSL

North and East registers growth, while South declines (%)

10.1

(1.2)

14.0 18.6

12.4

2.4

9.8

1.1 3.3 3.2

13.2 17.1

7.6

(6.5)

5.8

North East West South Total

FY12 FY13 9MFY14

Source: Company, Industry, MOSL

Tamil Nadu drags South performance, but recovery signs visible Consumer sentiment in the South, particularly Tamil Nadu, has been weak over

the last couple of years due to drought and major power shortage, which impacted industrial activity.

However, with improved power availability and relatively better monsoon in FY14, there are signs of recovery in Tamil Nadu – 2W volumes declined 9.3% in 3Q after 30% decline in 2Q and 18% decline in 1Q.

In Karnataka and Andhra Pradesh, 2W volumes grew 21% and 12.9%, respectively in 3QFY14.

TVS Motor

18 March 2014 4

Within the South, Tamil Nadu has been the worst hit (%)

(1.3)

5.8

23.7

(0.3)

3.3 1.6 7.5

(8.5)(19.4)

(6.5)

Andhra Pradesh

Karnataka Kerala Tamil Nadu South Zone

FY13 9MFY14


Signs of recovery visible in 3QFY14 in the South, as well (%)

(9.9)

3.4 12.9

(5.4)

7.6

21.0

(18.0)(30.0)

(9.3)(10.8) (10.9)

2.9

1QFY14 2QFY14 3QFY14

Andhra Pradesh Karnataka Kerala

Tamil Nadu South Zone


TVS Motor

18 March 2014 5

Scooters outperform; Jupiter helps TVSL gain share Mopeds register healthy growth in non-South markets

Motorcycle volumes grew 3.5% in 9MFY14, driven by 9.6% growth in the North and

13.1% growth in the East, though the South saw 9.7% decline.

Scooter volumes grew 18%, outpacing Motorcycle volume growth across regions. The

share of Scooters has increased from 21.3% in FY13 to 23.7% in 9MFY14. Post the

launch of Jupiter in September 2013 in the non-South markets, TVSL has witnessed

healthy improvement in its market share in Scooters.

Moped volumes declined 10.6% in 9MFY14 due to 31% decline in the largest market,

Tamil Nadu, which contributes 47% of volumes. However, in non-South markets,

growth has remained strong at 18%. In Uttar Pradesh, the largest non-South market

for Mopeds, volumes grew 20%.

Motorcycle grew 3.5% in 9MFY14, led by North and East (%)

8.3

(3.9)

13.1 16.7

10.1

(0.3)

6.5

(0.5) (1.8)

0.2

9.6 13.1

4.8

(9.7)

3.5


FY12 FY13 9MFY14


South also witnessed positive growth in 3QFY14 (%)

4.8 7.3

(2.0)(17.8)

(2.9)

13.0

23.8

11.2

(13.5)

6.4 12.0 9.1

5.2 3.9 7.1


1QFY14 2QFY14 3QFY14


Scooters outperform across regions; share at 23.7% v/s 12% in FY07 Scooter volumes grew 18%, outpacing Motorcycle volume growth across

regions. The share of Scooters has increased from 21.3% in FY13 (12% in FY07) to 23.7% in 9MFY14.

Changing customer preferences are driving value migration from motorcycles to scooters in India.

Scooters outperform motorcycles across regions (9MFY14, %)

29.4 37.8

16.4 9.2 9.6 13.1

4.8

(9.7)

North East West South

Scooters Motorcycle


Share of scooters rises further (%)

14 10

21 19 16

12

22 21 17

14

23 25

20 17

25 29


FY11 FY12 FY13 9MFY14


TVS Motor

18 March 2014 6

Mopeds register 18% growth in non-South market Moped volumes declined 10.6% in 9MFY14 due to 31% decline in the largest

market, Tamil Nadu, which contributes 47% of volumes. In non-South markets, growth in Moped volumes has remained strong at 18%.

In Uttar Pradesh, the largest non-South market for Mopeds, volumes grew 20%.

Mopeds register growth across non-South markets (%)

10.5

(2.3)

6.7 13.5 11.6

17.1

31.7

12.4

(21.7)(10.6)

North East West South PAN India

FY11 FY12 FY13 9MFY14 (YoY)


Overall volumes down due to high South exposure

(31)

8

18

Tamil Nadu Excl. Tamil Nadu Excl. South

Moped growth 9MFY14 (%)


UP is the largest non-South market for Mopeds, with

9% share. In 9MFY14, Moped volumes grew

20% in UP.

TVS Motor

18 March 2014 7

TVSL gaining share in Scooters South recovery augurs well; Buy

Post the launch of its 110cc Scooter, Jupiter, TVSL’s market share in Scooters has increased in non-South markets. Launch in the South market in 4QFY14 would further boost its share.

Recovery in South markets augurs well for TVSL, given its high dependence on this region (South India, which contributed 31% of industry volumes in FY13, accounted for 56% of TVSL’s volumes).

TVSL is well positioned to benefit from the scooterization wave in India. Over the next 12-18 months, it plans to launch multiple products across segments to reinforce and fill gaps in its product portfolio.

We expect EPS to grow at a CAGR of 34% and FCF to grow at a CAGR of 25% over FY14-16, with RoE improving from 19.9% to 25.5%. Maintain Buy.

Jupiter helps TVSL gain share; new Scooty to further strengthen position With Jupiter launch, TVSL has the complete range of scooters, with products in

every sub-segment (women, unisex, men). Demand for Jupiter remains strong, with a waiting period across major markets.

Post the launch of its 110cc Scooter, Jupiter, TVSL’s market share in Scooters has increased in non-South markets. Launch in the South market in 4QFY14 would further boost its share.

Upcoming launch of Scooty Zest in April 2014 (110cc engine, currently offering 90cc variant) will further strengthen TVSL’s positioning in the women's Scooter space.

We expect TVSL’s Scooter volumes to register a CAGR of 19.5% over FY14-16, driven by product actions, capacity ramp-up and robust Scooter industry growth.

Post Jupiter launch, TVSL gains share in non-South market (%)

10.6

22.2 19.2

31.0

6.4 10.0 9.0 21.0

8.7 13.8

10.8 16.3


FY11 FY12 FY13 1HFY14 3QFY14


TVSL gains share in Motorcycles, driven by gains in North (%)

5.7 6.0 5.7

10.4

7.0

5.1 5.0 5.3 6.7

5.56

5.9 5.3 5.1 6.3 5.63


FY11 FY12 FY13 9MFY14


Recovery signs visible in South; TVSL could benefit disproportionately Performance of the 2W industry has been the weakest in the South market,

which saw 6.5% volume decline in 9MFY14, largely due to 19.4% decline in Tamil Nadu.

However, signs of recovery are visible in the South as well, with marginal growth of 2.9% in 3QFY14 (v/s decline of 10.3% in 1HFY14).

TVS Motor

18 March 2014 8

South India, which contributed 31% of industry volumes in FY13, accounted for 56% of TVSL’s volumes.

New launches, recovery in the South and robust 19.5% CAGR in Scooter volumes should drive 13.3% CAGR in TVSL’s overall volumes over FY14-16.

South recovery could benefit TVSL disproportionately…

13 22 9

13 22

34

56 31

TVS Motor Industry

FY13 volume share (%)



…particularly in Mopeds and Scooters

67

30

58 53

Mopeds Motorcycles Scooters Total

TVS South FY13 vol. exposure (%)


Reinforcing strong product pipeline, filling gaps in portfolio Limited product actions were the key reason for TVSL’s significant market share

loss from 22.3% in FY03 to 12% in 1HFY14. Unlike the past, TVSL has a strong product pipeline and plans to launch a

product every quarter, including two new executive motorcycles and a diesel three-wheeler.

Unlike the past, TVSL now has a robust product pipeline

Timeline Product Category Comments 1QFY15 Scooty Zest Scooter (110cc engine) Same 110cc engine as in Wego, Jupiter 1QFY15 Star City Motorcycle (110cc engine) Product upgrade (all-new platform) 2QFY15 Diesel 3W Three-wheeler Diesel segment constitute 65% of three-wheeler

2QFY15 Victor Motorcycle (110cc engine) To share platform with Star City upgrade model

2QFY15 4-stroke Moped

Moped (100cc) To improve fuel efficiency, currently 2-stroke 70cc available


Success of new launches could yield disproportionate gains Given its wide distribution network (second to Hero MotoCorp) and low base, success of any one or two launches could drive disproportionate gains in market share and volumes for TVSL. Wide network could help TVSL achieve disproportionate gains from successful launches

900 845

650 700

Hero Moto TVS Motor Bajaj Auto HMSI

No. of dealers


TVS Motor

18 March 2014 9

Sale of non-core investments + healthy cash from operations = net cash Healthy cash from operations (FCF CAGR of 25% over FY14-16) coupled with sale

of non-core investments should transform TVSL into a net cash company by FY16.

TVSL had net debt of INR6.2b in FY13. It recently sold its majority stake in its Energy venture, reducing consolidated debt by INR2.6b.

Expect FCF CAGR of 25% over FY14-16

4,4403,303

5,4336,619 6,866

-1,768-767

-1,959-1,565 -1,557

2,672 2,5363,474

5,054 5,309

FY12 FY13 FY14E FY15E FY16E

CFO (INR m) Capex (INR m) FCF (INR m)


High FCF to transform TVSL into net cash company by FY16

8,181 6,170

3,717

822 -2,080

571480

224

48

17

FY12 FY13 FY14E FY15E FY16E

Net debt (INR m) Interest cost (INR m)


Maintain Buy with a target price of INR120 TVSL is well positioned to benefit from the scooterization wave in India. Over

the next 12-18 months, it plans to launch multiple products across segments to reinforce and fill gaps in its product portfolio.

We expect EPS to grow at a CAGR of 34% and FCF to grow at a CAGR of 25% over FY14-16, with RoE improving from 19.9% to 25.5%. We expect TVSL to be a net cash company by FY16, driven by strong FCF.

Sustained strength of the Scooter industry and TVSL’s market share gains, coupled with initial signs of recovery in the South, increase our confidence in TVSL’s ability to deliver strong volume-led earnings growth. We now value TVSL at 12x (v/s 10x earlier) FY16E EPS of INR10.

Maintain Buy, with a target price of INR120.

TVS Motor

18 March 2014 10

Financials and valuation Income statement (INR Million) Y/E March 2011 2012 2013 2014E 2015E 2016E Net Sales 62,880 71,415 70,650 80,007 96,330 110,661 Change (%) 44.1 13.6 -1.1 13.2 20.4 14.9 EBITDA 3,954 4,694 4,090 4,720 6,117 7,436 EBITDA Margin (%) 6.3 6.6 5.8 5.9 6.4 6.7 Depreciation 1,073 1,175 1,304 1,291 1,388 1,470 EBIT 2,882 3,518 2,786 3,429 4,729 5,966 Interest 723 571 480 224 48 17 Other Income 356 217 246 308 339 373 Extraordinary items 34 0 916 -303 0 0 PBT 2,481 3,165 1,636 3,815 5,020 6,321 Tax 535 674 476 954 1,255 1,580 Tax Rate (%) 21.6 21.3 29.1 25.0 25.0 25.0 Reported PAT 1,946 2,491 1,160 2,861 3,765 4,741 Adjusted PAT 1,972 2,491 1,810 2,634 3,765 4,741 Change (%) 3.7 26.3 -27.3 45.5 42.9 25.9

Balance sheet (INR Million) Y/E March 2011 2012 2013 2014E 2015E 2016E Share Capital 475 475 475 475 475 475 Reserves 9,519 11,221 11,772 13,799 16,453 19,804 Net Worth 9,994 11,696 12,247 14,274 16,928 20,279 Debt 7,678 8,311 6,345 4,345 4,320 3,820 Deferred Tax 957 976 931 931 931 931 Total Capital Employed 18,629 20,982 19,523 19,550 22,179 25,030 Gross Fixed Assets 19,723 21,545 22,479 24,479 25,979 27,479 Less: Acc Depreciation 10,347 11,289 12,365 13,656 15,043 16,514 Net Fixed Assets 9,376 10,256 10,115 10,823 10,936 10,966 Capital WIP 574 525 361 320 385 443 Investments 6,611 9,309 8,688 8,953 9,953 10,953 Current Assets 12,014 11,055 12,029 13,092 17,446 21,817 Inventory 5,279 5,846 5,097 5,455 6,380 7,329 Debtors 2,706 2,080 3,005 3,069 3,431 4,245 Cash & Bank 60 130 175 628 3,498 5,899 Loans & Adv, Others 3,969 2,998 3,752 3,940 4,137 4,344 Curr Liabs & Provns 9,946 10,163 11,670 13,638 16,541 19,148 Curr. Liabilities 9,453 9,585 11,136 12,429 14,965 17,191 Provisions 494 577 534 1,209 1,576 1,957 Net Current Assets 2,068 892 359 -546 904 2,669 Total Assets 18,629 20,982 19,523 19,550 22,179 25,030

E: MOSL Estimates

TVS Motor

18 March 2014 11

Financials and valuation

Ratios Y/E March 2011 2012 2013 2014E 2015E 2016E Basic (INR)

EPS 4.2 5.2 3.8 5.5 7.9 10.0 Cash EPS 6.4 7.7 6.6 8.3 10.8 13.1 Book Value 21.0 24.6 25.8 30.0 35.6 42.7 DPS 1.1 1.3 1.2 1.5 2.0 2.5 Payout (incl. Div. Tax.) 31.1 28.8 56.5 29.1 29.5 29.3

Valuation (x)

P/E

22.7 15.6 10.9 8.7

Cash P/E

13.2 10.5 8.0 6.6 Price / Book Value

3.4 2.9 2.4 2.0

EV/Sales

0.7 0.6 0.4 0.4 EV/EBITDA

11.6 9.5 6.9 5.2

Dividend Yield (%)

1.4 1.7 2.3 2.9

Profitability Ratios (%) RoE 21.2 23.0 15.1 19.9 24.1 25.5 RoCE 17.8 19.8 15.7 20.1 25.4 28.0 Turnover Ratios

Asset Turnover (x) 3.4 3.4 3.6 4.1 4.3 4.4

Cash flow statement (INR Million) Y/E March 2011 2012 2013 2014E 2015E 2016E OP/(Loss) before Tax 2,481 3,165 1,628 3,512 5,020 6,321 Depreciation 813 942 1,076 1,291 1,388 1,470 Others 0 0 0 0 0 0 Interest 470 408 327 224 48 17 Direct Taxes Paid 811 700 527 954 1,255 1,580 (Inc)/Dec in Wkg Cap -674 626 800 1,359 1,419 637 CF from Op. Activity 2,341 4,409 4,181 5,125 6,281 6,493 (Inc)/Dec in FA & CWIP -1,074 -1,768 -767 -1,959 -1,565 -1,557 (Pur)/Sale of Invt 830 -2,699 -295 -265 -1,000 -1,000 Others 223 658 77 308 339 373 CF from Inv. Activity -21 -3,809 -985 -1,916 -2,227 -2,185 (Inc)/Dec in Debt -3,968 -778 -276 -2,000 -25 -500 Interest Paid -703 -571 -517 -224 -48 -17 Dividend Paid -411 -659 -715 -834 -1,112 -1,390 Others 1,812 2,269 564 303 0 0 CF from Fin. Activity -3,271 261 -945 -2,755 -1,184 -1,907 Inc/Dec of Cash -950 861 2,251 454 2,870 2,402 Add: Beginning Balance 1,010 -731 -2,077 175 628 3,498 Closing Balance 60 130 175 628 3,498 5,899

E: MOSL Estimates

TVS Motor

18 March 2014 12

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Disclosure of Interest Statement TVS MOTOR CO LTD 1. Analyst ownership of the stock No 2. Group/Directors ownership of the stock No 3. Broking relationship with company covered No 4. Investment Banking relationship with company covered No

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