>TVS Motor Company Ltd. (EMKAY)

Worst is behind, upgrade rating to HOLD

We came back positive from our meeting with the management of TVS Motor on (1) profitability of domestic business due to easing metal prices (2) strong management confidence (3) rational growth targets. However, a lot depends on the success of the new launches (upgrade of Flame, a new motorcycle in price range of 40000 to 45000 and a new ungeared scooter).

Having said that, we continue to have concerns with respect to Indonesian venture. We are concerned with the cash burn as well as limited availability of information with respect to the Indonesian venture. The management indicated of a loss of Rs 500 mn (Rs 1.5 per share) in FY09 as well as FY10. Also, TVS has taken a debt of USD 30 mn in the Indonesian venture (30% of FY10 standalone debt).

We believe that worst is over for TVS in the domestic business on volumes as well as profitability front. Infact, we believe that in FY10, the company would report the maximum EBIDTA growth, largely due to low base. We have upgraded our FY10 earnings estimates by 12% to Rs 2.9 per share and introduce our FY11 estimates. We upgrade our target price to Rs 35. At Rs 35, the stock would trade at a PER of 12.2x and 9.1x, EV/EBIDTA of 7x and 5.7x and P/B of 1.0x and 0.9x our FY10 and FY11 estimates respectively. We upgrade our rating on the stock from SELL to HOLD.

Extracts of the management meeting are as follows

New launches
■ In motorcycles, TVS will introduce a new model in he price range of 40,000 to Rs 45,000 in 2HFY10. In June/July 2009, the company will introduce upgrade of Flame, rectifying the errors with the existing Flame.

■ In scooters, TVS will be launching a new ungeared scooter in 100cc+ category, which is around 70% of the scooters market. This will also provide a cushion against the potential market share loss in the sub 100cc segment, with the entry of Honda Motors and Scooters India (HMSI). TVS aims to increase its run rate by 5000 p.m (increase of 27% over FY09 average run rate of 18,400), scooters post the launch of 100cc+ scooter. We have factored in an increase of 2000 units p.m
from 2HFY10.

■ For Mopeds, the company is looking for a modest growth of 5% to 6%. The primary focus area will be accessing the non southern market. The company will be focusing on creating awareness for its mopeds. We do not expect any significant contribution from the new markets in FY10.

Profit margins
■ Gross profit margins (Sales – RM) for mopeds, scooters and motorcycles are comparable. However, there are higher Selling and distribution cost in case of motorcycles and scooters due to low volumes and intense competition. With rising volumes in motorcycles, the per vehicle cost will come down and hence aid EBIDTA margin expansion.

Indonesia operation
■ Till date TVS has invested around USD 80 mn. Of this around USD 40-45 mn is towards physical assets, USD 15 to 20 mn is towards product development and balance towards brand building activity.

■ The funding for the Indonesian venture has been through equity contribution of USD 50 m from TVS (which itself was funded through an ECB) and USD 30 mn through a debt from IFC.

■ Also, the company will need around USD 10 m per annum in the near term for brand building activity.

■ Indonesian venture has made a loss of around Rs 500mn in FY09 and expect similar amount of loss in FY10.

■ It aims to breakeven in FY11 with a target sales of 100,000 units.

■ It has around 100 dealers as on now and the number is expected to increase to 150. The dealers have a very low operating cost model and break even with as low as 35 units per month.

Debt on books
■ Long term debt in standalone books is around 5.3 bn. Out of these around 80 m is through ECB and balance is sales tax deferral loan.

■ Around USD 40 m ECB is repayable in F10 as well as FY11. Capex

■ Capex for FY10 and FY11 will be around Rs 400 mn

Three – wheelers
■ Total investment of Rs 1.5 bn

■ Dealer ship network of around 60 dealers

■ Company aims to breakeven at 15,000 units p.a.

■ We have been very conservative in our volumes assumptions for three wheelers and expect company to sell around 5000 numbers in FY11.

Valuation and View
We believe that worst is over for TVS in the domestic business on volumes as well as profitability front. Infact, we believe that in FY10, the company would report the maximum EBIDTA growth, largely due to low base. We have upgraded our FY10 earnings estimates by 12% to Rs 2.9 per share and introduce our FY11 estimates. Having said that we continue to have concerns with respect to Indonesian venture. We are concerned with both the cash burn as well lack of regular information flow. However, we do not expects the stock price to react negatively to the loss reported by the Indonesian business given the start up nature of the business. We upgrade our target price to Rs 35. At Rs 35, the stock would trade at a PER of 12.2x and 9.1x, EV/EBIDTA of 7x and 5.7x and P/B of 1.0x and 0.9x our FY10 and FY11 estimates respectively. We upgrade our rating on the stock from SELL to HOLD.

To see full report: TVS MOTOR