Two Wheeler Industry 13 May 2010

8/8/2019 Two Wheeler Industry 13 May 2010

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Kotak Securities - Private Client Research Please see t he disclaimer on t he last page For Privat e Circulat ion 21

SECTOR REPORT May 13, 2010

Valuat ion and Recommendation

HH is currently trading at a PE of 17.0x and 15.6x its FY10 and expected FY11EEPS of Rs112 and Rs122 respectively. We believe that HH is fairly valuedconsidering significant slowdown in FY11 expected earnings growth. We expectthe company' s earnings in FY11E to grow by 9.3% versus 52% earnings growthreported over FY08-FY10.

We value the company at 16x its FY11E EPS of Rs122.2 and arrive at a price targetof 1,955. We believe that our PE multiple of 16x (a premium over long termaverage one year forward PE multiple of 14.7x) factors in the company's leadershipstatus, positive cash flow generation and healthy balance sheet. However due torelative lower earnings growth rate expected in FY11 as against FY10, our assignedPE multiple of 16x is a discount to the short term one year forward PE multiple of17.4x.We initiate coverage on the stock with an ACCUMULATE rating and a pricetarget of Rs1,955.

PE Band

Source: Capitaline, Kotak Securities - Private Client Research

0

600

1200

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3000

M a r - 0 2

S e p - 0

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M a r - 1 0

S t o c

k P r i c e

( R s

)

Price 12X 16X 20X 24X


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Profit and loss statement (Rs mn)

(Year-end March) FY09 FY10E FY11E

Revenues 123,569 158,312 180,658

% change YoY 20 28 14EBITDA 17,633 27,670 30,337% change YoY 31 57 10

Other Income 2,014 2,587 2,193Depreciation 1,807 1,915 2,294EBIT 17,840 28,342 30,236

% change YoY 26 59 7Interest cost 25 25 25Extraordinary expenses/(income) - - -

Prof i t bef ore t ax 17,815 28,317 30,211% change YoY 26 59 7

Tax 4,997 5,999 5,815as % of PBT 28 21 19Net Income 12,818 22,318 24,396% change YoY 32 74 9

Shares outstanding (mn) 200 200 200 EPS (repor t ed) (Rs) 64.2 111.8 122.2CEPS (Rs) 73.2 121.4 133.7

DPS (Rs) 20.0 100.0 20.0

Source: Company, Kotak Securities - Private Client Research

Cash f low st atem ent (Rs mn)


EBIT 17,840 28,342 30,236Depreciation 1,807 1,915 2,294Change in working capital 847 (721) 217

Change in other net current asset 1,318 (93) 590Operat ing cash f low 21,811 29,442 33,337Interest (25) (25) (25)

Tax (4,807) (5,981) (5,790)Misc expenses 161 - -Others - - -

Cash fl ow f rom operat ions 17,140 23,436 27,522

Capex (3,262) (1,925) (8,500)(Inc)/dec in investments (8,019) (16,313) 6,000

Dividends (4,439) (4,673) (25,700)Cash f low from i nvestm ents (15,720) (22,910) (28,200)Proceeds from issue of equit ies - - -

Increase/(decrease) in debt (535) (125) (250)Proceeds from share premium - - -Cash f low f rom f inancing (535) (125) (250)

Opening cash 1,311 2,196 2,597Closing cash 2,196 2,597 1,669


Balance sheet (Rs mn)

(Year-end M arch) FY09 FY10E FY11E

Cash and cash equivalent s 35,432 48,597 42,149Accounts receivable 1,499 4,337 4,950Inventories 3,268 4,531 5,171

Loans and advances 3,113 2,543 3,048Others 59 50 50Current assets 43,371 60,059 55,368

Misc. exps - - -LT investments 451 4,000 3,520Net f ixed assets 16,943 16,953 23,159

Tot al asset s 60,765 81,011 82,047Payables 7,030 10,410 11,879Others 8,228 7,399 8,405

Current liabilit ies 15,259 17,809 20,284Provisions 5,270 26,455 5,517Debt 785 660 410

Other liabilit ies 1,444 1,462 1,487Equity 399 399 399Reserves 37,608 34,226 53,949

Tot al l i abi l i t ies 60,765 81,011 82,047 BVPS (Rs) 190 173 272


Ratios analysis


EBITDA margin (%) 14.3 17.5 16.8PAT margin (%) 10.4 14.1 13.5

Inventory days 11 11 12Debtor days 7 10 10

Creditor days 22 24 24

Debt-Equity 0.0 0.0 0.0

ROCE (%) 51.1 76.5 67.1ROE (%) 37.9 61.5 54.8

Price/Sales (P/S) 3.1 2.4 2.1Price/Book (P/B) 10.0 11.0 7.0Price/Earnings (P/E) 29.6 17.0 15.6


FINANCIALS


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BAJAJ AUTO

PRICE : R S.2,145 R ECOM M ENDATION : ACCUM ULATETARGET PRICE : RS.2,280 FY11E PE: 15.1 X

Re-st ructuring paysBajaj Aut o's performance in t he past thr ee years has been volatile w it hconstant change in strategies. After going through a lean patch in FY08and FY09, the company made a str ong come-back w it h t he launch of newmotorcycle in the 100cc space. During FY10, BAL took some strategic deci-sions like exiting from the scooters space, focus on building brands, sepa-rate brand for 3W business and increasing expo rt . BAL's grow th trajecto ryis current ly on t he upsw ing w hich w e expect w ill cont inue in FY11E. De-spit e cost pressure w e expect t he company' s perf ormance to remain r obuston expected 20% increase in volumes. BAL is expected to outperform theindustry volumes and thereby increase its market share. Given BAL'sstrong growth prospects coupled with overall positive outlook, we initiatecoverage on t he sto ck w it h an ACCUMULATE rati ng and price target ofRs.2,280.

q Pulsar and Discover to lead the march. Buoyed by the current robust twowheeler demand and with booming new products, BAL is expected to achievea strong volume growth in FY11E. Both of BAL's core brands; Discover and Pul-sar are expected to pave the path for future growth for the company. Together,Pulsar and Discover are expected to account for more than 70% of the motor-cycle volumes in FY11E. On back of expected strong show from Discover andPulsar brands, we expect the company' s sales volume to increase 20% from2.9mn in FY10 to 3.4mn in FY11E.

q De-risked business model. BAL's de-risked business model provides cushion

to the company's revenues and profitability during trying times. BAL derives~80% of the revenues from the 2W segment and the rest ~20% from the 3Wsegment. Within the motorcycle segment the company has presence in boththe sub125cc segment and 125cc+ segment. For BAL, the sub125cc segmentcontributes around 60% of the 2W volumes and the 125cc+ segment contrib-utes the remaining 40% of the 2W volumes. BAL derives ~70% of its revenuesfrom the domestic market and ~30% of its revenues come from the exportmarket. Accordingly the company's revenues do not face a major risk in anevent of slowdown in demand from a particular geography/segment.

q Margins to remain healthy in FY11E. BAL enjoys a healthy product mix withdecent exposure in high margin products. With product mix expected to fur-ther improve in FY11E, pressure on margins on account of rising raw material

prices is expected to be limit ed. We have factored in 20% volume growth forthe company in FY11E and that should lead to better leveraging of fixed cost.Thirdly by passing on the excise duty hike across products the company willearn an additional Rs600mn from its Pantnagar facility (situated in the tax freezone) and the same will go a long way in protecting major downfall in marginsfor the company. On back of above mentioned reasons we expect BAL to re-port EBITDA margin of 20.8% in FY11E versus EBITDA margin of 21.7% inFY10.

Stock details

BSE code : 532977NSE code : BAJAJ-AUTOM arket cap (Rs mn) : 310,346Free f loat (%) : 5052 wk Hi/Lo (Rs) : 2163/660

Avg daily volume : 65,905Shares (o/s) (mn) : 145

Source: Capitaline

Summary table(Rs m n) FY09 FY10E FY11E

Sales 88,435 119,210 142,011Growth (%) (1) 35 19EBITDA 12,385 25,926 29,524EBITDA margin (% ) 14.0 21.7 20. 8Net Prof it 6,545 17,001 20,609Debt 15,700 13,016 12,816EPS (Rs) 45.2 117.5 142.4DPS (Rs) 22.0 40.0 20.0

RoE (%) 47.5 79.7 54.9RoCE (%) 35.4 68.1 57.7EV/Sales (x) 3.6 2.6 2.1EV/EBITDA (x) 25.4 11.9 10.1P/E (x) 47.4 18.3 15.1P/BV (x) 18.0 10.7 6.7

(FY09-10) Q1 Q2 Q3 Q4

Sal es 23,385 28,875 32,956 33,995EPS (Rs) 20.3 27.3 32.8 36.5

Source: Company, Kotak Securities - PrivateClient Research

1 year perf orm ance (Rel t o sensex)

Source: Capitaline

Shareholding pattern

Source: Capitaline

A r u n A g a r w a larun.agarw al@kot ak.com+91 22 6621 6143

Bajaj Auto

Sensex

Promoter49%

FII's16%

Banks/ MF/FI's

8%

Others27%


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Valua t ion and recomm endat ion

AT the CMP of Rs2,145 the stock trades at 18.3x and 15.1x its FY10 and expectedFY11 EPS of Rs117.5 and Rs142.4, respectively. We value the company at 16x itsFY11E EPS of Rs142.4 and arrive at a value of Rs2,280 on the stock. We initiatecoverage on the stock with an ACCUMULATE rating.

Despite HH's leadership status, we have applied similar PE multiple to BAL giventhe later's robust expected earnings growth FY11E. Historically, BAL has traded ata discount to HH; however with company's strong come back in the 100ccsegment, the stock has recently been trading at multiple, similar to that of HH.Furthermore we expect BAL to outperform industry volume growth in FY11 andhave relatively better earnings growth prospect in FY11E as compared to HH. Wetherefore believe that assigning similar PE multiple to BAL and HH is justified. BALis currently on a high growth trajectory with rising volumes and healthy margin.Bajaj Auto' earnings are expected to grow at CAGR of 63% over FY09-FY11E itsmarket share in the domestic motorcycle segment is expected to move up from22% in FY09 to 26% in FY11E.


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INVESTM ENT POSITIVESVolum es to cont inue rob ust show in FY11E

Buoyed by the robust two wheeler demand coupled with booming new products,BAL is expected to show a strong 20% volume growth in FY11E. Volumes in

FY11E are expected to increase over and above the 30% volume growth witnessedduring FY10. During FY10 the company sold 2.85mn units and we expect thevolumes to grow by 20% in FY11E to 3.4mn units. Volumes are expected to growacross segments and geographies.

q Domestic volumes to remain robust

BAL is expected to report volume growth of 20% in FY11E in the domestic market.Both of BAL's core brands are expected to continue their growth in FY11E.Discover100 which was launched in July 2009 has been a great success for BALand has helped the company in regaining the lost market share to a large extent.During FY08 the company brought about a major modification in its marketsegmentation strategy when it decided to significantly reduce its exposure in thesub 125cc segment (primarily the 100cc segment) and accordingly it reported 41%and 43% sales volume fall in the domestic sub 125cc category in FY08 and FY09respectively. However with the re-entry into the sub125cc segment the company'svolumes saw a significant turnaround with volumes growing by 115% in thissegment in the domestic market for BAL in FY10.

q Discover and Pulsar leading t he w ay

BAL is looking to create a strong franchise in the motorcycle segment through it'semphasize on Discover and Pulsar brand. Even though BAL would be sellingPlatina and Boxer (only for exports); but bulk of the sales would comprise ofDiscover and Pulsar brand. Discover100 volumes continue to remain strong and weexpect the company's volume in the domestic sub125cc segment to grow by 29%in FY11E. Besides that, the launch of Pulsar135LS is expected to further pushvolumes and help the company achieve 16% volume growth in the domestic125cc+ segment as against negative growth witnessed during the past couple ofyears. Overall we expect the company's domestic motorcycle volumes to grow at23% and outperform the industry volume growth in FY11E.

For BAL, Discover brand gained momentum post Discover100 launch. Discoverbrand is been positioned as a commuter bike where it is competing with theworld's best selling model - Splendor. Currently the company is selling close to90,000 units of Discover per month and it accounts for close to 40% of thecompany's motorcycle sales. In FY11E, we expect Discover to do an averagemonthly run-rate of ~100,000 units and continue to account for around 40% ofthe motorcycle volumes.

BAL - Domestic 2W volume (Thousands)

Source: SIAM

BAL - Domestic volume growth

Source: SIAM

-

50

100

150

200

250

A p r

M a y

J u n

J u l

A u g

S e p

O c t

N o v

D e c

J a n

F e b

M a r

FY09 FY10

(1.2)

(0.6)

-

0.6

1.2

1.8

2.4

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

(24)

(12)

-

12

24

36

48

Volume (mn units - LHS)growth (% - RHS)

Strong volume growt h tocontinue in FY11

BAL is expected t o repo rtvolume growt h of 20% in

FY11E in the domestic market

Bulk of the sales wouldcomprise of Discover and Pulsar

brand

}Come b ack by BAL


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Pulsar, the company's sport bike model is expected to receive further boost withthe launch of Pulsar135LS. Pulsar is the market leader in the premium segmentand till recently was the company's best selling model. Currently the company isselling close to 65,000 units per month and it accounts for almost 30% of themotorcycle volumes. In FY11E, we expect the monthly average volumes to increaseto ~85,000 units and the contribution to increase to around 33%.

q Additional boost from revival in export markets

With domestic business going strong for the company; revival in export businesscomes as an additional growth booster for BAL. For BAL export is of significance asit derives sizeable portion of its business from export activity. Export businesscontributed 40% in volume terms and 30% in value terms to the overall businessmix in FY09. During FY09, BAL derived 43% of its export sales from Africa andMiddle East, 27% from South Asia, 19% from Latin America and 11% from SouthEast Asia. However because of global slowdown, BAL witnessed falling demandfor its product from majority of its export market (expect the African market).However during 2HFY10 the export volumes started to pick up due to recovery inmajority of BAL's export market. During FY11E, we expect the company's export

volume to grow by 17% on back of lower base (during 1HFY10), new productlaunches and on going resurgence in global economies.

q Dominance to continue in the 3W business

BAL is the leading 3W player having presence in both the passenger carrier andgoods carrier segment.3W volumes accounts for 11-12% of the overall companyvolumes and is sold in both the domestic and export markets. In the domesticmarket 3W sales primarily comes from the passenger carrier segment where thecompany has witnessed stable monthly volumes of 14,000-15,000 per monthduring FY10. The 3W passenger vehicle segment is highly regulated as they requirepermit for operation by various states governments. Currently the demands comefrom replacement of old vehicle, conversion of vehicle to alternative fuel and newpermits if any issued by the government. On the export front the company hasseen pick up in the 3W passenger carrier volumes during 2HFY10 on back ofglobal recovery.

BAL - Export 2W volume (000)

Source: SIAM

BAL - Export volum e grow th

Source: SIAM

-

25

50

75

100

A p r

M a y

J u n

J u l

A u g

S e p

O c t

N o v

D e c

J a n

F e b

M a r

FY09

FY10

-

0.2

0.4

0.6

0.8

FY06 FY07 FY08 FY09 FY10-

20

40

60

80

Volume (Mn Units - LHS)growth (% - RHS)

Export vo lumes are crit ical asit accounts for sizeableportion of its business

Company adopting anaggressive approach tow ards its

3W business


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BAL is looking to adopt an aggressive approach to its 3W business. BAL hasrecently launched couple of new product in the 3W passenger carrier segment andis expected to launch two products in the CV segment. With new launches/ upgrades/variants in the passenger carrier and CV segment, the company expectsto continue its growth in the 3W space. In our estimates for FY11E, because ofhigh dependence on new permits, we have assumed 3W sales volumes of 33,000

units per month that t ranslates into a nominal 12% volume growth for FY11E.Considering the company's aggressive approach towards its 3W business, webelieve that there could be positive surprise to our volume assumptions which inturn will lead to an up-side in our earnings estimates.

Chasing the 4mn volume mark.

BAL has set for itself an ambitious target of 4mn vehicles sales in FY11E. This

represents a 40% jump over FY10 volumes of 2.9mn units. BAL is looking to clockan average monthly run-rate of 300,000 motorcycles (as against monthly averageof ~237,000 motorcycles clocked during 4QFY10) taking them to annual sales of3.6mn units. Remaining 400,000 units would be contributed by the 3W segment.BAL has set for itself a target of 1mn units from exports. We believe thatsignificant efforts will be required to achieve this target, considering the 15%expected industry growth rate in FY11E. We have factored in a far more realistic20% volumes growth rate for the company in FY11E. However the company'ssuperlative 40% growth target only provides with a further upside opportunity inthe stock.

De-risked business model

BAL's de-risked business model provides cushion to the company's revenues andprofitability during underperformance by a segment/geography. BAL derives ~80%of the revenues from the 2W segment and the rest ~20% from the 3W segment.Within the motorcycle segment the company has presence in both the sub125ccsegment and 125cc+ segment. For BAL, the sub125cc segment contributes around60% of the 2W volumes and the 125cc+ segment contributes the remaining 40%of the 2W volumes. BAL derives ~70% of its revenues from the domestic marketand ~30% of its revenues come from the export market. Accordingly thecompany's revenues do not face a major risk in an event of slowdown in demandfrom a particular geography/segment.

BAL - 3W volume (000)

Source: Company

BAL - 3W volu me gro w th

Source: Company

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8

16

24

32

40

A p r

M a y

J u n

J u l

A u g

S e p

O c t

N o v

D e c

J a n

F e b

M a r

FY09

FY10

-0.40

-0.20

0.00

0.20

0.40

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

(15)

-

15

30

Volume (mn Units - LHS)

growth (% - RHS)

Target of 300,000 monthly 2Wvolumes

80% volu me - 2W20% volu me - 3W

70% domestic revenue

30% export revenue


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Margins to remain heal thy despi te cost pressures

The company witnessed a remarkable improvement in EBITDA margins from 14%in FY09 to 21.7% in FY10. Reasons for improvement in margins included softeningof raw material price, change in product mix, substantial volume growth andhigher export realizations. Of late, metal prices have seen a significant increase andare expected to impact the margins of the company in FY11E. However animprovement in product mix, expectation of significant volume growth and taxbenefit from Pantnagar facility are expected to lower the impact and we haveaccordingly factored in 96bps dip in margins for the company in FY11E.

BAL enjoys a healthy product mix with decent exposure in high margin products.With the launch of Pulsar135LS, we expect the product mix to improve further inFY11E. We believe that this measure is expected to limit the impact of higher rawmaterials cost on the company's margins. Furthermore we have factored in 20%volume growth for the company in FY11E and that should lead to better leverageof fixed cost. Thirdly by passing on the excise duty hike across products thecompany will earn an additional Rs600mn from its Pantnagar facility (situated inthe tax free zone) and the same will go a long way in protecting major downfall inmargins for the company. On back of above mentioned reasons we expect BAL toreport EBITDA margin of 20.8% in FY11E versus EBITDA margin of 21.7%reported in FY10E and stay way ahead of FY09 EBITDA margin of 14% .

Str ong balance sheet - Cherry on t op

BAL has a strong balance sheet with huge cash reserves. The debt is in the form ofzero percent sales tax deferral loan payable over a period of time. BAL enjoysnegative working capital cycle on back of efficient working capital management.Accordingly BAL is able to generate positive cash flow from operations and positivefree cash flow. As of FY09, BAL had ~Rs12bn cash in its books (Rs 82 per share)which has likely increased to ~Rs15.3bn (Rs106 per share) in FY10E. BAL is lookingto expand its capacity from 4mn units to 5mn units over the next 12 months andwe expect the funding would be done through internal accrual. Significant profitgrowth during FY10E is expected to lead to strong jump in RoCE from 35.4% inFY09 to 68.1% in FY10 and is expected to remain in excess of 50% during FY11E.

Risk and concernsn Low er th an expected v olumes. Lower than expected volume growth for BAL

during FY11E could significantly impact our sales and profitability estimates.

n Price w ar. A price war by players to capture market share can have negativeimpact on margins and profitability for the company.

Healthy p roduct mix androbust volume growth wouldhelp maintain strong EBIDTA

margin

Positive cash flow

Excellent return ratios


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FY10 Review

Financial performance

(Rs m n) FY10 FY09 YoY(%)

Volumes (mn units) 2.9 2.2 30.0Revenues 119,210 88,435 34.8

EBITDA 25,926 12,385 109.3EBITDA Margin (%) 21.7 14.0Reported PAT 17,001 6,545 159.8

Reported PAT Margin (%) 14.3 7.4Adjusted PAT 18,243 7,777 134.6Adjusted PAT Margin (%) 15.3 8.8

Adjusted EPS 126.1 53.8 134.6

Source: Company

BAL reported a significant turnaround in its performance during FY10 over FY09.On back of new launch and overall improvement in demand the company reported

30% volume growth; an increase from 2.2mn units to 2.9mn units. Volumegrowth coupled with 4% increase in realization led revenues to a 35% increasefrom Rs88,435mn during FY09 to Rs119,210mn during FY10. EBITDA marginsshowed a stupendous increase on back of falling raw material price, robustvolumes and improved export realizations. On YoY basis EBITDA margin increasedfrom 14% to 21.7%. On back of improved volumes and lower cost the company'sadjusted net profit more than doubled from Rs7,777mn during FY09 toRs18,243mn for the period under consideration.

Financial Outlookn Volumes. After volume de-growth in FY08 and FY09, BAL is expected to re-

port a robust 25% CAGR volume growth over FY09-FY11E. Volumes grew

across all the segments and sub-segments where the company has exposure.Re-entry in the 100cc segment and pick up in export markets are the primereasons for volume growth. BAL reported tremendous 30% increase in volumesin FY10 from 2.2mn units in FY09 to 2.9mn units. We expect the company'svolume to rise by another 20% in FY11E to 3.4mn units. In FY11E, volumes inthe two wheeler segment are expected to grow by 21% to 3mn and in the 3Wsegment by 12% to 0.4mn units.

n Revenues . Revenues for BAL increased from Rs88.4bn in FY09 to Rs119.2bn inFY10 (35% growth) and in FY11E we expect the company to report revenuesof Rs142bn (20% growth). During FY10 revenue growth was supported by30% volume growth and 4.5% improvement in realizations and during FY11revenues would sustain 20% growth on back of volumes increse.

n Margins. BAL's registered a dramatic improvement in its EBITDA margin thatrose from 14% in FY09 to 21.7% in FY10. Improvement in margins has beenon account of better volumes, fall in raw material prices and better export real-ization. However during FY11 we expect EBITDA margins to decline by 56bpsto 20.8% but still remain healthy.

n Net profit s. BAL is expected to show tremendous improvement (three fold in-crease) in its net profit over FY09-FY11E. We expect BAL's reported net profitto increase from Rs6,545mn in FY09 to Rs20,609mn in FY11E. We expect thecompany to report EPS of Rs142.4 during FY11E.


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Valua t ion and recomm endat i on

AT the CMP of Rs2,145 the stock trades at 18.3x and 15.1x its FY10 and expectedFY11 EPS of Rs117.5 and Rs142.4 respectively. We value the company at 16x itsFY11E EPS of Rs142.4 and arrive at a value of Rs2,280 on the stock. We initiatecoverage on the stock with an ACCUMULATE rating.

Despite HH's leadership status, we have applied similar PE multiple to BAL giventhe later's robust expected earnings growth FY11E. Historically, BAL has traded ata discount to HH; however with company's strong come back in the 100ccsegment, the stock has recently been trading at multiple, similar to that of HH.Furthermore we expect BAL to outperform industry volume growth in FY11 andhave relatively better earnings growth prospect in FY11E as compared to HH. Wetherefore believe that assigning similar PE multiple to BAL and HH is justified. BALis currently on a high growth trajectory with rising volumes and healthy margin.Bajaj Auto' earnings are expected to grow at CAGR of 63% over FY09-FY11E itsmarket share in the domestic motorcycle segment is expected to move up from22% in FY09 to 26% in FY11E.


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Revenues 88,435 119,210 142,011

% change YoY (1) 35 19EBITDA 12,385 25,926 29,524% change YoY 1 109 14

Other Income 537 1,443 1,189Depreciation 1,298 1,365 1,601EBIT 11,624 26,004 29,112

% change YoY (6) 124 12Interest cost 210 60 50Extraordinary expenses/(income) 1,853 1,868 -

Prof i t bef ore t ax 9,561 24,076 29,062% change YoY (16) 152 21

Tax 3,016 7,075 8,454as % of PBT 32 29 29Net Income (Reported) 6,545 17,001 20,609% change YoY (13) 160 21

Net Income (Adjusted) 7,777 18,243 20,609% change YoY (6) 135 13Shares outstanding (mn) 145 145 145

EPS (repor t ed) (Rs) 45.2 117.5 142.4EPS (adjusted) (Rs) 53.8 126.1 142.4CEPS (Rs) 54.2 126.9 153.5

DPS (Rs) 22.0 40.0 20.0




EBIT 9,771 24,136 29,112Depreciation 1,298 1,365 1,601Change in working capital (1,513) 2,804 714

Change in ot her net current asset 830 (7,984) (271)Operat ing cash f low 10,386 20,320 31,157Interest (210) (60) (50)

Tax (3,084) (7,077) (8,456)

Misc. expenses (1,833) 1,833 -Others

Cash f low f rom operat ions 5,259 15,016 22,651Capex (3,908) (3,572) (4,500)(Increase)/decrease in investments 486 (4,337) (11,211)

Dividends (3,386) (3,724) (6,771) Cash f low f rom investments (6,807) (11 ,633) (22 ,482)Proceeds from issue of equit ies - - -

Increase/(decrease) in debt 2,357 (2,684) (200)Proceeds from share premium - - -Cash f low f rom financing 2,357 (2,684) (200)

Opening cash 561 1,369 2,068Closing cash 1,369 2,068 2,036




Cash and cash equivalent s 11,805 16,113 26,430Accounts receivable 3,587 4,730 5,631Inventories 3,388 4,054 4,843

Loans and advances 13,652 18,141 19,535Others 1,257 1,225 1,481Current assets 33,689 44,262 57,920

Misc. exps 1,833 - -LT investments 7,649 8,378 9,240Net f ixed assets 15,644 17,851 20,750

Tot al asset s 58,814 70,491 87,910Payables 8,000 12,612 15,017Others 4,134 1,000 1,000

Current liabilit ies 12,134 13,612 16,017Provisions 12,242 14,896 12,889Debt 15,700 13,016 12,816

Other liabilit ies 42 40 38Equity 1,447 1,447 1,447Reserves 17,250 27,480 44,703

Tot al l i abi l i t ies 58,814 70,491 87,910

BVPS (Rs) 117 200 319


Ratios analysis



Inventory days 17 15 14Debtor days 13 15 15Creditor days 35 40 40

Debt-Equity 0.9 0.4 0.3ROCE (%) 35.4 68.1 57.7

ROE (%) 47.5 79.7 54.9

Price/Sales (P/S) 3.5 2.6 2.2

Price/Book (P/B) 18.4 10.7 6.7Price/Earnings (P/E) 47.4 18.3 15.1


FINANCIALS


33/43



TVS M OTOR

PRICE : RS.100 R ECOM M ENDATION : ACCUM ULATETARGET PRICE : RS.112 FY11E PE:13.0 X

Aggressive betTVS Motor is the flagship company of the TVS group and is one of the im-port ant p layers in the Indian tw o w heeler space. TVS Mot or h as diversif iedbusiness mix w it h p resence in almost all t he categor ies and sub-categoriesof t he tw o w heeler industry. Because of th e intensif ied competit ion andcompany's conservative approach; the performance of TVS Motor over thepast few years has been lackluster. How ever the company has decided t oget mo re aggressive in it s approach and w e accordi ngly expect t hecompany' s perf ormance to show signi fi cant impro vement i n FY11E. In ourview , new launches and better produ ct mix w ould help t he company ingrowing volumes and improving margin leading to 39% increase in ad-

justed pro f it s in FY11E. We init iate coverage on t he stock w it h an ACCU-MULATE rating and a price target of Rs.112.q New l aunches hold th e key. TVS Motor recently launched products are ex-

pected to play a critical role in boosting the company's volumes in FY11E. TVSMotor recently launched couple of new products; one each in scooter and mo-torcycle segment. In the scooter segment the company launched a gearlessscooter " Wego" in the 110cc segment and in the motorcycle segment thecompany launched a clutchless motorcycle " Jive" in the executive segment.Both these models are very vital for the company as they are expected to createnew markets and help the company to improve its market share in the domes-tic two wheeler market. We expect the company's volumes in the two wheelersegment to increase by 20% from 1.5mn in FY10 to 1.8mn in FY11E.

q Product mix moving towards higher end products. TVS Motors productmix is expected to get better with the launch of new products. Since the pastfew years the company's product portfolio has been moving towards the bot-tom end of the market. On back of new launches in the scooter and motor-cycle segment, share of low priced mopeds would come down. In the scooterssegment, the launch of Wego in the 110cc segment would strengthen theproduct portfolio as its earlier products were all below the 90cc engine capac-ity. In the motorcycle segment the company's new launch in the executive seg-ment would lead to more balanced mix.

q Margins to improve despite cost pressures. Unlike for other two wheelerplayers where we are expecting fall in margins; TVS Motor is expected to im-prove its margins in FY11E. Margins improvement is expected on two counts-

firstly on back of healthy product mix and secondly due to robust volumegrowth. Both the above factors are expected to safeguard the margins from ris-ing input cost in FY11E. We expect the company's EBITDA margin in FY11E at7.7% as against FY10 EBITDA margin of 7.4% .


TVS Motors intention of adapting an aggressive approach is expected to augurwell for the company's growth prospect in FY11E. TVS Motor is expected to postremarkable 29.3% growth in revenues in FY11E. Despite difficult situations relatedto input cost, TVS Motors EBITDA margin is expected to show improvement inFY11E. Accordingly the company's earnings in FY11E are expected to increase at arobust pace of 39% . TVS Motor is currently trading at PE of 18.0x its FY10

adjusted EPS and 13.0x its FY11E estimate. We have valued the company at 14.5xits FY11E EPS of Rs7.7 and arrive at the target price of Rs112. Our PE multiple of14.5x is 10% discount to the larger players in the industry due to its smaller scaleof operation. We rate the stock as ACCUMULATE.

Stock details

BSE code : 532343NSE code : TVSMOTORM arket cap (Rs mn) : 23,755Free f loat (%) : 4052 wk Hi/Lo (Rs) : 111/36

Avg daily volume : 363,936Shares (o/s) (mn) : 238

Source: Capitaline

Summary table(Rs m n) FY09 FY10E FY11E

Sales 37,367 44,240 57,206Growth (%) 14 18 29EBITDA 1,863 3,260 4,394EBITDA margin (%) 5.0 7.4 7.7A dj ust ed Net Pr of i t 310 1,320 1,832Debt 9,060 9,803 8,711Adjust edEPS (Rs) 1.3 5.6 7.7DPS (Rs) 0.7 0.7 0.7

RoE (%) 4.1 17.2 20.8RoCE (%) 4.8 8.7 14.3EV/Sales (x) 0.8 0.7 0.5EV/EBITDA (x) 16.9 9.8 7.0P/E (x) 76.5 27.5 13.0P/BV (x) 3.2 3.0 2.5

(FY10) Q1 Q2 Q3 Q4

Sales 9,887 1 1,299 10,895 12,160EPS (Rs) 0.8 1.0 1.0 2.8

Source: Company, Kotak Securities - PrivateClient Research

1 year perf orm ance (Rel t o sensex)

Source: Capitaline

Shareholding pattern

Source: Capitaline

A r u n A g a r w a larun.agarw al@kot ak.com+91 22 6621 6143

TVSM otor

Sensex

Promoter60%FII's

4%

Others23%

Banks/

MF/FI's13%


34/43



INVESTM ENT ARGUM ENTSNew launches to be the key vo l ume dr i ver

In FY11E, we expect new launches by the company to play a critical role inbolstering its volumes and help them grow faster than the industry. TVS Motors

recent launches are expected to drive the volumes for the company in FY11E.TVS Motor recently launched couple of new products; one each in scooter andmotorcycle segment. In the scooter segment the company launched a gearlessscooter " Wego" in the 110cc segment. TVS already has a 20.5% market sharethrough the " Scooty" brand. With the launch of Wego, we expect the company tofurther strengthen its portfolio in the scooter segment. Since the target marketsfor Scooty and Wego are diverse, we do not expect any cannibalization on accountof the new launch. We expect the company's domestic volume in the scootersegment to increase from FY10 volumes of 0.3mn to 0.39mn in FY11E,representing a growth of 28%.

In the motorcycle segment the company has launched an auto clutch motorcyclecalled " Jive" . One of the key features of this motorcycle is the absence of theclutch lever that gives the rider the comfort of shifting gear without pressing theclutch. In the motorcycle segment the company relies on its two key models; Starand Apache that are present in the entry level segment and the premium segmentrespectively. TVS does not have any significant presence in the key executivesegment. To plug the gap the company has launched the new model " Jive"(110cc) in the executive segment which we expect would provide the necessaryboost to the company's falling motorcycle volumes. Over the past few years thecompany's performance in the motorcycle segment was lackluster and thecompany's market share plummeted from 12.9% in FY07 to 6.7 % in FY10.However on back of company's aggressive approach and new launch in the keyexecutive segment we expect revival in volumes and market share for thecompany. We expect the company's domestic motorcycle volumes to grow by28% from 0.5mn in FY10 to 0.63mn units in FY11. Accordingly we expect thecompany's market share in the domestic motorcycle space to increase from 6.7%to 7.5%.

TVS Motor, the sole player in the mopeds segment, has shown steady growth inthis category over the past few years. For FY11E, we have a factored in a modest6.1% volume growth on account of company's focus shifting towards better

margin products. We expect the volumes in the moped segment to grow from0.57mn units in FY10 to 0.6mn units in FY11E.

TVS - Domestic Scooter segment

Source: SIAM, Kotak Securities - Private Client Research

TVS - Domestic Motorcycle segment


(0.2)

(0.1)

-

0.1

0.2

0.3

0.4

0.5

FY07 FY08 FY09 FY10 FY11E(14)

(7)

-

7

14

21

28

35Volumes (mn units - LHS)% growth (RHS)

(1.0)

(0.5)

-

0.5

1.0

FY07 FY08 FY09 FY10 FY11E(50)

(25)

-

25

50Volumes (mn units - LHS)% growth (RHS)

New launches to play acritical role in bolstering its

volumes in FY11E

In the scooter segment thecompany launched a gearlessscooter "Wego" in the 110cc

segment.

In the motorcycle segment thecompany has launched an auto

clutch motorcycle called "Jive"


35/43



TVS - Dom esti c 2W


TVS Motor is now aggressively looking to increase its presence in the 2W segmentand through new launches the company hopes to mark its presence across allsegments / sub segments and eventually increase its market share byoutperforming the industry volumes. We expect the company's domestic volumesin the 2W segment to increase by 20.2% from 1.37mn in FY10 to 1.65mn inFY11E. Despite increasing competition, we expect the company's market share inthe domestic two wheeler segment to increase from 14.5% in FY10 to 15% inFY11E.

Expor t marke t show ing s igns of im provement

TVS Motor has reported improvement in export numbers over the past fewmonths. Export volumes for the company during April-October 2009 averaged at~11,000 and that has improved to ~16,000 units since November 2009, in linewith FY09 average monthly volumes. Export volumes in 2HFY10 were higher by21% over 1HFY10 volumes.

(1.8)

(0.9)

-

0.9

1.8

FY07 FY08 FY09 FY10 FY11E(25)

(13)

-

13

25Volumes (mn units - LHS) % growth (RHS)

Recovery in export volumes would act as a positive for the company consideringthat ~12-15% of the company volumes come from export activity. During FY11we expect the company's export volumes to grow from 164,301 units in FY10 to~210,600 units. Our FY11E export volume growth rate of 28% factors the globalrecovery and lower base of FY10.

Exports volumes are critical for the company as they come handy during domestic

downturn. During FY09 the company derived 14.6% of its overall volumes fromthe export segment, the share came down to 10.7% in FY10 because of globalslowdown. With resurgence in export volumes we expect the share of exportvolumes to the company's overall volumes to increase 11.7% in FY11E.

TVS - Export volumes


TVS - Export Volume Break-up


(0.07)

-

0.07

0.14

0.21

FY07 FY08 FY09 FY10 FY11E(20)

-

20

40

60

Volumes (mn units - LHS)

% growth (RHS)

0%

25%

50%

75%

100%

FY06 FY07 FY08 FY09 FY10 FY11E

Scooters Motorcycles Moped 3W

TVS Motor is now aggressivelylooking to increase its presence

in t he 2W segment

Export volumes to grow by28% in FY11


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Stabi l iz ing i ts 3W venture

TVS is in the process of steadying its 3W business with volumes yet to take off in abig way. TVS Motor entered the three wheeler passenger segment in March FY08by launching TVS King in two variants - two-stroke petrol and two-stroke LPG.During its 1st year of operations the company sold a mere 4,198units followed by15,116 units sold in FY10. We expect the company to sell 36,000 units in FY11E.With increasing volumes from the three wheeler segment, we expect the exposureof the company to two wheelers to gradually come down. During FY11E, ~5% ofthe company's revenues are expected to come from the three wheeler segmentversus 2.5% expected in FY10.

M o v i n g t o w a r d s b e t t e r p r o d u ct m i x

TVS Motor product mix is relatively inferior as compared to its peers. Thecompany' s EBITDA margin of ~7.5% as against EBITDA margin of more than 15%for peers gives a fair idea of the company's product mix vis--vis its peers.

TVS Motor is currently the only player to be present in the all the three segmentsof the 2W industry viz. scooter, motorcycle and moped. Since the past few yearsthe company's product portfolio has been moving towards the lower pricedproducts.

However with new products we expect the company's product mix to improve inFY11E. In the scooters segment, the launch of Wego in the 110cc segment wouldstrengthen the company's portfolio as its earlier products were all below the 90ccengine capacity.

In the motorcycle segment the company's new launch in the executive segmentwould enhance the company's product portfolio and reduce the share of the entrysegment in the overall product mix.

One of the prime reasons for the detoriating product mix was the company'sfalling sales in the motorcycle segment. However moving into FY11E we expectthe contribution of the motorcycle segment to increase from 42.2% in FY10 to45.1% in FY11E and moped's share to fall f rom 37.6% in FY10 to 33.3% inFY11E.

We believe that TVS Motor have substantial scope of enhancing its product mix.New launches would help the company in two ways. Firstly it would lead toenhanced contribution from the scooter and motorcycle segment and the samewould push down contribution from moped segment. Secondly, within the scooterand the motorcycle segment, it would lead to product mix shift towards upper endof the market.

TVS - Volume contributors


EBITDA Margin Movement


0%

25%

50%

75%

100%

FY06 FY07 FY08 FY09 FY10

Scooters Motorcycles Moped

TVS - Product Mix

Source: Company, Kotak Securities - Pri-vate Client Research

0

20

40

60

80

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

ScootersMotorcyclesMoped

0

5

10

15

20

25

FY06 FY07 FY08 FY09 FY10E

HHML BAL TVS

Expected t o sell 36000 unit sin FY11 versus 15116 units

sold in FY10


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EBITDA m argins to show im provem ent in FY11E

Unlike for other two wheeler players where we are expecting fall in margins, TVSMotor is likely to improve its margins in FY11E. We expect the company's EBITDAmargin in FY11E at 7.7% as against FY10 EBITDA margin of 7.4% . Improvingproduct mix and robust volume growth is expected to help the company safeguardmargins from rising input cost in FY11E.

With the launch of new products we expect the company's product mix toimprove in FY11E thereby shielding the company's margins against rising inputcost. During FY11E, we expect the contribution from the motorcycle segment toincrease by 300 bps to 45.1% of overall volumes. Concurrently the contribution ofscooters is expected to increase by 140bps to 21.6%. On the other hand thevolume contribution from the moped segment is set to come down from 37.6%to 33.3% . Even within the scooter segment the company's product mix wouldimprove on account of entry into the 110cc segment and in the motorcyclesegment, new launch in the executive segment would lead to favorable mix. Shifttowards higher value products would lead to higher realizations. We expect thecompany's blended realization in FY11E to increase by 7.1% to Rs30,419.

We do not expect competition to have any major impact on the company'smargins. In the scooter segments the company hardly faces any competition in thelower end of the market. With their new launch in the higher end of the market,the company is expected to grab market share from the incumbents. In themotorcycle segment, entry in the executive segment will enhance the company'spresence and is expected to help them compete more aggressively. In the mopedsegment the company is the largest player with no competition from any majorplayers.

We expect that the margins would get further cushion from 21.1% expectedvolume growth in FY11E. Apart from this, we expect that the strong demand for2W would give the company leeway in partly passing on the higher raw materialcost. We therefore expect that despite input cost pressures, TVS Motors FY11E

EBITDA margins will increase by 30bps over FY10 levels.

New launches may reverse ear l ier m arket share losses

TVS Motor over the past few years has been loosing out market share in themotorcycle segment that accounts for 80% of the industry volumes. Over the pastfew years company's inability to launch a successful product coupled withincreasing competition led to TVS Motor's market share in the domesticmotorcycle segment plummeting to 6.7% in FY10 from ~13% in FY06.

TVS - EBITDA M arg in

Source: Company, Kotak Securities - Pri-vate Client Research

TVS Motors - Domestic motorcycle segment mkt share

Source: SIAM

Dometsic 2W volume growth rate

Source: SIAM

5.0

7.5

10.0

12.5

15.0

1 Q F Y 0 6

3 Q F Y 0 6

1 Q F Y 0 7

3 Q F Y 0 7

1 Q F Y 0 8

3 Q F Y 0 8

1 Q F Y 0 9

3 Q F Y 0 9

1 Q F Y 1 0

3 Q F Y 1 0

(26)

(13)

-

13

26

FY07 FY08 FY09 FY10

Industry TVS

-

2.5

5.0

7.5

10.0

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

We expect the company'sEBITDA margin in FY11E at

7.7% as against FY10EBITDA margin of 7.4%


38/43



In the domestic sub 125cc segment the company was the major loser where itsmarket share halved from 14% in FY06 to 6.6% in FY10. TVS Star remains thecompany's top selling model in the domestic segment. TVS Flame that waslaunched in April 2008 got caught in litigation with BAL over usage of twin sparkplug and this was major set back for the company. Furthermore the company hasnot been able to launch any successful product over the past few years and that

along with fading sales of its existing product led to sharp fall in its sales thatdropped from an average monthly volume of ~56,000 units in FY06 to ~30,000units in FY10. However with new launch in the executive segment we expect thecompany's volumes to improve in FY11E and regain a small proportion of the lostmarket share.

TVS - Domestic sub125cc motorcycle segment

Source: SIAM

Entry of new players like Honda Motorcycles, Suzuki Motorcycles and YamahaMotor in the premium segment led to steep competition for one of its more

successful model 'Apache'. On account of no new successful launches by thecompany its market share in the 125cc+ segment came down from 11% in FY07to 7.1% in FY10. Competition in the premium segment has become stiffer and wedo not expect any improvement in the company's market share in the premiumsegment in FY11E. Sales in FY10 in the premium segment remained flat for thecompany as against 11% industry growth. On account of company's initiative ofaggressive marketing in FY11E, we have factored in 13% volume growth for thecompany in the premium segment in line with overall segment growth.

TVS - Domestic 125cc+ motorcycle segment

Source: SIAM

-

50

100

150

200

1 Q F Y 0 6

2 Q F Y 0 6

3 Q F Y 0 6

4 Q F Y 0 6

1 Q F Y 0 7

2 Q F Y 0 7

3 Q F Y 0 7

4 Q F Y 0 7

1 Q F Y 0 8

2 Q F Y 0 8

3 Q F Y 0 8

4 Q F Y 0 8

1 Q F Y 0 9

2 Q F Y 0 9

3 Q F Y 0 9

4 Q F Y 0 9

1 Q F Y 1 0

2 Q F Y 1 0

3 Q F Y 1 0

4 Q F Y 1 0

-

4

8

12

16Volumes (Units '000 - LHS)

Market share (% - RHS)

-

11

22

33

44

55

1 Q F Y 0 6

2 Q F Y 0 6

3 Q F Y 0 6

4 Q F Y 0 6

1 Q F Y 0 7

2 Q F Y 0 7

3 Q F Y 0 7

4 Q F Y 0 7

1 Q F Y 0 8

2 Q F Y 0 8

3 Q F Y 0 8

4 Q F Y 0 8

1 Q F Y 0 9

2 Q F Y 0 9

3 Q F Y 0 9

4 Q F Y 0 9

1 Q F Y 1 0

2 Q F Y 1 0

3 Q F Y 1 0

4 Q F Y 1 0

-

4

8

12

16

20Volumes (Units '000 - LHS)

Market share (% - RHS)

TVS Star remains thecompany's top selling model in

the domestic segment

Competition in the premiumsegment has become st if f


39/43



During FY10 the domestic motorcycle industry had a dream run but TVS Motorsdomestic motorcycles sales increased by 7.5% which was far lower than 26%industry growth rate. In FY11E on account of low base and new launch we expectthe company to achieve 20% volume growth and thereby outperform industryvolumes. In terms of domestic market share we expect 50bps increase in FY11E forthe company.

Diversif ied business mix

TVS Motor is a significant two wheeler player with presence in all the segments ofthe two wheeler industry.

q Scooter segment

TVS has presence in the lower end and the mid-segment of the scooters segmentthrough its Scooty brand. Recently the company launched another scooter Wegoto strengthen its grip in the higher end of the scooter segment. TVS Motoraccounts for 21% of the scooter volumes and we expect the share to remain moreor less the same in FY11E. In the business mix the company derives 22% of itsoverall volumes from the scooters segment.

q Motorcycle segment:

l Sub 125cc segment: In the sub125cc segment the company has witnesseddrop in volume and substantial fall in market share. TVS Motor highest sellingbrand Star is present in this segment; but no new successful launch coupledwith increasing competition has led to TVS Motor market share dropping from14% in FY06 to 6.6% in FY10. Another important reason for falling marketshare has been the company's near absence in the high volume executive seg-ment. However with the launch of Jive in the executive segment the companyis looking to fill the vacuum and consolidate its position in the sub125cc seg-ment.

l 125cc+ segment: TVS is present in this segment through its Apache modeland holds around 7% market share. Competit ion in this segment has becomevery fierce in the past 3 years. We expect the company to be more aggressivegiven the highly competitive nature of this segment and we accordingly expectthe company volumes in grow in line with the industry.

q Moped

TVS Motor is the market leader in the mopeds segment with almost 100% marketshare. TVS Motor has reported consistent volume growth in this segment sinceFY06. Its share in the company's overall mix has increased from 22% in FY06 to38% in FY10 though we do not consider it to be a very healthy sign for thecompany. Moving ahead we expect the share of mopeds in overall mix to comedown following company's focus on the scooters and motorcycle segment.

q Export

Exports accounts for around 10-12% of the company's overall volumes. 90% ofthe export volumes consist of motorcycles while the rest includes scooters andmopeds. TVS Motor exports volumes have started picking up post global recoveryand accordingly we expect the company's export volume to grow by 28% inFY11E.

q Three w heeler

During FY08 the company ventured into the three wheeler (passenger segment)industry in a move to diversify into new segments. Even though the currentcontribut ion of 3% to the company's revenues is not significant; a gradual scale upin the 3W business would help the company reduce its dependence on the twowheeler industry to a certain extent.

TVS Motor accounts for 21% ofthe scooter volumes

Launch of Jive in the executivesegment to consolidate its

position in the sub125ccsegment.

Moped share in overall mix t ocome down following company's

focus on the scooters andmotorcycle segment.


40/43



Risk and concerns

Poor show by new launches: Our FY11E volume growth estimate of 21%significantly depends on fairly strong performance by the company's newproducts. Failure of company new products would have substantial impact on ourearnings estimates for FY11E.

FY10 ReviewTVS Motors FY10 results have shown a tremendous improvement over FY09.During FY10 revenues rose by 18.4% from Rs37,367mn to Rs44,240mn. Volumeincrease of 14% was the prime reason for rise in revenues. TVS Motor reported asignificant 75% higher EBITDA of Rs3,260mn. On back of fall in input cost andbetter volumes the company recorded improved EBITDA margin of 7.4% asagainst EBITDA margin of 5% reported during FY09. In FY10, the companyprovided for tax write-back of Rs104mn. Adjusted PAT for the period increased by325% from Rs310mn in FY09 to Rs1,320mn for the period under consideration.Due to extraordinary losses during the year, the reported profit for the year stoodat Rs865mn.

In FY10 TVS Motor has booked one time loss on its investments in TVS Finance &Services Ltd (a fellow subsidiary) to the tune of Rs890mn. TVSF&S has seen lossesand erosion in its networth over the past few years and accordingly the companyhas decided to transfer its entire holding to another subsidiary at a nominal price(as authenticated by the valuer's) and book the remaining amount as loss on saleof investments. However this step being a one time extraordinary event would nothave any impact on the company' s estimated FY11E earnings. In addit ion thecompany sold off some surplus land in the books of TVS Motor that resulted inone time gain of Rs546mn. During the year the company also provided forRs73mn towards VRS provisioning.

Financial performance

(Rs m n) FY10 FY09 YoY(%)

Volumes (mn units) 1.5 1.3 14.0Revenues 44,240 37,367 18.4

EBITDA 3,260 1,863 74.9EBITDA Margin (%) 7.4 5.0Reported PAT 865 310 178.5

Reported PAT Margin (%) 2.0 0.8Adjusted PAT 1,320 310 325.0Adjusted PAT Margin (%) 3.0 0.8

Adjusted EPS 5.6 1.3 325.0

Source: Company

Financial Outlookn Volumes. TVS Motor has been one of the laggards in terms of domestic vol-

ume growth over the past 4 years. TVS Motors two wheeler domestic volumeshave increased from 1.26mn units in FY06 to 1.36mn units in FY10 as againstindustry volume growth from 7mn units in FY06 to 9.4mn units in FY10. Dur-ing FY10 the company's volume grew by 14% as against 26% volume growthreported by the industry. However in FY11E we expect the company to outper-form industry volumes with 21% growth primarily on back of lower base andnew launches.

n Revenues. TVS Motor' s revenues grew by 18.4% in FY10E supported by 14%volume growth and 4% higher realization. With higher expected volumegrowth of 21.1% coupled with 7.1% better realization, revenues in FY11E areexpected to increase by 29.3% from Rs44,240mn to Rs57,206mn.


41/43



n Margins. TVS Motors EBITDA margin is improved from 5% in FY09 to 7.4% inFY10 on back of lower input cost. We believe that improvement in product mixand robust volumes will help the company improve further its margins to 7.7%in FY11E despite increasing raw material cost.

n Net profit s. During FY10, TVS Motors adjusted net profits increased substan-tially to Rs1,320mn from Rs310mn in FY09. We expect the company to con-tinue the strong show in FY11E on back of robust volume growth and im-proved margins. Accordingly we expect the company to report 39% growth inadjusted net profit in FY11E to Rs1,832mn.


TVS Motors intention of adapting an aggressive approach is expected to augurwell for the company's growth prospect in FY11E. TVS Motor is expected to postremarkable 29.3% growth in revenues in FY11E. Despite difficult situations relatedto input cost, TVS Motors EBITDA margin is expected to show improvement inFY11E. Accordingly the company's earnings in FY11E are expected to increase at arobust pace of 39% . TVS Motor is currently trading at PE of 18.0x its FY10adjusted EPS and 13.0x its FY11E estimate. We have valued the company at 14.5xits FY11E EPS of Rs7.7 and arrive at the target price of Rs112. Our PE multiple of14.5x is 10% discount to the larger players in the industry due to its smaller scaleof operation. We rate the stock as ACCUMULATE.


42/43





Revenues 37,367 44,240 57,206

% change YoY 14 18 29EBITDA 1,863 3,260 4,394% change YoY 101 75 35

Other Income 122 74 128Depreciat ion & Amort ization 1,029 1,490 1,667EBIT 957 1,844 2,855

% change YoY 104 93 55Interest cost 646 628 820Extraordinary expenses/(income) - 455 -

Prof i t bef ore t ax 311 761 2,035% change YoY (12) 145 168

Tax 0 (104) 204as % of PBT 0 (14) 10Net Income (Reported) 310 865 1,832% change YoY (2) 179 112

Net Incom e (Adjust ed) 310 1,320 1,832% change YoY (2) 325 39Shares outstanding (mn) 238 238 238

EPS (repor t ed) (Rs) 1.3 3.6 7.7EPS (adjusted) (Rs) 1.3 5.6 7.7CEPS (Rs) 5.6 9.9 14.7

DPS (Rs) 0.7 0.7 0.7




EBIT 957 1,389 2,855Depreciation 1,029 1,490 1,667Change in working capital 357 (348) 990

Change in ot her net current asset (672) 117 (482)Operat ing cash f low 1,671 2,647 5,031Interest (646) (628) (820)

Tax (68) 54 (254)

Misc expenses (226) (50) (50)Others (200) - -

Cash f low f rom operat ions 531 2,023 3,907Capex (962) (984) (1,550)(Inc)/dec in investments (1,388) (1,497) (1,026)

Dividends (195) (195) (195)Cash f l ow f r o m in vest m en t s (2,544 ) ( 2,6 76) (2 ,771 )Proceeds from issue of equit ies - - -

Increase/(decrease) in debt 2,396 743 (1,091)Proceeds from share premium - - -Cash f low from f inancing 2,396 743 (1,091)

Opening cash 37 421 511Closing cash 421 511 557




Cash and cash equivalents 1,352 1,629 1,700Accounts receivable 1,816 1,818 2,351Inventories 3,206 4,351 5,145

Loans and advances 3,495 3,413 3,921Others - - -Current assets 9,868 11,211 13,117

Misc. exps 753 803 853LT investments 3,845 5,156 6,156Net f ixed assets 10,364 9,858 9,741

Tot al asset s 24,831 27,028 29,868

Payables 5,503 6,303 8,620

Others - - -Current liabilit ies 5,503 6,303 8,620Provisions 655 690 717

Debt 9,060 9,803 8,711Other liabilit ies 1,481 1,431 1,381Equity 238 238 238

Reserves 7,894 8,564 10,201Tot al l i abi l i t ies 24,831 27,028 29,868

BVPS (Rs) 31 34 40


Ratios analysis



Inventory days 35 31 30Debtor days 13 15 15Creditor days 52 52 55

Debt-Equity 1.2 1.2 0.9ROCE (%) 4.8 8.7 14.3

ROE (%) 4.1 17.2 20.8

Price/Sales (P/S) 0.6 0.5 0.4

Price/Book (P/B) 3.2 3.0 2.5Price/Earnings (P/E) 76.5 27.5 13.0


FINANCIALS


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Research TeamDipen ShahIT, Mediadip en.shah@kot ak.com+91 22 6621 6301

Sanjeev ZarbadeCapital Goods, Engineeringsanjeev.zarb ade@kot ak.com+91 22 6621 6305

Teena VirmaniConstruction, Cement, Mid Capteena.virmani@kot ak.com+91 22 6621 6302

Apurva DoshiLogistics, Texti les, M id Capdoshi.apu rva@kot ak.com+91 22 6621 6308

Saurabh GurnurkarMedia, IT

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Saurabh Agr awalMetals, Miningagraw al.saurabh@kot ak.com+91 22 6621 6309

Saday SinhaBanking, Economysaday.sinha@kot ak.com+91 22 6621 6312

Sarika LohraNBFCssarik a.loh ra@kot ak.com+91 22 6621 6313

Arun AgarwalAutomobilesarun.agarwal@kot ak.com+91 22 6621 6143

Ruchir KhareCapital Goods, Engineeringruchir.khare@kot ak.com+91 22 6621 6448

Jayesh KumarEconomy

kum ar.jayesh@kot ak.com+91 22 6652 9172

Shrikant ChouhanTechnical analystshrikant .chouhan@kot ak.com+91 22 6621 6360

K. KathirveluProductionk.kath irvelu@kot ak.com+91 22 6621 6311

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