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Indonesian venture to dent profitability
For the month of November 2010, TVS Motors’
Indonesian subsidiary, PT TVS Motor Company
Indonesia (PT TVS), registered overall sales of just 779
units vs 1,771 units in October 2010. For YTD FY11, it
has registered overall sales of 13,627 units, translating
into monthly run rate (MRR) of just 1,703 units. This is
significantly lower than the management’s guidance of
required 6,000 units MRR for break-even. The volume
performance during YTDFY11 further vindicates our
view that the Indonesian venture would continue to
dent TVS Motors’ consolidated profitability. We expect
the venture to break-even only by FY14E (vs the
management’s guidance of H1FY12E).
�� Nov 2010 volumes lower than industry: The overall
industry sales for the month of Nov 2010 in Indonesia
stood at 653,824 units. PT TVS’ drop in sales, down 56%
MoM, was significantly higher than the industry’s 6%
fall. Though, we believe that a MoM comparison is not
relevant as September being the festive month (Idul
Fitri*), the order backlog is carried forward to October
and as a result sales during November are traditionally
lower than that of October. However, the significant
drop in volumes vs the industry’s is disappointing.
�� Creating a brand identity, distribution network
crucial: We believe it would be challenging for TVS
Motors to compete against Japanese players – Honda
(47% market share), Yamaha (45%) and Suzuki (7%).
While TVS Motors has been successful in developing a
new model (Neo), we believe that the next challenge
for the company would be to create a brand identity
and distribution network against well-entrenched
Japanese competitors.
�� Sell with target price of Rs66: At CMP of Rs73, the
stock trades at 17.3x FY11E standalone EPS of Rs4.2
and 14.1x FY12E standalone EPS of Rs5.2. We believe
the current valuations have factored in the expected
traction in its standalone business, while ignoring the
losses at its Indonesian subsidiary. We re-iterate our
Sell rating with a target price of Rs66 (we have valued
the core business at 10% discount to Hero Honda’s
historical P/E of 13.5x Sept 2012 earnings and assigned
a negative value of Rs3.1 for the Indonesian venture).
Volume performance of Indonesian subsidiary tepid
During 8MFY11 (April-Nov 2010), PT TVS registered overall volumes of 13,627 units. This translates
into monthly run rate (MRR) of ~1,703 units, significantly lower than 6,000 units needed for breakeven.
We continue to remain concerned about the profitability of this venture. During 8MFY11, the
market share of TVS stood at just 0.3%. Honda, Yamaha and Suzuki control 99% share in the
Indonesian market.
Indonesian project to dent consolidated earnings till FY13E
TVS Motors started manufacturing TVS Neo, the bebeks (step-through), through its 100% subsidiary
PT TVS Motor Company, Indonesia, from FY08. This facility is located at Karawang (near Jakarta) and
has a manufacturing capacity of 300,000 units. Till date, TVS Motors has invested Rs2bn in the
subsidiary. Accumulated losses till date have been Rs2.8bn. Currently, with a MRR of 1,700 units, it
operates at only 7-8% capacity utilization. While the management expects the subsidiary to breakeven
by H1FY12E, we believe it would take longer.
We believe it would be challenging for TVS Motors to compete against Japanese players – Honda
(47% market share), Yamaha (45%) and Suzuki (7%), which together have a 99% market share. While
TVS Motors has been successful in developing a new model (Neo), we believe that the next
challenge for the company would be to create a brand identity and distribution network against
well-established Japanese competitors.
PT TVS sold 15,000 units in FY10. We have factored in volumes of 26,400 units for FY11E (YTD MRR at
1,703 units) and 42,000 units for FY12E. However, we expect the Indonesian venture to achieve
break-even only in FY14E. Given the YTDFY11 performance, we see further downside to our
assumption of 26,400 units for FY11E.
In its FY10 annual report, TVS Motors has mentioned gross exit margins for Indonesian venture at
5% in FY09 and 17% in FY10.
Valuations and recommendations
We expect TVS Motors’ standalone business to register strong 24% revenue and 39% earnings CAGR
over FY10-12E, driven by strong operating leverage. We believe current valuations have more than
captured this opportunity, while ignoring losses at the Indonesian subsidiary. We expect the
Indonesian venture to achieve break-even only by FY14E vs the management’s guidance of FY12E. At
CMP of Rs73, the stock trades at 17.3x FY11E standalone EPS of Rs4.2 and 14.1x FY12E standalone EPS
of Rs5.2. We maintain our Sell rating with a target price of Rs66 (we have valued the core business at
10% discount to Hero Honda’s historical P/E multiple of 13.5x Sept 2012E earnings and assigned a
negative value of Rs3.1 for its Indonesian venture).
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