Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
TVS Motor Company Ltd.
Scaling up for a turnaround [EXTRACT]
TVS is India’s third-largest company in a fast-growing 2-W sector
We initiate coverage of TVS Motor (TVS), India’s third-largest 2-W company by
volume, with a 15% market share. TVS has a monopoly in mopeds, which account
for 6% of the 2-W market and the second position in scooters with a 22% market
share. We forecast TVS’s volume will grow 19%/16% YoY in FY12/13, mainly
driven by rapid growth across all product categories, particularly scooters and
exports of 2-Ws and 3-Ws.
Margins should improve with increasing scale
TVS’s margins of around 6% are significantly lower than those of its peers at 12-
16% due to the company’s smaller scale. We forecast EBITDA margins will
expand 40bp/60bp to 6.4% and 7.0% in FY12/13 due to: 1) operating leverage
following strong volume growth; 2) a larger proportion of higher-margin 3-Ws in
its total mix; and 3) lower losses at its Indonesian operations.
We forecast a rapid recovery in earnings
We forecast an EBITDA CAGR of 33% over FY11-13, driven by strong volume
growth, its resulting operating leverage, and a 57% EPS CAGR over FY11-13 (our
estimate). Our FY12/13 EPS estimates are 20% below and 11% above consensus,
respectively.
Valuation: initiate coverage with a Buy rating and Rs85 price target
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
13.3% and an intermediate growth rate of 13%. At our price target, the stock’s
implied valuation is 12x FY13E PE. We believe its valuation remains attractive at
7x EV/EBITDA FY12E—a 35% discount to its peers.
Risk analysis
Market share losses
Over the past few years, TVS has continued to lose market share in the
motorcycle segment (it did not have a strong presence in the fastest-growing
executive segment) and scooter segment (it did not have a presence in the higher
cc segment). The company has since entered both segments with the launch of
the TVS Jive (an executive segment bike) and the TVS Wego (a 110cc scooter)
in FY10, which helped it gain market share in FY11 (around 60bp to 15.1%).
However, we think potential product launches/re-launches by its competitors
pose a significant risk to TVS’s market share, particularly in the motorcycle
segment.
Raw material costs
The ratio of raw material costs to sales has risen by around 300bp in 9M FY11
at the standalone level to 74.1%. We believe further pressure from raw material
costs presents a risk to our earnings estimates. An increase of 100bp in raw
material costs to sales could negatively impact EBITDA and PAT margins in
FY12 by 100bp and 80bp at the standalone level, respectively.
Delay in turnaround of Indonesian operations
TVS has made significant investments in its Indonesian subsidiary, PT. TVS
Motor Company Indonesia (PT. TVS) to the extent of Rs.1.5bn in the past two
years. PT. TVS is currently generating substantial losses (Rs.1bn in FY10) due
to its small scale and higher spending on product development and brand
building. According to management, PT. TVS will reach a cash break-even
point in FY12. However, we expect PT. TVS to only turn EBITDA positive in
FY14. Any delay in the turnaround of its Indonesian operations or greater-thanexpected
losses presents a key risk to our view. TVS’s FY11 results due on 29
April should provide more clarity on its Indonesian operations.
Delay in new product launch
We have not assumed any product launches by TVS in our estimates, but our
positive view on the company stems from management’s guidance of a
motorcycle launch in the executive segment, a new variant of the Scooty and
other re-launches in FY12. Should there be delays in its launches/re-launches,
TVS’s market share could erode, which can lead to a de-rating for its stock.
Investments in subsidiaries
TVS has made substantial investments in its subsidiaries engaged in related (PT.
TVS, Sundaram Components) and unrelated (TVS Energy, TVS Housing)
operations. TVS invested around Rs.2bn in FY09 and FY10, primarily in its
Indonesian subsidiary—which is making substantial losses due to its small scale.
TVS recently announced potential investments to enter the low-cost housing
market through its 100%-owned subsidiary, TVS Housing. A delay in the
turnaround of its new ventures or substantial investments in unrelated ventures
could be negative for the company’s minority shareholders.
Competitive strengths
Ability to innovate
We believe TVS’s key competitive strengths include its ability to innovate and
enter new product categories. According to management, TVS has many firsts—
it was the first company to launch a four stroke motorcycle and an auto clutch
motorcycle in India. TVS expects to leverage its strong ability to innovate to
launch products/variants.
100% market share in mopeds
TVS has a 100% market share in India’s moped segment. A decline in financing
has led to strong growth in the moped market; we expect TVS to benefit from
continued robust growth in this segment.
Growing international presence
With the launch of its 3-Ws, we believe TVS has greater potential to expand in
the international market. Within two years of the launch, TVS’s cumulative 3-W
exports have reached close to 19,000 units. We forecast its 3-W exports will
record a CAGR of 42% in FY11-15. In addition, the company’s 2-W exports
have gained traction—it grew 39% YoY in FY11 after a 14% YoY decline in
FY10. Its Indonesian subsidiary has a total cumulative volume of 30,000 up to
FY10. Management indicated its current sales rate for Indonesia is around 2,000
units/month; it expects this to increase to around 7,500 units/month in the
medium term.
Presence across all product categories
We think a key strength for TVS is its presence in all the product categories,
including mopeds (where it has a 100% market share). With its most recent
launch of the TVS Jive (an executive segment motorcycle) and TVS Wego (a
110cc scooter), the company has a comprehensive product portfolio. This could
help maintain its market share amid increasing competition.
Management strategy
New product launches
TVS had a limited presence in the largest and fastest-growing executive segment
category for motorcycles and higher cc segment for scooters until FY10. This
led to the company’s considerable market share decline. To arrest its declining
market share, it introduced the TVS Wego (a 110cc scooter) and TVS Jive (an
executive segment motorcycle) in FY10. Following the product launches, TVS
gained 110bp in market share YoY in the scooter segment in FY11 and 30bp in
market share YoY in the motorcycle segment in FY11. Overall, the company
gained a 60bp share in the 2-W market in FY11 (its market share increased from
14.5% in FY10 to 15.1% in FY11).
Management has indicated it will launch a new motorcycle in the executive
segment and a new variant of the Scooty in FY12. A ramp up in volume for the
TVS Wego and potential launches in FY12 could drive volume growth for the
company.
Valuation
Price target derivation
TVS is trading at a PE ratio of around 13x 2012E compared to around 15x for
Bajaj Auto and Hero Honda. At our price target of Rs85, the implied valuation
for TVS’s stock is around 12x FY13E PE.
We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool. We assume a
WACC of 13.3% and an intermediate growth rate of 13%.
TVS Motor Company Ltd.
TVS Motor is India's third-largest two-wheeler company by volume. It has a
presence in all the product categories including mopeds (25% of two-wheeler
sales), where it has a 100% market share. TVS also has a strong position in the
scooter segment (22%); and motorcycles form the rest of its two-wheeler sales
(54%). TVS entered the three-wheeler (passenger) segment in FY08 and has
gained an around 5% market share. Exports and auto component sales constitute
about 11% and 15% of its total consolidated sales, respectively.
Statement of Risk
The key risks to our earnings estimates for auto companies are fluctuations in
sales volumes and raw material prices. Demand is linked to various factors
including economic growth and interest rates. Given a high level of
consolidation within the industry, the two-wheeler segment is more prone to
price wars.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
TVS Motor Company Ltd.
Scaling up for a turnaround [EXTRACT]
TVS is India’s third-largest company in a fast-growing 2-W sector
We initiate coverage of TVS Motor (TVS), India’s third-largest 2-W company by
volume, with a 15% market share. TVS has a monopoly in mopeds, which account
for 6% of the 2-W market and the second position in scooters with a 22% market
share. We forecast TVS’s volume will grow 19%/16% YoY in FY12/13, mainly
driven by rapid growth across all product categories, particularly scooters and
exports of 2-Ws and 3-Ws.
Margins should improve with increasing scale
TVS’s margins of around 6% are significantly lower than those of its peers at 12-
16% due to the company’s smaller scale. We forecast EBITDA margins will
expand 40bp/60bp to 6.4% and 7.0% in FY12/13 due to: 1) operating leverage
following strong volume growth; 2) a larger proportion of higher-margin 3-Ws in
its total mix; and 3) lower losses at its Indonesian operations.
We forecast a rapid recovery in earnings
We forecast an EBITDA CAGR of 33% over FY11-13, driven by strong volume
growth, its resulting operating leverage, and a 57% EPS CAGR over FY11-13 (our
estimate). Our FY12/13 EPS estimates are 20% below and 11% above consensus,
respectively.
Valuation: initiate coverage with a Buy rating and Rs85 price target
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
13.3% and an intermediate growth rate of 13%. At our price target, the stock’s
implied valuation is 12x FY13E PE. We believe its valuation remains attractive at
7x EV/EBITDA FY12E—a 35% discount to its peers.
Risk analysis
Market share losses
Over the past few years, TVS has continued to lose market share in the
motorcycle segment (it did not have a strong presence in the fastest-growing
executive segment) and scooter segment (it did not have a presence in the higher
cc segment). The company has since entered both segments with the launch of
the TVS Jive (an executive segment bike) and the TVS Wego (a 110cc scooter)
in FY10, which helped it gain market share in FY11 (around 60bp to 15.1%).
However, we think potential product launches/re-launches by its competitors
pose a significant risk to TVS’s market share, particularly in the motorcycle
segment.
Raw material costs
The ratio of raw material costs to sales has risen by around 300bp in 9M FY11
at the standalone level to 74.1%. We believe further pressure from raw material
costs presents a risk to our earnings estimates. An increase of 100bp in raw
material costs to sales could negatively impact EBITDA and PAT margins in
FY12 by 100bp and 80bp at the standalone level, respectively.
Delay in turnaround of Indonesian operations
TVS has made significant investments in its Indonesian subsidiary, PT. TVS
Motor Company Indonesia (PT. TVS) to the extent of Rs.1.5bn in the past two
years. PT. TVS is currently generating substantial losses (Rs.1bn in FY10) due
to its small scale and higher spending on product development and brand
building. According to management, PT. TVS will reach a cash break-even
point in FY12. However, we expect PT. TVS to only turn EBITDA positive in
FY14. Any delay in the turnaround of its Indonesian operations or greater-thanexpected
losses presents a key risk to our view. TVS’s FY11 results due on 29
April should provide more clarity on its Indonesian operations.
Delay in new product launch
We have not assumed any product launches by TVS in our estimates, but our
positive view on the company stems from management’s guidance of a
motorcycle launch in the executive segment, a new variant of the Scooty and
other re-launches in FY12. Should there be delays in its launches/re-launches,
TVS’s market share could erode, which can lead to a de-rating for its stock.
Investments in subsidiaries
TVS has made substantial investments in its subsidiaries engaged in related (PT.
TVS, Sundaram Components) and unrelated (TVS Energy, TVS Housing)
operations. TVS invested around Rs.2bn in FY09 and FY10, primarily in its
Indonesian subsidiary—which is making substantial losses due to its small scale.
TVS recently announced potential investments to enter the low-cost housing
market through its 100%-owned subsidiary, TVS Housing. A delay in the
turnaround of its new ventures or substantial investments in unrelated ventures
could be negative for the company’s minority shareholders.
Competitive strengths
Ability to innovate
We believe TVS’s key competitive strengths include its ability to innovate and
enter new product categories. According to management, TVS has many firsts—
it was the first company to launch a four stroke motorcycle and an auto clutch
motorcycle in India. TVS expects to leverage its strong ability to innovate to
launch products/variants.
100% market share in mopeds
TVS has a 100% market share in India’s moped segment. A decline in financing
has led to strong growth in the moped market; we expect TVS to benefit from
continued robust growth in this segment.
Growing international presence
With the launch of its 3-Ws, we believe TVS has greater potential to expand in
the international market. Within two years of the launch, TVS’s cumulative 3-W
exports have reached close to 19,000 units. We forecast its 3-W exports will
record a CAGR of 42% in FY11-15. In addition, the company’s 2-W exports
have gained traction—it grew 39% YoY in FY11 after a 14% YoY decline in
FY10. Its Indonesian subsidiary has a total cumulative volume of 30,000 up to
FY10. Management indicated its current sales rate for Indonesia is around 2,000
units/month; it expects this to increase to around 7,500 units/month in the
medium term.
Presence across all product categories
We think a key strength for TVS is its presence in all the product categories,
including mopeds (where it has a 100% market share). With its most recent
launch of the TVS Jive (an executive segment motorcycle) and TVS Wego (a
110cc scooter), the company has a comprehensive product portfolio. This could
help maintain its market share amid increasing competition.
Management strategy
New product launches
TVS had a limited presence in the largest and fastest-growing executive segment
category for motorcycles and higher cc segment for scooters until FY10. This
led to the company’s considerable market share decline. To arrest its declining
market share, it introduced the TVS Wego (a 110cc scooter) and TVS Jive (an
executive segment motorcycle) in FY10. Following the product launches, TVS
gained 110bp in market share YoY in the scooter segment in FY11 and 30bp in
market share YoY in the motorcycle segment in FY11. Overall, the company
gained a 60bp share in the 2-W market in FY11 (its market share increased from
14.5% in FY10 to 15.1% in FY11).
Management has indicated it will launch a new motorcycle in the executive
segment and a new variant of the Scooty in FY12. A ramp up in volume for the
TVS Wego and potential launches in FY12 could drive volume growth for the
company.
Valuation
Price target derivation
TVS is trading at a PE ratio of around 13x 2012E compared to around 15x for
Bajaj Auto and Hero Honda. At our price target of Rs85, the implied valuation
for TVS’s stock is around 12x FY13E PE.
We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool. We assume a
WACC of 13.3% and an intermediate growth rate of 13%.
TVS Motor Company Ltd.
TVS Motor is India's third-largest two-wheeler company by volume. It has a
presence in all the product categories including mopeds (25% of two-wheeler
sales), where it has a 100% market share. TVS also has a strong position in the
scooter segment (22%); and motorcycles form the rest of its two-wheeler sales
(54%). TVS entered the three-wheeler (passenger) segment in FY08 and has
gained an around 5% market share. Exports and auto component sales constitute
about 11% and 15% of its total consolidated sales, respectively.
Statement of Risk
The key risks to our earnings estimates for auto companies are fluctuations in
sales volumes and raw material prices. Demand is linked to various factors
including economic growth and interest rates. Given a high level of
consolidation within the industry, the two-wheeler segment is more prone to
price wars.
No comments:
Post a Comment