Corporate Finance 2 Project 1

TVS MOTORS Company

TVS MOTORS LTD.

Economic analysis
1. The Indian economy grew at a rate of 8.2% in Q3FY2011 and is expected to grow at above 8% in
FY2012. Thus the purchasing power and the market size are also expected to grow.
2. India is fighting hard to control inflation which can be thought of as a by-product of high growth
rate. WPI inflation is currently at about 8.2% with food inflation as high as 15.6%. It is expected
to moderate to the levels of 5.5 to 6% in FY2012. High inflation will lead to hike in raw material
prices and thus hike in two wheeler prices thus adversely affecting the sales.
3. In an effort to control inflation RBI has been raising repo rate which now stands at 6.75%, while
the reverse repo rate is at 5.75%. As a result the banks are hard pressed to increase their own
lending rates. This would adversely affect the sales of two wheeler segment since financing loans
would get dearer.
4. Crude oil is trading at new highs thus instigating hike in domestic fuel prices. Hike in prices will
increase operating cost of the firm and could also adversely affect the sales.
Industry Analysis
1. Industry Competitors:
a. TVS motors holds third position in Indian two wheeler industry, the first two being
occupied by Hero Honda and Bajaj auto respectively. It faces tough competition from
these rivals and has a market share of just 6.7% in the motorcycle segment.
b. It faces competition from Honda in the scooters segment.
2. Bargaining power of suppliers:
a. TVS Motors has the lowest capacity utilisation among its competitors at 63.4% in 200910. Also they have abundant suppliers.
3. Bargaining power of customers:
a. They have a large product range on the basis of power and price to choose from.
4. Threat of new entrants:
a. In future we might see foreign two wheeler companies coming to India with new
products suitable for Indian market and might pose a threat to the domestic producers.
5. Threat of substitutes:
a. Low price cars like Tata Nano and others might prove to be a near substitute and thus
capture some part of the two wheeler market.
Company Analysis
Operating Performance: The Operating Profit margin for TVS Motors of 3.18% and its Net Profit
Margin of 1.83% in FY2010 seems to be on the rise when compared to its performance for the previous
two fiscal years. It is expected to rise further in FY2011 when the Operating Profit Margin is expected to
be 4.9% and the Net Profit Margin is expected to be 3.21%. But it is still way below that of its
competitors. For Bajaj Auto the Operating Profit Margin was 19.04% and the Net Profit Margin was
13.41% in FY2010 and for Hero Honda the Operating Profit Margin was 15.96% and the Net Profit
Margin was 12.57% in FY2010.
Financial Performance: The current ratio and quick ratio of TVS Motors is 1.08 and 0.67 in FY2010
respectively. It has been increasing over the past two years. For Bajaj Auto the current ratio and quick
ratio are 1.06 and 0.6 respectively and for Hero Honda the current ratio and quick ratio are 0.6 and 0.5
respectively. Hence we can see that the liquidity for TVS Motors is better than its competitors.
Capital Structure: TVS Motors has debt of 54.13% and equity of 45.87% currently. Its debt to equity
ratio has been rising over the past few fiscal years and is currently at 1.18. Comparing the debt to equity
ratio with its competitors, Bajaj Auto has a debt to equity ratio of 0.46 and for Hero Honda it is only 0.02.
This shows that TVS Motors has the highest amount of debt in its capital structure and thus has the least
WACC of 11.8%. Whereas the WACC for Bajaj Auto is 13.1% and that of Hero Honda is 12.06%. But if
Team: G05

Srikanth(10FN-109), Saurabh(10FN-102), Nikhil(10FN-121),

Tushar (10FN-115), Tarun (10DM-162)

Corporate Finance 2 Project 2

TVS MOTORS Company
TVS Motors increases its debt any further, financial distress costs will increase exponentially and the cost
of equity will go much higher. There by increasing the WACC above it competitors.
Distribution: TVS Motors has been giving handsome dividends of 130%, 85%, 70%, 70% and 120% of
the face value in FY2006, FY2007, FY2008, FY2009 and FY2010 respectively. It has 50% dividend till
now in FY2011 and a bonus issue of 1:1 in September 2010. The company has never bought back any
shares from its shareholders.
Working Capital: TVS Motors Account Receivables cycle has been declining over the past few fiscal
years and is currently at 16.03 days in FY2010 when compared to 4.78 in FY 2006. Whereas the
Accounts Receivable cycle for Bajaj Auto is 9.45 days and that of Hero Honda is just 2.84 days. The
Accounts Payable cycle has been more or less constant for TVS Motors and was 54.67 days in FY2010.
Whereas that of Bajaj Auto was 73.18 days in FY 2010 and for Hero Honda was 54.71 days in FY2010.
Hence TVS Motors has higher working capital requirement compared to its competitors.
Investments in Fixed Assets: TVS Motors made considerable investments in fixed assets in FY2007 and
FY2008 and is currently operating at only 63.4% capacity utilization hence hasnt made significant
investments in the last two fiscal years. However with the growth in sales expected in the coming years it
will again need to invest significantly in fixed assets.
Short Term investments: TVS Motors has made significant investments in short term investment in
FY2010 compared to what it has been doing historically.
SWOT Analysis:
Strengths:
1. Expanding footprint in 3-wheelers and 100 cc plus scooters market having an operating margin of
14% compared to 8% for 2-wheelers.
2. Monopoly in the mopeds market which contributes about 22% of total sales.
Weakness:
1. Low capacity utilization compared to its competitors leading to less efficient operations.
Opportunities:
1. Exports presently contributing 15% of sales and expected to contribute 25% in 4-5 years.
2. Indonesian subsidiary which is currently bleeding is expected to break even by FY2012 and will
start contributing to TVS Motors profits.
Threats:
1. High Debt to Equity ratio which might make it difficult to raise further debt for expansion.
2. Its share of the motorcycle market has been declining due to increased competition.
Growth Rate in Sales and Sustainable Growth Rate: Since we have 3 quarters data for FY2011 we
have taken the growth rate for Q4FY2010 and assumed that TVS Motors will be able to grow at the same
rate during Q4FY2011. Since the auto industry is expected to grow at 18-24% during FY2012 we expect
the sales of TVS Motors to grow at 15% during the same period. After which the growth rate will decline
to 10% during FY2013 and FY2014. After which we expect the sustainable growth rate to be at around
5% since that is the average sustainable growth rate of the auto industry.
Valuations: The dividend payout doesnt seem to be directly proportional to the Net Income earned by
TVS Motors for that year. Hence the dividend discount model is not appropriate for finding out the
enterprise value of TVS Motors. So we have used the Free Cash Flow Model for the same.
We have got an Enterprise Value of Rs. 5445.22 Cr. and an Equity Value of Rs. 3275.35 Cr.
The numbers of shares outstanding are 47.5 Cr. giving it an Intrinsic Value per share of Rs. 68.95.
Currently the stock is trading at Rs. 55.85 which is below its intrinsic value. Hence we believe that the
stock is UNDERVALUED.
Currently the stock is trading at a trailing P/E ratio of 15.51 which is below its P/E ratio at the end of the
last fiscal year and also below the industrial average for the two wheelers auto industry of 17.98. This is
in line with our conclusion that the stock is undervalued.
The 12 months price target for TVS Motors is Rs. 69.
Team: G05

Srikanth(10FN-109), Saurabh(10FN-102), Nikhil(10FN-121),

Tushar (10FN-115), Tarun (10DM-162)