Tvs Motors Credit Risk Analysis

Company Profile TVS Motor Company (TVS-M) one of the largest two wheeler manufacturers in India, started manufacturing in 1979. TVS-M currently manufactures a range of two wheelers namely motorcycles, scooters, scooterettes and mopeds in its plants located at Hosur (in Tamilnadu) and at Mysore (in Karnataka). Our subsidiary M/s Lakshmi Auto Components Ltd (LAC), the Engine component division has been merged with TVS-M, so the annual report of 2003-04 comprises of both. Our market share is around 22 %. TVS-M is also the market leader in the moped segment enjoying a share of 69 %. The combined capacity as of march 04 is more than 1.6 million vehicles TVS-M also exports its bikes as SKDs and CKDs to African and South American countries and also to Bangladesh and Srilanka.

Historical Comparison 1. Current Ratio 2004-

2005-

2006-

Average 2007-

2005

2006

2007

233.23 39.56 73.87 61.89

357.90 58.90 24.35 103.22

396.56 111.40 86.56 103.77

329.23 69.95 61.59 89.63

405.38 87.86 3.73 72.17

0.29 164.70 573.54

0.30 214.88 759.55

0.30 227.58 926.17

0.30 202.39 753.09

0.30 277.52 846.96

452.19 55.61 507.80

524.46 62.44 586.90

577.02 49.73 626.75

517.89 55.93 573.82

505.76 60.99 566.75

1.13

1.29

1.48

1.30

1.49

2008

Current Asset Inventories Sundry Debtors Cash and Bank Short Term Investments Other C.A. Loans Current Liability Current Liab. Provisions

Current Ratio

0.19

Notes: The Short Term part of the Investments have been taken as Current Assets

The current ratio of the company has improved by .19 over the last three years average of 1.30. Thus we will give it a score of 2.

2. TOL/TNW TOL Secured Loan

175.0

308.61

506.16

329.93

452.68

Unsecured Loan Current Liability

1 11.83 452.1

76.43 524.46

127.40 577.02

71.89 517.89

312.66 505.76

Differed Tax Lib

9 148.5

149.01

159.01

152.18

154.90

1 41.35 828.8

48.19 1106.7

46.17 1415.7

45.24 1117.1

44.36 1470.3

9

0

6

2

6

Share capital Reserves and

23.75 655.0

23.75 742.37

23.75 785.52

23.75 727.66

23.75 797.83

Surplus

8 678.8

766.12

809.27

751.41

821.58

1.44

1.75

1.47

1.79

Provisions

TNW

3 TOL/TNW Ratio

1.22

0.32

Total outsiders liability by Total Net worth has worsened by .32 over the last three years average. So we have given a score of 0.

3. PAT/Net Sales Ratio PAT

183.32

160.71

102.10

148.71

60.86

Net Sales

2875.9

3234.9

3854.9

3321.9

3219.5

1

6

6

4

0

0.06

0.05

0.03

0.05

0.02

PAT/Net Sales

-0.03

Ratio

PAT by net sales ration has gone down by0 .03 from the last three years average. So we score it as 0.

4. Inventory+Receivables/Net Sales

Inventory

233.2

357.9

396.5

329.2

405.3

Receivables

3 39.56

0 58.90

6 111.40

3 69.95

8 87.86

7.99

8.99

10.71

9.23

8.94

34.15

46.38

47.44

42.66

55.15

Daily Net Sales Ratio

12

The turnover ratio of Inventory + Receivables by Net sales has worsened by 12 days. So we score it as 0.

Financial Parameter Current ratio TOL/TNW PAT/Net Sales (Inv. + Rec.)/Daily

Score

sales Score

1 0 0 0

2 2 2 2

1

8

Out of 8 TVS has managed to score only 1, which clearly states that it is in a financially bad position compared to its historical performance.

Industrial Comparison TVS Motors

Bajaj Auto Ltd

Current Ratio

1.49

Hero

Industry

Honda Average 0.88 0.96 1.05

Total liabilities / Total Net

1.79

2.09

1.72

2.19

worth PAT/Net Sales Inventory + Receivables/

1.89 55.15

0.13 145.21

0.09 18.09

0.08 77.15

Net Sales PBDIT/Interest (times) ROCE

60.34 0.04

360.23 0.03

61.28 0.97

142.69 0.35

Current Ratio Total liabilities / Total Net

2.00 2.00

worth PAT/Net Sales Inventory + Receivables/ Net

2.00 2.00

Sales Total Score

8.00

The score clearly shows that although TVS Motors is doing badly compared to its historical performance, its far better than the two other major players in the Two wheeler industry.

Financial Risk Rating (Working Capital) PBDIT/Interest 2007-2008 PBT Interest Depreciation PBDIT PBDIT/Interest Ratio

35.37 2.19 94.59 132.15 60.34246575

ROCE PBIT Total Asset Current Lib & Prov. Capital employed ROCE Ratio

37.56 1,382.01 566.75 815.26 4.61%

Financial Risk Rating 2007-2008 Current ratio TOL/TNW PBDIT/Interest PAT/Net Sales ROCE (Inv.+Rec.)/Daily Sales Total Score

Score 1.49 1.79 60.34 1.89% 4.61% 55.15

4 5 5 0 0 5

5 5 2 2 2 4

Score 20 25 10 0 0 20

20

75

37.5

R&J Model

Financial Parameter Score Current ratio

TOL/TNW

PAT/Net Sales

(Inv. + Rec.)/Daily sales

1 Greater than

0 Equal to average plus or

-1 Less than

average plus

minus a variation of

average minus

0.03 Less than

0.03 Equal to average plus or

0.03 Greater than

average minus

minus a variation of

the average

0.20 Greater than

0.20 Equal to average plus or

plus 0.20 less than

average plus

minus a variation of

average minus

0.50 Less than

0.50 Equal to average plus or

0.50 Greater than

average minus

minus a variation of 20

the average

20 days

Days

plus 20 days

We are suggesting a more stringent rating system in which if the company go below the average of last three years performance it’s given a negative score which will negate a positive score in some other criterion.

Current ratio TOL/TNW PAT/Net Sales (Inv. + Rec.)/Daily sales Total Score

1 -1 0 0 0

As per our new rating system the score of TVS Motors in Historical comparison is Zero.

Book Value/ Market value

Share Capital Reserves and Surplus Book Value No. Of Equity shares Book Value Share price as on 5/12/08 Book Value/Market Value

23,75,00,000 7,97,83,00,000 8,21,58,00,000 23,75,43,557 34.59 24.15 1.43

The market value of TVS Motors as per December 5, 2008 price (Rs.24.15) is below its book value. Thus it is underpriced. The book value is 1.43 times of the market value.

Contingent liability

Contingent Liabilities not provided for Liabilities contested but not provided for Total CL CL/TNW

167.53 74.19 241.72 0.29

Since its above 10% of the Total Net Worth we give a score of -10

INDUSTRY RISK The industry risk for TVS Motors, is measured by analysing where the company stands on the following parameters. These parameters are Competition & Market Risk, Industry Cyclicity, Regulatory Risk, Technology and quality control, User Profile, and Inputs Profile. Based on the companies standing on the above mentioned parameters, corresponding scores have been assigned to the company.

Sl.

Measure of

No.

Score

Score

Reasons for score TVS Motors operates in a highly competitive market, driven largely by aggressive Japanese motorcycle makers, along with a large Indian Player, Hero Honda. The overall demand of motorcycles will be dampened by the current financial crisis. With demand slowing down all over the globe, and most of the first world facing recession, Indian Financial institutions are also going slow on the origination of new loans. Having said that the company has seen a dip in its sales in the economy segment and therefore is under pressure.

C Typically the two wheeler segment is a high risk loan segment and

ompe

hence most banks have either gone slow on two wheeler loans on stopped them altogether. Hence growth in the rural and semi urban

tition 1

&

markets has come to a standstill.

3

Mark

The industry has unique barriers to entry, in that beyond the

et

constantly maintain contact with the customer. These will include

Risk

building of the plant the company will have to set up facilities to sales and marketing outlets, service centres and the like.

The company is among the top 3 players in the market.

The company also has a steady brand that has been around in the country for a long time. It has facilities abroad that are coming on stream, which will make it less susceptible to Indian demand. The company has also received multiple awards for its new product launches – TVS Flame & TVS Apache.

The slowdown in the 1st world is having an impact on the consumption patterns in India. With credit drying up, the aspirational buyer’s appetite to take on debt and consume is being curtailed.

The boom period preceding the current slowdown in demand has led to a situation of overcapacity among most producers. This is having an impact on costs while operating in this phase.

Over the long term, the industry is poised for a recovery. As the

Indus 2

try Cycli cality

disposable income of Indians increase the appetite to consume will also rise, leading to higher demand for two wheelers in the long

3

term. The current slowdown is expected to last for another 18-22 months and auto industry will be affected severely during this time. The severity of the situation may be seen by the fact that GM and Ford are now asking for a government bailout to remain functional. In India also, Sundaram Fasteners competitors have had to shut shop, while Ashok Leyland is operating its factories for only 2 days a week.

Typically the segment has grown by around 15% YOY, but this year that will not be the case and slow growth will continue to plague the industry. The size of the large players ensures that they are capable of weathering industry cycles and hence are not expected to go bankrupt in the current scenario.

Motorcycle industry in India is seen as the common mans consumption space and hence is not susceptible to negative government cues. On the whole the motorcycle space is not very susceptible to government policy changes directly, but they are depending on fuel price decisions. In a rising oil price scenario, the demand may dampen. To combat this, the company has entered the electric two wheeler space.

The space is also dependent on RBI outlook on liquidity situation in the country. If the liquidity in the market dries up, the demand

Regu 3

lator y Risk

will also fall.

4

Although the company, spends roughly 2.6% of revenue on R&D, and depends on 400 engineers working in this space, it has not experienced a skilled labour crunch. The company operates in a highly industrialized state and given that there are an abundance of training institutes and engineering colleges around, the company does not experience difficult in finding skilled labour.

The company’s relations with labour unions are good and it has not experience any production stoppages.

Environment and Pollution clearances are also in order. There also a huge R&D spends on more efficient engines.

The company aggressively pursues innovation and quality enhancements.

It

has

always

enjoyed

100

%

of

employees in Total Quality Management and cost savings by improved processes have averaged 3 crores every year.

The expenditure on Research and Development amounts to 2.6% of revenue on average, which ensures that the company always has the capability to roll out new products in order to keep the demand stimulated. An

Tech

example of this would the launch of TVS StaR (sport & auto start variants) at a time when the industry was

nolo

experiencing a slowdown. This helped TVS gain a larger market share in the economy segment.

gy 4

and Quali ty Cont rol

4

The company has also pursued quality enhancements and accessory development for its premium and sports line of motorcycles. TVS Flame and TVS Apache have won awards for design and other functional breakthroughs.

The company recognises that it will constantly have to work on the design of its motorcycles so that they are always on the cutting edge, thereby winning the favour of the discerning customer.

There are technology R&D tie-ups with global agencies. This ensures that the company’s engineers are always performing. There is also a culture within the company to publish

research

articles

in

global

periodicals.

The

company has constantly applied for patents over the years.

The users of the company have a wide array of choice ahead of them. And also they are broadly classified into the following categories, economy, premium and luxury. For each of these segments there needs to be a different value proposition. The company by and large has maintained this parity and continues to be competitive across all segments.

The innovations that the company has driven into its product

User 5

Profi le

portfolio are driven by patents and the company’s R&D effort

3.5

ensures that there is a flow of innovation.

The company has a wide area of operation, and global presence also.

The company’s investment in TQM and QC’s has ensured that there is a history of good product quality.

The growth of middle class in the country has resulted in fast changing lifestyles in urban and to some extent rural centres. This opens a huge market for lifestyle vehicles.

The company is dependent on fuel price and steel price movements when it comes to its raw material acquisition costs.

The cost of raw materials depends on huge demand for

6

Input

consumption by other global economies. However given the

s

dampened.

Profi

dampening global scenario, commodity prices globally have also

2.5

Fuel prices have also fallen from their highs hence reducing the

le

cost of moving raw material.

The company has been pursuing the use of new components in order to reduce its dependence on steel.

TOTAL SCORE

20

MANAGEMENT RISK Parameters such as Integrity, Expertise competence/commitment, Track Record, Structure & Systems & Capital Market Perceptions are taken into account when looking to ascertain management risk.

Sl.

Measure

No

of Score

. 1

Inte

Score

4

grit y

Reasons for score

The company and the group in general, are perceived with the virtues of professionalism, high quality processes and integrity.

The company has shown good corporate governance disclosures, and is extremely transparent about its disclosures when it comes to the board of directors as well as the functioning of the company.

2

E xper tise, Co mpe tenc e or com mit men t

4

The company has a very competent management, and is also backed by the management expertise of the TVS Group. This ensures that the company always has the best management talent on hand.

The company is committed to quality and continuous process innovation. This is seen by the company’s commitment to TQM implementation at its assembly lines.

The R&D is focussed on delivering the most cutting edge of products be that in terms of quality or in terms of design innovation.

The company has successfully competed with Japanese rivals, still keeping itself at the top 3 position in India.

The company is looking at future products in line with changing socio economic scenario’s by looking at more fuel efficient engines, and electric vehicles. Although these products may represent a huge R&D cost at present, the payoff in the long term is expected to be huge.

3

Trac 3.5 k Rec ord

Number 3 player in the Indian motorcycle space.

4

Stru ctur e and

3

Statutory requirements are met.

World class management and governance processes to be instituted through the new structure

Management is professional and distinct lines of command exist.

Syst ems

Company has ensured that its processes are along the line of the best in industry, ensuring that information is always readily available enhancing decision making.

Constant supply chain process enhancement takes is encouraged in the company.

5

C

2

apit al

The company share capital consists of 250000000 shares of Re. 1 /each.

Out of the above 23,10,00,000 equity shares of Re. 1/- each were allotted for consideration other than cash to the shareholders of

Mar

erstwhile transferor company viz. Sundaram Auto Engineers (India)

ket

Limited, Chennai

Perc

65,42,857 Equity shares of Re. 1/- each allotted to the shareholders of

epti

amalgamated company viz. Lakshmi Auto Components Limited, Chennai

ons

The company is perceived as one with high integrity and good values in the capital market space. Having existed for a long time in India is enjoys a good recall among investors as well.

EPS has declined due to adverse market conditions. But future outlook remains positive. TOTAL SCORE

16.5

Compiled Score card for TVS Motors Historical Comparison Industrial Comparison Financial Risk Rating Contingent Liability Industry Risk Management Risk Grant Total Score

1 8 37.5 -10 20 8.25

64.75