Automotive Industry – Two Wheeler SegmentFinancial Analysis & Valuation of TVS Motor Company and Hero Honda

TABLE OF CONTENTS

GLOBAL ECONOMIC CONDITIONS........................................................................................................................ 3

OUTLOOK - INDIAN ECONOMY............................................................................................................................ 4

OUTPUT.....................................................................................................................................................................4AGGREGATE DEMAND...................................................................................................................................................4EXTERNAL ECONOMY....................................................................................................................................................5MONETARY CONDITIONS...............................................................................................................................................5FINANCIAL MARKETS.....................................................................................................................................................5INFLATION SITUATION...................................................................................................................................................6GROWTH AND INFLATION OUTLOOK................................................................................................................................6

INDIAN AUTO INDUSTRY..................................................................................................................................... 7

TWO WHEELER SEGMENTAL CLASSIFICATION AND ITS GROWTH.......................................................................10

DEMAND DRIVERS......................................................................................................................................................11

INDIAN AUTO COMPONENTS INDUSTRY............................................................................................................ 11

COMPETITOR ANALYSIS.................................................................................................................................... 13

INDIAN TWO WHEELER INDUSTRY SEGMENTS..................................................................................................................13TWO-WHEELER SALES AT A GLANCE...............................................................................................................................14PREMIUM SEGMENT...................................................................................................................................................14EXECUTIVE SEGMENT..................................................................................................................................................14ECONOMY SEGMENT...................................................................................................................................................14

Fleet Composition..............................................................................................................................................15market share.....................................................................................................................................................15exports..............................................................................................................................................................16

PLAYER ANALYSIS.............................................................................................................................................. 16

TVS MOTOR COMPANY..................................................................................................................................... 17

PROFILE....................................................................................................................................................................17PRICE ANALYSIS.........................................................................................................................................................18SHARE HOLDING PATTERN...........................................................................................................................................18CAPITAL STRUCTURE...................................................................................................................................................19HISTORY...................................................................................................................................................................19FINANCIAL SYNOPSIS...................................................................................................................................................19BUSINESS SYNOPSIS....................................................................................................................................................19SEGMENTAL PERFORMANCE...................................................................................................................................20Key Developments................................................................................................................................................20

GLOBAL ECONOMIC CONDITIONS

1. The global economy is showing tentative signs of recovery signaling, albeit hesitantly, the winding down of the global recession. For a number of developed economies the pace of contraction in output has declined in the second quarter of 2009. The recovery is still dependent on sustained policy stimulus that has spurred aggregate demand while also reducing overall uncertainty. The recovery is expected to remain slow and gradual, with decreasing but significant downside risks.

2. The downside risks could arise from premature withdrawal of policy stimulus, the possibility of some permanent loss in output in the developed economies owing to the crisis, need for improving domestic savings in several developed economies to make growth less dependent on global imbalances, unfinished financial and corporate restructuring that would involve further deleveraging and tight credit market conditions, current level of high excess capacity, large and rising unemployment and the associated pressures on both aggregate demand and protectionism, anemic private consumption and investment demand, and the costs of sustained large fiscal stimulus.

3. These possibilities point to the risks of a job-less recovery, and a W-shaped double-dip recession where another mild phase of recession may intervene before a durable recovery. The timing of the exit from the policy stimulus will, thus, be critical to the recovery path of the global economy; both premature exit as well as delayed exit would have concomitant costs. In September 2009 the G-20 highlighted the importance of continuing the stimulus till the recovery is secured, consistent though with the other important objectives of price stability and fiscal sustainability.

4. After a series of successive and frequent downward revisions to the growth outlook of the world economy for 2009 from (+) 3.9 per cent in July 2008 to (-) 1.4 per cent in July 2009, the IMF, for the first time, revised the projected growth outlook upwards in October 2009, recognizing the emerging signs of recovery. The latest forecast is for a contraction in the world output by (-) 1.1 per cent. The recovery is expected to be led by emerging market economies (EMEs), particularly from Asia. According to the WTO, world merchandise exports increased by about 8.0 per cent in the second quarter of 2009 over the preceding quarter, even though year-on-year growth continued to decline by 33.0 per cent. The outlook of the Institute of International Finance (IIF) for October 2009 suggests that net private capital flows to the EMEs which had recovered in the second quarter of 2009 gained pace in the third quarter; 30 EMEs are projected to receive US$ 349 billion in 2009, which will still be only about one fourth of the peak level of net flows received in 2007.

OUTLOOK - INDIAN ECONOMY

OUTPUT

In India, economic growth in the first quarter of 2009-10 at 6.1 per cent represents a mild recovery over the 5.8 percent growth recorded during the preceding two quarters in the second

half of 2008-09. In comparison to the high average growth of 8.8 per cent recorded during the five-year period 2003-08, however, the first quarter growth in 2009-10 still points to persistence of the slowdown. Information available on various lead indicators of economic activity in the second quarter of 2009-10 suggests that because of the deficient monsoon, kharif output may be adversely affected. The industrial sector has started exhibiting recovery, with 10.4 per cent growth in August 2009 and 5.8 per cent growth during April-August 2009, as against 1.7 per cent and 4.8 per cent during the corresponding periods of the previous year, respectively. Growth in core infrastructure witnessed notable acceleration in August 2009, and the growth over April-August 2009 was higher at 4.8 per cent as against 3.3 per cent during the corresponding period of the previous year. Lead indicators for services suggest pick up in activities relating to construction and telecommunications, even though external demand dependent services, such as tourism and cargo handled at ports, continue to be depressed.

AGGREGATE DEMAND

The deceleration in aggregate demand that was witnessed in the second half of 2008-09 continued during 2009-10. Growth in private consumption demand fell to as low as 1.6 per cent in the first quarter of 2009-10. Investment demand also decelerated further, and the high growth in government consumption demand that was witnessed in the last two quarters of 2008-09 also moderated. Corporate performance data indicate that growth in sales, which had decelerated significantly in the second half of 2008-09, exhibited negative growth in the first quarter of 2009-10, notwithstanding improvement in profitability. The deficient monsoon and the associated drought like conditions in several parts of the country, and the more recent floods could also dampen rural demand. Given the predominant role of domestic demand in conditioning the growth outlook in India, weak private consumption and investment demand, thus, continue to be a key drag on faster recovery.

EXTERNAL ECONOMY

Weak external demand conditions persisted, as reflected in the sustained decline in India’s exports. In the first quarter of 2009-10, exports continued to decline while imports increased, primarily reflecting higher oil prices, resulting in a higher trade deficit in the balance of payments in relation to the preceding quarter. The surplus in net invisibles, led by buoyant remittance inflows, contributed to finance close to 78 per cent of the trade deficit. The current account, thus, remained in deficit of about US$ 5.8 billion. Reflecting India’s resilience to the crisis in 2008-09 and the growth prospects of the economy, capital flows, which had turned negative in the last two quarters of 2008-09, reversed in the first quarter to ensure financing of the current account deficit without any depletion of foreign exchange reserves. The rebound in capital inflows has persisted through the second quarter of 2009-10. Including valuation gains on foreign exchange reserves and the SDRs allocated by the IMF to India, India’s foreign exchange reserves increased by USD 32.8 billion during 2009-10 (up to October 16, 2009) to a level of USD 284.8 billion.

MONETARY CONDITIONS

The accommodative monetary policy stance adopted by the Reserve Bank in response to the global financial crisis, particularly post-September 2008, continued in 2009-10. The aim of this policy stance was to maintain ample rupee liquidity, comfortable dollar liquidity and ensure flow of credit to productive areas of the economy. Reflecting the accommodative policy stance, the

liquidity conditions remained in surplus on a sustained basis, which was absorbed by the Reserve Bank through reverse repo operations under the LAF. Growth in broad money (M3) also remained high at 18.9 per cent (as on October 09, 2009), supported by high growth in deposits (by 19.4 per cent). On the sources side, monetary expansion was driven by the large borrowing program of the Government, while bank credit to the commercial sector continued to decelerate (with a growth of 10.7 per cent).

FINANCIAL MARKETS

The financial markets in India which functioned normally even at the height of the crisis, posted further decline in risk spreads and higher volume of activities. The overnight call rate hovered around the floor of the LAF corridor reflecting the abundant liquidity in the system. In the collateralized segments, namely market repo and collateralized borrowing and lending obligation (CBLO), the interest rates remained below the inter-bank call rates while there was increase in activities. Volumes in the CP and CD markets also increased.

In the government securities market, 80.4 per cent of the net borrowing requirement has been completed so far; weak demand for credit in the private sector and comfortable liquidity conditions helped in containing the pressures on yield. Corporate bond yields hardened somewhat but the risk spread fell to the pre-Lehman levels.

In the credit market, the gradual moderation in lending and deposit rates continued through the second quarter of 2009-10, demonstrating the transmission of lower policy rates, though with lags. Despite some reduction in interest rates, the flow of credit to the private sector remained sluggish due to subdued overall private consumption and investment demand. Credit card and consumer durables related credit exhibited negative growth, corroborating the impact of significant deceleration in private consumption demand. The flow of resources from the non-banking sources, however, increased marginally in the first half of 2009-10.

In the foreign exchange market, the rupee appreciated by about 10.0 per cent against the US dollar over the end-March level. The equity market sustained the recovery seen since April 2009, and outperformed most of the EMEs in terms of the extent of recovery in stock prices. The primary market activities also picked up significantly, with higher funds mobilized through public issues and private placements, large oversubscription of certain new issues indicating the return of risk appetite in the market, and manifold increase in mobilization of resources by mutual funds.

INFLATION SITUATION

The sharp decline in headline WPI inflation from the peak level of 12.9 per cent in August 2008 yielded space for adoption of growth-supportive accommodative monetary policy to mitigate the impact of the crisis. After remaining negative for 13 consecutive weeks, WPI inflation turned modestly positive in September 2009. Despite the low headline (year on year) WPI inflation at 1.2 per cent (as on October 10, 2009), inflationary pressures have started to emerge, with WPI showing 5.9 per cent increase over March 2009 level and CPI inflation remaining stubbornly elevated at double digit levels. The changing inflation environment, however, is being driven by strong escalation in the prices of food articles, which have increased by 14.4 per cent (year-on-year) so far. Excluding food items, the WPI inflation remains depressed at (-) 3.4 per cent. This suggests both short supply as well as inefficient distribution channels. From the stand point of monetary policy, anchoring inflation expectations in the face of sustained high inflation in essential commodities will be a key challenge.

GROWTH AND INFLATION OUTLOOK

The growth and inflation mix could change over time, creating conflicting demands on the stance of monetary policy. While premature reversal of the monetary policy stance entails the risk of stifling recovery, persistence of accommodative stance could adversely impact inflation expectations.

The current growth outlook for 2009-10 has both upside prospects as well as down side risks. Upside prospects to growth include the impact of the growth supportive policy stimulus, recovery in industrial production and core infrastructure sector, significant upturn in overall business confidence as per different surveys, strong recovery in the stock market with higher mobilization of resources, return of capital inflows and the improving outlook for the global economy which could boost the sluggish consumer and investor confidence. The downside risks include the unexpectedly large deceleration in private consumption demand and some decline in corporate sales in the first quarter of 2009-10, impact of the deficient monsoon and recent flood in certain parts of the country on agricultural output and rural demand, sustained deceleration in credit growth and decline in exports. The Reserve Bank’s professional forecasters survey points to downward revision to the growth outlook from 6.5 per cent to 6.0 per cent in 2009-10, reflecting the drought situation in the agriculture sector.

The inflation outlook is currently driven by the emerging signs of inflationary pressures, even though certain developments could neutralize these pressures. These include sluggish aggregate demand and negative output gap, stabilization of oil prices in last few months – notwithstanding the recent increase in October 2009, adequate buffer stocks of food grains and the prospects of a better rabi crop that could partly offset the adverse impact of deficient kharif, selective import of certain commodities and the normal trend reversal seen in prices of food articles over different crop seasons. On the other hand, the visible inflationary pressures may also persist and escalate further on account of the fading away of the base effect, cost push pressures through wage-price revisions in the face of elevated CPI inflation, challenges in improving the supply situation in the short-run of essential commodities, gradual pressure on global commodity prices along with global recovery, and rising inflation expectations on account of elevated CPI inflation.

Financial conditions have improved significantly in India, ahead of a stronger recovery in growth. This is evident from the return of capital flows, significant recovery in the stock markets, and better transmission from low policy rates to declining lending rates. There also need be no concerns about private credit getting crowded out since over 80.4 per cent of the government borrowing programme has been completed so far as there is adequate liquidity in the system. The deceleration in private consumption and investment demand needs to be reversed from the low levels seen in the first quarter of 2009-10 for ensuring a sustainable recovery. Lead information in terms of growth in nonoil imports and demand for credit in the second quarter of 2009-10, however, does not point to any major recovery in demand from the private sector. The overall economic outlook is, therefore, a mixture of upside prospects of recovery and downside risks. Managing this tradeoff between supporting growth and reining in inflation expectations poses a complex policy challenge.

INDIAN AUTO INDUSTRY

India is emerging as one of the world’s fastest growing passenger car markets and second largest two wheeler manufacturer. According to the International Yearbook of Industrial Statistics 2008 released by United Nations Industrial Development Organisation (UNIDO), India ranks 12th in the list of the world’s top 15 automakers. It is home to the largest two wheeler manufacturer and fifth largest commercial vehicle manufacturer in the world. The industry is producing about 19 lakh passenger vehicles, 4.5 lakh commercial vehicles, 90 lakh two wheelers and 5 lakh three wheelers per annum.

In order to make India a power to reckon with in the automotive sector the government launched the Automotive Mission Plan (AMP) 2006-2016. As per the AMP, it is estimated that the total turnover of the automotive industry in India would be in the order of USD 122 billion - USD 159 billion in 2016. It is expected that in real terms, India would continue to enjoy its eminent position of being the largest tractor and three-wheeler manufacturers in the world and the world's second largest two-wheeler manufacturer. By 2016, India will emerge as the world's seventh largest car producer (as compared to the eleventh largest currently) and retain the fourth largest position in world truck manufacturing sector. Further, by 2016, the automotive sector would double its contribution to the country's GDP from current levels of five per cent to 10 per cent. The Indian automotive industry consists of the following five segments:

FIGURE 1: INDIAN AUTOMOBILE INDUSTRY

The total two-wheeler sales of the Indian industry accounts for around 77% of the total vehicles sold in India. With 26,12,881 two wheelers already sold in India in the quarter from Jun-Sep 2009, the Indian wheeler industry is poised for high growth In the coming years. In terms of volume, about 6% of the two wheelers manufactured are exported.

FIGURE 2: DOMESTIC MARKET SHARE FOR 2008-09 1

The following table2 illustrates the growth of the auto industry in India.

1 Society of Indian Automobile Manufacturers (SIAM)2 Society of Indian Automobile Manufacturers (SIAM)

Category 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Passenger Vehicles

7,23,330 9,89,560 12,09,876

13,09,300

15,45,223 17,77,583 18,38,697

Commercial Vehicles

2,03,697 2,75,040 3,53,703 3,91,083 5,19,982 5,49,006 4,17,126

Three Wheelers

2,76,719 3,56,223 3,74,445 4,34,423 5,56,126 5,00,660 5,01,030

Two Wheelers

50,76,221

56,22,741

65,29,829

76,08,697

84,66,666 80,26,681 84,18,626

Grand Total

62,79,967

72,43,564

84,67,853

97,43,503

1,10,87,997

1,08,53,930

1,11,75,479

TABLE 1: AUTOMOBILE PRODUCTION TRENDS

The following table3 gives the number of vehicles exported in each category.

Category 2002-03

2003-04

2004-05

2005-06

2006-07 2007-08 2008-09

Passenger Vehicles 72,005 1,29,291

1,66,402

1,75,572

1,98,452 2,18,401 3,35,739

Commercial Vehicles

12,255 17,432 29,940 40,600 49,537 58,994 42,673

Three Wheelers 43,366 68,144 66,795 76,881 1,43,896 1,41,225 1,48,074

Two Wheelers 1,79,682

2,65,052

3,66,407

5,13,169

6,19,644 8,19,713 10,04,174

Grand Total 3,07,308

4,79,919

6,29,544

8,06,222

10,11,529

12,38,333

15,30,660

TABLE 2: AUTOMOBILE EXPORT TRENDS

TWO WHEELER SEGMENTAL CLASSIFICATION AND ITS GROWTH

The three main product segments in the two-wheeler category are scooters, motorcycles and mopeds. However, in response to evolving demographics and various other factors, other subsegments emerged, viz. scooterettes, gearless scooters, and 4-stroke scooters. While the first two emerged as a response to demographic changes, the introduction of 4-stroke scooters has followed the imposition of stringent pollution control norms in the early 2000. Besides, these prominent sub-segments, product groups within these sub-segments have gained importance in the recent years.

The two wheeler industry has been growing at a CAGR of 9.45% from 2004 to 2009, with the production being about 63 lakh vehicles in 2004 to an estimated 100 lakhs in 2009. Motorcycles have always been the major contributor to the two wheeler industry in India. From a share of about 77.39% in 2004, it has steadily grown to about 80.38%. The share of scooters has gone down from 16.63% in 2004 to 13.88% in 2009. The following table gives the percentage share of motorcycles, scooters and mopeds in the two wheeler industry in India4.

3 SIAM4 Prowess (Business Beacon)

Scooters Motorcycles Mopeds Base

2004 15.76% 78.76% 5.48% 63,44,365

2005 13.31% 81.64% 5.05% 72,89,442

2006 11.52% 83.62% 4.59% 83,89,265

2007 13.18% 81.35% 5.20% 81,54,068

2008 13.70% 80.79% 5.24% 83,57,140

2009e 13.76% 80.64% 5.55% 99,66,806

TABLE 3: PERCENTAGE SHARE OF TWO WHEELERS IN INDIA

FIGURE 3: TWO WHEELER PRODUCTION TRENDS

DEMAND DRIVERS

The demand for two-wheelers has been influenced by a number of factors over the past few years. The key demand drivers for the growth of the two-wheeler industry are as follows:

Inadequate public transportation system, especially in the semi-urban and rural areas Increased availability of cheap consumer financing in the past 3-4 years Increasing availability of fuel-efficient and low-maintenance models Increasing urbanisation, which creates a need for personal transportation Changes in the demographic profile Difference between two-wheeler and passenger car prices, which makes two-wheelers the

entrylevel vehicle Steady increase in per capita income over the past few years Increasing number of models with different features to satisfy diverse consumer needs.

INDIAN AUTO COMPONENTS INDUSTRY

As per an Automotive Component Manufacturers Association of India (ACMA) report, the turnover of the auto component industry was estimated at over USD 18 billion in 2007-08, an increase of 27.2 per cent since 2002. It is likely to touch USD 40 billion, increasing India’s share in the global auto component market from 1 per cent to 3 per cent by 2015-16. The Indian tyre industry, which is an integral part of the Indian Automotive components industry, has registered a turnover of about USD 6 billion.

Value in USD million

2003-04 2004-05 2005-06 2006-07 2007-08

Turnover 6,730 8,700 12,000 15,000 18,000

Exports 3,615 2,873 2,469 1,692 1,274

Imports 4,938 3,328 2,482 1,902 1,428

Investment 3,100 3,750 4,400 5,400 7,200

TABLE 4: AUTO COMPONENT INDUSTRY TRENDS

The Indian auto component Industry is highly fragmented. Around 500 organized players account for the 77% of the value added in the sector. Unorganized players are mainly replacement market players or tier 3 or 4 component manufacturers. Automotive Manufacturers Association of India (ACMA) represents the auto component industry in India and has around 500 registered members.

The Auto components industry is predominantly divided into the following segments5:

FIGURE 4: AUTO COMPONENTS INDUSTRY IN INDIA

5 Automotive Manufacturers Association of India (ACMA)

COMPETITOR ANALYSIS

INDIAN TWO WHEELER INDUSTRY SEGMENTS

TWO-WHEELER SALES AT A GLANCE

Details Apr 2009-May 2010 Apr 2008-May 2009 Var %Scooter/Scooterettes 209,031 182,293 14.67%Motorcycles 1,282,316 1,172,775 9.34%Mopeds 83,658 69,570 20.25%Electric Two 1,332 2,390 -44.27%

wheelersTotal 1,576,337 1,427,028 10.46%Source: SIAM

PREMIUM SEGMENT

If we analyze the motorcycle sub-segments then it would be visible that Bajaj Auto has a significant

presence in the premium segment with a market share of ~55% followed by Hero Honda (~22%), TVS

Motors (~13%) and HMSI (10%).

EXECUTIVE SEGMENT

Hero Honda dominates this segment with a market share of ~70% followed by Bajaj Auto (20%), HMSI

(~6%) and TVS Motors (1%). This segment retrieves higher revenues from the rural areas, which are less

dependence on finance; therefore comparatively it is among the best performing segments YTD.

ECONOMY SEGMENT

This segment is a strong foothold for Bajaj Auto which has a market share of ~45% followed by Hero

Honda (~34%) and TVS Motors (~24%). This is the most competitive segment as all the 3players

relatively have a higher presence in the same. But this segment continues to be the worst hit due to the

credit unavailability and global slowdown. The industry has shown a CAGR of ~15% from FY04-FY07

on account of finance availability from PSU Banks and private banks like ICICI Bank. But from FY08 –

FY09 YTD the industry has shown shrinkage as most of the banks reduced their exposure in the auto

finance domain given the unfavorable macro economic situation.

FLEET COMPOSITION

MARKET SHARE

EXPORTS

Majority of exports are to Bangladesh, Sri Lanka, Nepal and Bhutan

Highest growth (Y-o-Y of 79%) witnessed in segment above 125cc which constituted 36% of the exports

PLAYER ANALYSIS

Hero Honda Largest two-wheeler manufacturer in the worldBajaj Auto 2nd largest two-wheeler manufacturer in the world and the largest 3-

wheeter manufacturerTVS Motors 3rd largest manufacturer with facilities in India & Indonesia Honda Motors Recently entered the Indian market through its direct subsidiary (in

addition to its JV with Hero)Suzuki Recently entered the Indian market through its direct subsidiary (earlier

JV with TVS was withdrawn)

TVS MOTOR COMPANY

PROFILE

Lines of Business Industry Automotive

Products Motorcycles,Mopeds,Ungeared scooters, Automotive components

History Type Private Conglomerate

Founded by In 1982 as Indian Motorcycle Pvt. Ltd.

HeadQuarter Chennai, TN

Key Financials Turnover 4008.91 cr.

EBITDA 202.49 cr.

EBITDA Margin 5.05%

Return on Equity 17.25%

Total Asset turnover 1.56

Current Ratio

Market Data Stock Price : BSE 58.90 [Code: 532343]

: NSE 58.85(moneycontrol as on 17/12)[Code: TVSMOTOR]

52 Week High

52 Week Low

Market Performance

Face Value 1

Market Cap

P/E

Industry P/E (Moneycontrol )30.32

EPS

P/BV

PRICE ANALYSIS

Source: Thomson Reuters

SHARE HOLDING PATTERN

CAPITAL STRUCTURE

HISTORY

The third largest two-wheeler company is the flagship company of the TVS Group (4billion USD) with an annual turnover of over a billion. It was the fiirst two-wheeler manufacturer in the world to be honored with the Japanese Quality award – The Deming Prize for Total Quality Management.

Set up in the 1980s with its origin in Sundaram Clayton Ltd., launched an easy-to-use 50cc moped followed by the launch of 7 new bikes on a single day. After the takeover by Suzuki Motorcycles in 1987 its name changed to TVS Suzuki Ltd. This ended in 2001 when TVS Motor Company came to existence.

FINANCIAL SYNOPSIS

For the fiscal year ended 31 March 2009, TVS Motor Company Limited's revenues increased 13% to RS38.11B. Net loss totaled RS632M, up from RS282.5M. Revenues reflect an increase in income from operations. Higher loss reflects an increase in labour charges, increased depreciation charges, an increase in interest & finance charges, higher repair & maintenance expenses, increased audit fees, higher power & fuel expenses and increased other expenses.

Revenues EBITDA Margins PAT

BUSINESS SYNOPSIS

The company’s prime activity involves manufacturing and selling motorcycles, mopeds, ungeared scooters and three-wheelers.

The products of the Group include TVS Apache, TVS Scooty, TVS Fiero, TVS Super XL, TVS Victor, TVS Centra, TVS Star etc. It's plants are located at Hosur, Tamil Nadu , Mysore, Karnataka and Solan, Himachal Pradesh.

The Chairman and Managing Director of the Company is Mr. Venu Srinivasan who is the grandson of TV Sundaram Iyengar.

SEGMENTAL PERFORMANCE

Source: Annual Report

The increased growth in Ungeared Scooters is due to its independence from influence of availability of retail finances. Although sales grew in two wheeler segment at 5% growth its incomparable to that of Hero Honda at 30%.

Three wheeler, TVS King was introduced in six states and has achieved a 5% MS.

KEY DEVELOPMENTS

Focus on Auto partsTVS Motor Company’s BOD have approved an investment of INR 185 million in the subsidiary Sundaram Auto Components. Source: Business Std, Mar 2009The auto component industry in India has around 10,000 firms in the unorganized sector as compared to 500 on the organized sector. It is vital for the survival of the parent automotive industry and TVS decision to invest here shows the long term focus to strengthen the brand.

Expected Increased volume in sales: New LaunchesThe company has always shown its excellence in performance from its wide range of products updated frequently with their focussed R&D. TVS Motors has recently launched a number of novel products. TVS Motor Company in November unveiled two novel products - India's first auto-clutch motorcycle and an automatic scooter. In addition it even re-launched its Twin Spark Plug motorcycle.

Excercice Duty Cut – December 2008TVS Motors increase in sales over the last few months is primarily due to the excercise duty cuts in addition to its new launches.

Financing Concern: Auto loans are critical for any automotive business and the high interest rates for auto loans even now hinders the potential growth. But with the falling interest rates and the expected pick up in the economy will aid TVS in taking complete advantage from the new launches.TVS Motor Services Pvt. Ltd, is expected to support its sister concern TVS Motors by financing two-wheeler customers exclusively to boost the financial support from 15% to 50% a year ago, post the RBI approval commence operations by the end of 2009. This involves and investment of INR 60 Cr.

New Export Markets: South America and Philippines have been identified as new export markets in addition to existing export to five countries.

Focus of 3-wheeler industry:Mr Srinivasan said to ET in Nov 2009 that it is looking at doubling its auto sales to 40,000. It is targeting 50% Market share in 3 years with 15% of the company s sales coming from three-wheelers. This is to counter the competition – Bajaj Auto. Primary focus is given to increase in exports from Hosur factory by increasing production from 1200 units a month to 2000 units. Timed after the strict pollution control regulations of the government and removal of several two-stroke auto rickshaws, TVS King range with its LPG fuelled auto is looking forward to a great future.

TVS Valuation

TVS is the company with the stable D/E ratio is progressively increasing for the past 5 years. This is also evident in the decreasing Free cash flow to Firm which have taken a hit in the year 2007 due to global slump in the 2 wheeler sales, the cash flows post that have been stable and in the hindsight of the recent developments as listed above are expected to show an increasing growth trade. The models used for the valuation are FCFF, FCFE & EVA which are not very sensitive to the Capital structure.

Sales margin for TVS has also deacreased over the years and on an average margin is 4% and on a CAGR basis the margin is around 5%. In the valuation of the company we have assumed a conservative margin of 5%.

As per the director’s report as TVS is aggressively looking to boost sales in the 3 wheeler segment and the economy is also showing signs of revival with a reported GDP growth rate of 8.49% we have taken an liberal assumption of the ROC to be 15% while the terminal growth rate has been kept at the historical average of 4%.

The three stage FCFF model assumes the sustainable growth rate of 8.98% as calculated by taking the sales margin as 5% , the cash flows on discounting @ WaCC of 13.01% give a enterprise value of the company to be 1665.38 cr. which translates to a price per share of 70.11 based on the outstanding shares.

In the FCFE model the Debt to Capital Employed is assumed to be constant of 15% which is the target ratio of the company as maintained in the initial years of observations. We believe that the current Debt to Enterprise value of 29% is too high for the company to sustain in the long run. The enterprise value on discounting with the historical average cost of capital of 18% comes out to be 1511.09 cr.

In the EVA model the average Capital Employed in the company is calculated from the reinvestment ratio as calculated from the projected FCFF and NOPAT values & Capital Charge calculated using a constant WaCC of 13.01%. With the terminal growth assumption of 4% the valuation of the company comes out to be 1733.60.

HERO HONDA COMPANY

PROFILE

Lines of Business Industry Automotive

Products Motorcycles, Scooters

History Type Public Company

Founded by January 19, 1984 in Gurgaon, Haryana, India

HeadQuarter Delhi, India

Key Financials Turnover 14106. 04 cr.

EBITDA 1964.65 cr.

EBITDA Margin 13.92%

Return on Equity 28.16%

Total Asset turnover 2.32

Current Ratio

Market Data Stock Price : BSE 58.90 [Code: 532343]

: NSE 58.85(moneycontrol as on 17/12)[Code: TVSMOTOR]

52 Week High

52 Week Low

Market Performance

Face Value 1

Market Cap

P/E

Industry P/E (Moneycontrol )30.32

EPS

P/BV

HISTORY

The largest two-wheeler company by sales is the Joint Venture between Hero Group and Honda Motor Company has an annual turnover aloes to $3 billion. It was ranked 108 in the Forbes list of 200 most respected companies in the world. The company sold 3.8 million bikes in the fiscal year 2008-09 and net profit was up 32% from the previous year.