Dated: 28 Mar 23
Company: TVS Motor Company Ltd.
CMP: Rs. 1137.10

Introduction

In this article we will try to analyze TVS Motor Company Ltd. based on previous six years of financial statements viz Balance sheet, Profit and Loss statement and Cash flow statement. With this analysis we will try to gain insight into the financial health, operating efficiency and profitability of the company and finally try to derive the intrinsic value of the stock using Discounted Cash Flow method and the price at which the stock becomes attractive for long term investment.

Note: Here we are carrying out only the quantitative fundamental analysis of the company as the qualitative analysis is more subjective and individual views may vary vastly.

Leverage Ratios

Observations:

1. Interest coverage ratio has dropped from 12 to 2 during the period.
2. Debt to equity ratio has almost become six times during the period.
3. From the financial statements for the period, it can be seen that the company has been spending heavily on purchase of new plant and machinery and maintenance of existing ones. This expenditure is more than profit after tax for the company and despite this the company has been paying dividends to shareholders. To cover up the difference it has relied on long term and short term loans and that has led to the heavy debt in its books.

Operating Ratios

Observations:

1. The company is operating with negative working capital, which means its current assets are less than its current liabilities. In other words it may face illiquidity issues for which it may have to further rely on loans to meet immediate requirements.
2. Receivables turnover ratio has shown slight improvement after COVID year 2020.
3. Total assets turnover ratio has been steadily declining.
4. Overall the operating efficiency of the company has been on a decline during the observed period.

Profitability Ratios

Observations:

1. It can be seen that EBITDA margins have improved during the period while the PAT margins have come down. This is because of the higher Interests and or Taxes that the company had to pay. Since the company has been gradually piling up debt, this clearly is an impact of interest. as debt piles up it will put pressure on the bottom line and that is a cause of concern.
2. All other ratios viz ROE, ROCE and ROA have seen decline during the period indicating that all assets are not being utilized to full potential. Company is presently producing 15 types of 2-wheeler vehicles and 1 type 3-wheeler vehicle. This may lead to underutilization of many product lines that consume resources but do not produce results. Company must focus on these aspects and cut down on the models that are not performing.

Intrinsic Value

Assumptions:

• Terminal growth rate is assumed to be 0%.
• Discount rate is assumed to be 12%.
• Increase in Revenue is assumed to be Rs.724.89 Crores per year for the first five years and then Rs 362.45 Crores per year for the next five years. This growth rate is based on analysis of previous year’s revenues (refer to figure below). In the past revenue has increased at the rate of Rs. 1449.78 Crores per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.

• Free cash flow will be 1% of revenues in future. The FCF/Revenue ratio for the period under consideration has an average of 0.01. Here we assume that the same average will hold good for future.

Based on the above assumptions we have arrived at intrinsic value of the firm based on Free cash flows derived from extrapolated values of revenues. We have not done the calculation based on the projection of free cash flow as the company operated with negative free cash flow for the major part of the period in consideration. Please refer to the Free cash Flow projection chart below.

Revenue Growth Model

Intrinsic Value: Rs. 47.26

Stock Entry price with 25% margin of safety: Rs.35.44

The average of the above two stock entry prices works out to be Rs.35.44. When the stock starts trading below this price it becomes attractive for long term investment.

Author

Jibu Dharmapalan

Fundamental Analyst

Disclaimer: This is not a stock advise. Investors must use their due diligence before buy/selling any stocks.

References:

https://www.tvsmotor.com/en/investors/financial-reports

https://www.nseindia.com/get-quotes/equity?symbol=TVSMOTOR

More about the Company:

Board Of Directors

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