TVS Srichakra - Mini MRF!


(Rejinoldo) #1

TVS Srichakra - Mini MRF !

I’ll put down whatever info i have collected about this business.

Current market cap - RS. 2000 CR
Current market price - 2500 rs/share
Price / boomk = 5
P/E = 20 [ COSTLY COMPARED TO peers ]
OPM = 10%

ROCE = 30%
ROE = 39.5%
DEBT / EQUITY = 1.33
DIV YIELD = 1.33

Total sales close to 2000 crore at 5% net margin [ net profit close to 100 cr] .

Strong player in 2 wheeler tyres: TVSSL, after MRF, is the 2nd
largest player in 2 wheeler tyres . The company is
a supplier to leading players in this segment such as Hero Motocorp,
Bajaj Auto and TVS Motors. The company has, also, been makring
efforts to break into new OEM customers with positive results that
will over a period of time get reflected in numbers. The company
derives 60- 65% of its revenue from the OEM segment. As 2-wheeler
sales grow 10-15% p.a. over the next 2-3 years, the company stands a good chance to grow more .

Topline has grown at 14 to 17 % YoY for the last 5 financial year while bottomline has grown at 25% YoY for the last 5 yrs .

I am just trying to start a discussion here on this business.

Disclosure :- 1.5% OF my portfolio.

Management and company background :

TVS management is so far stain freeto my knowledge.

TVS Shrichakra is part of the TVS Group. The company is a leading manufacturer of
two-wheeler and three-wheeler tyres and enjoys a market share of 25%. With a network
of over 2,050 dealers and 20 warehouses across the country, the company is a major
supplier to TVS Motors, Hero MotoCorp, Bajaj Auto and India Yamaha Motor. Company
also exports to the US, Europe, Africa, South America and Southeast Asia. TVSSL earns
58% of its revenue from OE segment, 30% from the replacement segment and the rest
11% from exports…

Risks :

  1. RAW material volatility
  2. Slow down in auto sales .

Experts closely monitoring the company or industry pls contribute more info.

PS : Share price grew 10x during the last 4 yrs.


(Arun S G) #2

Hello Rejinoldo,

The obvious question that begs an answer is why not the real MRF? There are two gorillas in the ring - MRF and Apollo that dwarf the other players, so why not either of them? It would be interesting to see you compare TVS against at least these two and see where each one stands.


(Rejinoldo) #3

MRF is really tempting … But at 20000 cr M CAP … I am not getting the conviction to enter …


(Arun S G) #4

MRF market cap is 15,000 crore. Price of 36-37000 is an entirely different thing. One can do the financial analysis and management/business quality analysis, but I want to place a different perspective here.

The way I look at this is that due to high price and low equity, the number of retail sellers is low, so it starts to enter into a category called widow, or orphan shares. The big obstacle to such a classification of course is the extremely poor dividend yield.

But please go ahead & compare TVS with MRF/Apollo.

Disc: Invested in MRF.
Also had a small stake TVS, but decided to concentrate on MRF alone, now no holding.


(JKS) #5

http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/05552F7E_00FA_4406_A86D_BDCDE1C2AA6A_192616.pdf
Consistent, good performance in Q3, although the topline could have been a tad better.
I have to agree that the low raw material prices will continue to make the EPS look good and at about 230-240 annual EPS, this does not look that expensive.

Interim dividend of 300% is also announced.

I am expecting that the Michelin tieup (
http://www.business-standard.com/article/companies/michelin-ties-up-with-tvs-srichakra-to-make-bias-motorcycle-and-scooter-tyres-115060301130_1.html) and launch of Two wheeler radials should propel this to 2400 cr topline and 270 EPS, by next year (assuming crude remains, where it is !!)

PS - invested. no transactions in this scrip in preceding weeks


(TT) #6

While market leaders like CEAT and Apollo are trading at market cap/sales ratio of 0.64 and 0.58 respectively (PE of 6.50 and 8.80), TVS Srichakra is >1 (PE of ~12). However, TVS is debt free and growing faster.

Currently, I think TVS is fairly to slightly overvalued. It would be a good buy at 10 PE, which offers reasonable margin of safety. This could also explain why the stock has not moved up despite two stellar quarterly results - the stock was priced for this growth earlier itself. A couple more quarters of good growth should see the stock moving to a slightly higher orbit of price.


(Suvi) #7

This is what I could gather about TVS Shrichakra
First the decision making points:
TVS Shrichakra Tyre is mixed story, great management, excellent near term catalysts with expansion and brand building. At the same it does not offer consistent record of solid moat and cash flow. The change in interest rates coupled with patronage from TVS Motors can swing the side for TVS Shrichakra in next 2-3 years. Long term band 1 stock …strict no for now.
Competitive Advantage: Moderate
The financial indicators do not give a clear verdict for TVS Shrichakra. ROE and book value has been consistent along with revenue. But due heavy capex and subsequent higher interest the net margin and free cash flow languished erratically.
Two major instances of moat could be noticed. One is parentage from TVS Motors, which gave it a choice of composite product offering and supported to remain a leader in OEM segment.
Distribution network is entry barrier for all tyre guys as building a relationship, dealer network comes over the years.
Unfortunately none of these factors give a pricing power to tyre companies. At the same time all of them enjoy certain sections of market due to gap in demand and supply, here demand is always higher than supply.
Industry is growing at decent speed, concentrated competition despite of fragmented customer base.
Quality of Management: Substantial
Part of a group who has been dedicated to automobile industry, from clutches, to vehicles to tyres. The promoters are identified with the industry, owner operator management, deep routed values within system.
Management could have been more transparent on compensation disclosures, production norms. No sensitive transactions otherwise to suspect.
Excellent financial and operational management, commitment and spend towards brand building and sales promotion.
Risk Management: Substantial
Ownership has increased in balance sheet thanks to good amount of tangible assets addition. Inventory management has been commendable, so does receivables and payables. On working capital front management has been able to turn the tables.
Tangible assets has been increased dramatically by 20 basis points. This gives much needed cushion of whopping 41% asset base for a manufacturing company. A good amount of appreciation has come from building which are fresh and new.
Raw material is on decline, not due to rubber prices but inventory management though flattening rubber prices helped. The battle is not within pricing power and brand but remain competitive on net margin.
Earning efficiency is has been stunning, management tool loan for expansion created a bunch of ROE for shareholders and almost immediate cash flow. EPS jumped by 6 times in 6 years, the initial low net margin and negative cash flow is deceptive. Master stroke from management every time there is a expansion.
Borrowing front loans are paid promptly, long term borrowing has been down to one and half year of free cash flow. Debt maturity schedule doesn’t extend beyond 2020, debt equity is coming down. Finance costs have been decelerating from 3.65% of sales to 1.40% now.
The trading of tyres has taken a knock and margins have shrunk, management promptly shifted the focus to manufactured tyres.
Other expenses have been steady if not improved. Worry is lower tax rates, I tried to check the tax advantage….information are not available. If I normalize tax by 7-8% it will have equal impact on net margin.
Capital allocation story has been so far expansion, brand building through promotion expenses, dealer discounts etc. Management doled out few dividends presumably to keep capital markets happy.
The revenue growth have from volume, quality has been organic. A lot of the tyre companies are not that badly hit by cyclical turn. It’s has its own defensive nature which protects beyond a shut through period.
Financial integrity could have been better with inconsistent behavior of cash flow and net income. 100 Cr of debtors during 2015 changed the cash flow landscape. CFO have no presence in company, doesn’t even sign off on balance sheet. Management has been consistent on accounting estimates, judgments and policies.
Future Catalysts: Substantial
Multiple expansions has taken place or in progress either on own manufacturing or even contract management for a world leader like Michelin.
The industry has been managed its growth always, it has its own defensive characteristics can be seen with no so wild swing in revenue numbers across the players.
Big amount of money is pumped for promotion, advertisements, dealer discounts….all to increase share in after market segment which offers high margin but fragmented.
Stable business model, long term commitment …disciplined growth with lot of organic cash flow. These characteristics will make TVS Shri a good company to survive with.
The financial management from management started showing numbers across financials be it free cash flow, revenue, profit and efficiency ratios as well.
Margin of Safety: Substantial
Price behavior
Though in long run price has moved according to fundamental growth, the year wise movements have been inconsistent. The PE expansion have come in patches, market have a tendency to recognize TVS Shri some time after fundamental growth.
Relative Valuation
All of the relative valuations look like entertainment and have no correlation with fundamental growth and hence Price to book, price to sales or even price to earnings can not be relied upon.
I infused risk to relative valuation, margin of safety expanded to 40% thrown a moderate buy PE of 5.59 as expected. Book value based growth valuation suggests a buying price range upto 3059 for a 20% ROI and 2000 for 15% ROI.
Intrinsic Valuation
The discounted cash flow valuation works around 2276, very little margin with current price. One of the reason is base cash flow doesn’t consider all expansion plans, also growth has picked up recently. Conservative DCF ruled out either.
The franchise model throw up some interesting statistics. Asset reproduction value is way ahead of earnings power and also market cap by a far superior distance.
The excessive asset power has come from massive spend for brand building which has not resulted any earnings till date. Also management’s ability to use assets have been commendable looking at industry, enjoys wide margin of efficiency even with a seasoned competitor like MRF.
But does this recent growth started showing a reversing trend, may be partially. The growth has picked up in recent times, superior return on capital gives a growth power if I cant call it as franchise valuation. This shot up the franchise valuation to 3791 Cr more than double of MCAP.
High value and high price stock may be for now , base case value dragged EPV further to 1156 Cr and a paltry growth prospects.
Nine months post base assessment reveals a different story, 253 Cr expected adjusted PBIT put the EPV at a fair value almost 30% more than market value.
Inverse risk assessment
Not a complex business, not much unusual case stories to build either. Missing cognitive biases and adverse management choices. This gives us a better flavor of little risks to the valuation going forward.
Macro view
We are in middle of last and next general elections. The interest rates have been declined but not fully. Fundamentals are stronger but weakening.
Special situation: Insignificant
Multi bagger triggers are not visible at this point of time, large public float. Though good management and financials market has valued a good portion of it.
Subsidiary valuation can be a game changer, but no way to calculate independently with available information. The advantage tax rates can play a dampener in future.


(Suvi) #8

CBR 1: COMPETITIVE ADVANTAGE
MOAT METRICS 2007 2008 2009 2010 2011 2012 2013 2014
ROIC 0.47 8.63 -2.18 7.89 18.88 24.83 6.53 11.22
Sales Growth 10.06 25.8 21.58 54.89 33.92 13.65 15.73
EPS Growth 37.05 -3.37 231.12 31.28 0.12 -30.62 102.76
Book Value Growth 9.87% 32.10% 32.60% 19.67% 157.68% -45.01%
Free Cash Flow Growth -78.78
Book Value 77.23 84.85 112.09 148.63 148.63 382.99 210.62

Not a clear cut case at one go- moat metrics.
Evaluating Profitability
Ability to generate free cash flow
FREE CASH FLOW FOR TVS SHRICHAKRA
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Free Cash Flow 0 0 -33 -23 32 7 -56 -75 137 -77
Cash flow from Operations 0 0 -17 -11 50 62 10 80 187 13
Cap Spending 0 0 -16 -12 18 55 66 155 50 90
FCF Per share 0 0 0 -29.58 41.53 8.81 -72.97 -73 -97.3 179.32
FCF Growth 0 0 0 0 0 -78.78 0 0 0 0
Free cash flow to Sales% 0 0 -7.92 -4.94 5.52 0.96 -5.15 -5.14 8.31 -4.01
Capex to sales% 0 0 3.86 2.56 3.19 7.92 6.04 10.68 2.99 4.68
Free cash flow to Net Income 0 0 -4.84 -2.43 3.53 0.23 -1.43 -1.92 5.05 -1.39

Except for the year 2013 FCF to Sales has been negative most of the time and also supported in 2009 and 2010. Cash flow from operations has been fairly positive but continuous spend of capex has spoiled the FCF party. It was around 7-10% in last 3-4 years of sale value (Capex/Sale).
Ability to maintain a healthy Net Profit margin
Net Margin
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Net Margin 0 0 1.63 2.03 1.56 4.26 3.61 2.7 1.65 2.88

Although TVS Shrichakra have managed to maintain a positive net margin the range of margin has been extremely bad. Highest it could manage in 2010 where it earned 4.26%.
Ability to earn higher returns on equity
ROE
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Net Margin 0 0 12.84 16.63 14.52 39.55 39.21 30.74 17.98 30.2

The ROE has been very high during last few years, otherwise also the ROE was always positive.
Ability to earn higher returns on assets
ROA
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Net Margin 0 0 2.93 3.61 3.16 8.29 7.24 5.03 2.93 5.65

The return on assets have been patchy, except couple of years TVSS has failed to deliver the return on assets.
Ability to maintain a high Return on Invested Capital (ROIC)
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
ROIC 0 0 0.47 8.63 -2.18 7.89 18.88 24.83 6.53 11.22

Till 2012 ROIC was going, with capex in 2013 it came down before recovering in 2014. Current ROIC rushed to 29.79.
Initial indication on moat numbers
Except the return on Equity Company has either performed badly of inconsistently on other three parameters namely ROA, FCF and net margins.
There is no clear sign from moat numbers.

Four places throwing validation TVS Shri may be enjoying a moat or partial moat.
Integrated operations and composite product- both the situations arising being part of TVS Group which makes 2/3 wheelers and other automobile products.
Superior distribution network- if we see the history of Tyre Company in India TVS Shri is the youngest entrant. Most of the players have proven track record of decades. Apparently this is a entry barrier to all new companies.
Market leadership- TVSS is maintaining a leadership position in OEM segment.
Moat Validation
Integrated operations or composite product offering should bring in additional gross margins for moat to work.
Similarly market leadership did not lead to any cost advantage as worked out.
2015 2014 2013 2012 2011 2010 2009
Gross Margin MRF 36.67 34.72 29.9 27.06 32.7 38.38 31.46
Gross Margin Ceat 40.08 100 30.44 18.89 21.5
Gross Margin TVSS 34.42 33.55 32.73 31.12 40.35 31.16 32.73
Operating Margin MRF 10.15 10.09 7.03 5.71 8.06 6.99 5.48
Operating Margin Ceat 10.96 8.01 7.13 3.17 4.68 2.15
Operating Margin TVSS 3.88 2.8 7.72 8 8.42 5.51 5.41

If we look at both operating and gross margin TVS Shrichakra is doing well, but it’s not a runaway leader. In fact when it comes to operating margin actually competitors have churned more profit than TVS Shrichakra.
This is an industry with numerous competitors; a lot of them are doing good basis their management and financial performance.
As the moat couldn’t be fully validated we will give a final attempt during rationalization nest to rule out any further errors.
Longevity of moat
Depth of moat- none, numerous guys….you cant sell at higher price and steal high margins.
Width of moat- the distribution network is not something we can build over night as its not based on technology. However competitors are more established with bigger networks. This either didn’t get a lot of money for TVS Shri.
The forward integration of group companies shows the depth of TVS group knowledge on automobile for decades. Very strong moat as we can see no other two-wheeler manufacturer in India has got into tire manufacturing. But this captive consumption didn’t add any margins as we can see or perhaps understated as mark up pricing. There can be two scenarios here:

  • If the mark up pricing becomes fair pricing it will add to bottom line. We need to check what percentage of sales is to TVS Motors.
  • Stability of sales at all time due to long term commitment from parent.
    The industrial view for moat
    2014 2013 2012 2011 2010 2009
    Revenue Growth MRF 8.83 2.08 23.05 30.74 31.59 12.32
    Revenue Growth Ceat 4.47 9.93 8.67 29.05 28.31 11.69
    Revenue Growth TVSS 15.73 13.65 33.92 54.89 21.58 25.8
    Operating Income Growth MRF 9.53 46.51 51.4 -7.36 51.73 43.24
    Operating Income Growth Ceat 17.32 147 -26.22 180.41
    Operating Income Growth TVSS 60.21 -58.74 29.24 47.13 85.79 28.03
    Net Income Growth MRF 12.33 39.56 -6.36 73.08 42.56 78.05
    Net Income Growth Ceat 16.94 125.67 560.94 -33.74 -82.96
    Net Income Growth TVSS 102.74 -30.28 -0.36 31.26 231.05 -3.38

All companies are almost making revenue growth consistently. When it comes to operating income and net income growth varies from company to company. This indicates:

  • equal advantage is enjoyed by all peer companies or at least no one is at major dis advantage.
  • That leaves us with who manage working capital, operations and finance better produce better results. There is no long rope for any one for cake walk.
    Industry attributes
    Driving force of industry- automobile requirements for goods and personal movement.
    Competition within industry- multiple players, lack of pricing power but fair market share due to high demand.
    Macro picture- demand is more than supply, linked to population growth.
    Industry trends- CAGR is becoming higher and higher.
    Cash conversion cycle- moderate.
    Exposure to cyclical markets- partially, beyond a point it become a requirement.
    Pricing power- no
    Demand volatility- no
    Industry Rivalry
    Limited competition- no, but every one has their niche share.
    Changing industry- no
    Method of competition- may change by better dealer network. Competition is going to base on services.
    Impact from low cost countries- yes

(Suvi) #9

CBR 2: QUALITY OF MANEGEMENT
Compensation
Key Managerial Personnel:
S. Narayanan and Shobha Ramachandran

Name-2015 Gross Salary Perks Commission PF Stock Option
S Narayanan 4.73 0.61 4.13 Nil
Shobha Rmachandran 4.01 1.05 2.96 Nil

Last year TVS Shri made around 103 Cr profits, both management took almost 5% of net profits. Again the commission is paid as per articles of association and secretive. Last year profit was on higher side, the range of profit was generally 40-50 cr earlier. Lets check what these people were getting during 2013. An amount of 1.30 Cr was paid , looks like profit is taken into consideration, however we would expect better transparency.
Other Red Flags
Loan given and forgotten- there has been no loan paid to key managerial personnel.
Perks allowed outside package- not aware, related party transactions reflect only salary as services.
Stock options- not issued
Skin in game- Shobhana is family member of TVS where as Chairman is long tenured employee. TVS family with their associates hold 45% of company.
Character
Position to enrich friends and relatives:
Except the parent company and key managerial personnel I didn’t find any other related party transactions.
Transactions with key managerial personnel pertains to salary only. Where as dealing with parent company is restricted to purchase and sales only.
Board composition:
Information is not available on website much about board member except the name.
Candid about mistakes
Couldn’t be ascertained. Talked positive only.
Promotional management
Not much negative information available.
Talent Retention
Not known, but salary median is poor.
Tough Decisions
Leveraging debt has been good so far, spend on business promotion indicates lots of vigor.
Running the business
Performance
As we saw earlier the Return on equity is coming mainly due to superior financial leverage.
The revenue growth has been organic all the way. Management has not resorted to acquisition.
The share capital has been same since last five years. Aggressive tactics such as options, preferred or any other dilution method is not used.
Follow through
After market tyre- improving market has been the concern of management, I could see they are expressing since last five years. Management is talking about brand building, sales promotion etc. A substantial amount almost 6-7% of revenue has been pumped as soon as free cash is available.
Management also spoke about power crisis and obtaining a dedicated power line which they did in 2015.
Apart from above skilled resources has been highlighted, there is no way verifying such thing.
Candor
Management has not stepped out and provide information where it could have, e.g.

  • the production and sales number in quantity
  • sale figures for after market and OEM
    The statutory numbers are provided, additional information is a good information management.
    Self Confidence
    One example I could sight out is continue to spend on promotion and brand building despite tough results in previous years. This is to boost after market tyre sale.
    Flexibility
    Cost management- inventory has been tightened even in good years. Looks like management have paid attention to working capital management.
    Management has been opportunistic with debt, the moment it generates additional FCF it retires the debt.
    Capital allocation, good point perhaps is using debt primarily to expand which ha brought good ROE.
    Owner operator
    Entrepreneurial mind- yes
    Large stake in business- yes
    Buy back- not so far
    Pay dividends- yes
    Good ROE- yes
    Long term perspective of business- yes
    Passionate about business- yes
    Love of the game
    Lifelong learners – not known
    Philanthropy- not known
    Public appearances- not known
    Business Culture
    Decentralisation- no
    Day to day operations- yes
    Long term focused- yes
    Transparent communication- moderate

(Suvi) #10

Seedbed and controversial behaviors- my assessment on my extremely poor appetite and bad knowledge!








(Umang Joshi) #11

Was looking at TVS, but sales have been quite disappointing in the recent quarters. Also competition is heating up. JK Tyres & Apollo have announced their arrival.

Michelin deal is also of the older bias tyres.


(Suvi) #12

Hi Umang
If we have to categorise your questions then it will be:

  1. The recent disappointing performance on top line
  2. Competition rivalry
  3. Michelin contract

Regarding recent performance let us understand the growth drivers of TVS Shrichakra.

The growth has not been consistent. Interest is single determinant factor changing the bottom line. Example during 2009, 2012 ,2013. Despite of higher revenue and operating income growth , net margin and EPS fallen to negative territory growth. When interest costs come down it has bigger multiplier effect e.g. 2010, 2014; the growth in EPS and net income is faster than revenue or operating income.

The interest payment fluctuates as debts are taken for expansion, once paid off interest cost comes down.
Whether this quality is across the industry, lets check one major competitor MRF

One thing we can see clearly these companies are not that badly hit by cyclical turn. Take for example during the year 2008 , 2011 MRF was doing bas where was TVS Shri was doing good. Similarly during 2009, 2012 and 2013 TVS Shri was making negative growth where as MRF was clocking high numbers in 2009 and 2013.

For last several years TVS Shri enjoying a higher Return On Equity despite having a lower return on assets. The additional punch had come from financial leverage.

Let’s give a thought whether we can rely this use of debt by TVS Shri:
during last decade TVS Shri has used debt to its own advantage. Company had always higher financial leverage and multiplied ROE.

ROA has suffered due to bad margin, one of the reason of poor margin is higher interest payments.
When it come to using operational efficiency of assets both companies are on same footing.

Can we cross confirm both MRF and TVS Shri have competitive level of operating margins if net margin for TVS Shri is distorted by interest.

The five year average growth of operating profit for TVS Shri is 28% against 18% of MRF.
Then point to think is TVS Shri is intentionally using debt for expansion to generate excessive returns.

The capacity expansion from 1.7 Million to 3.6 is more than double.

What happens with capacity expansion? Cost per unit goes down, margin improves. But on flip side interest will start eating bottom line. Nine months results didn’t show much appreciation in revenue, apparently the expansion is in progress.

TVS has expanded recently capacity thrice to make it double. A plant at Uttarakhand was added few years back. Operations wise yes.
Other aspects like finance, HR, marketing India provides abundant supply of human resources. Skilling can be a misfit but there is no shut down point. Technology for this industry has been off the shelves meaning inventors and users are separated in value chain.
TVS Group has been south India centric with all most all of their business interest in automobile industry and TVS Shri can take advantage of such situation. The last expansion at Uttarakhand may be catering to north India OEM and retailers.
Expansion have taken place repeatedly to garner market share, money spent on business promotion to increase presence in after market. Though interest and depreciation has knocked off the margin management has been successful calling out their growth models. This is demonstrated through the superior usage of assets (asset and fixed asset turnover).
Organic cash flow has been always insufficient for TVS Shri due to big amount of capex requirement. But if we go back to last expansion not only it resettled the debts it made good amount of profits as well.

Ok, so what I was trying to say TVS Shrichakra has always been like that…patchy and sketchy. You would see clearly I would hesitate to put a tier 1 stock.

Now second part industry rivalry
The average life of 2 wheeler tyre is around 25000 km. Three wheeler around 8000 Km.
Major cost is raw material; a significant component goes for rubber followed by carbon black, chemicals and steel.
There are two types of tyres, bias tyre and radial tyre. Majority of the tyres manufactured for 2/3 wheelers is radial tyres. TVS Shri claims to have 2400 dealers and 300 depots.
39 tyre companies, 60 plants with a turnover of 48000 Cr. The total export for last year was 10200 Cr. 123 million tyres were produced.
Raw material cost is around 70%. Rubber constitutes 42% of raw material cost. 26000 Cr investment proposed during last year. The demand supply gaps are around 9.5% (demand is higher by 202485 MT).
The OEM segment is growing at 5% where as after market is growing by 15-16% CAGR. The after market tyres have high margin but requires brand building and distribution.

The industry’s demand outstrips supply, hence all will survive with a teaser price. What can bring additional horse power is working capital management, debt position and asset management. If you check TVS Shrichakra is way ahead of competitors at least now.

If we look at both operating and gross margin TVS Shrichakra is doing well, but it’s not a runaway leader. In fact when it comes to operating margin actually competitors have churned more profit than TVS Shrichakra.
This is an industry with numerous competitors; a lot of them are doing good basis their management and financial performance.

Third aspect is Michelin contract, this is part of 3.6 capacity. Micheline have business with all, I wont get carried away so I discounted it for catalyst purpose.

A factor what I liked was:

The forward integration of group companies shows the depth of TVS group knowledge on automobile for decades. Very strong linkage as we can see no other two-wheeler manufacturer in India has got into tire manufacturing. But this captive consumption didn’t add any margins as we can see or perhaps understated as mark up pricing. There can be two scenarios here:

If the mark up pricing becomes fair pricing it will add to bottom line. We need to check what percentage of sales is to TVS Motors.

Stability of sales at all time due to long term commitment from parent.


(Suvi) #13

I wanted to offload the last documentation last time, let me try this time:

Confession- I have holding in this stock, but timing of purchase are completely different. This document is a refresh of investment note of last time.

The risk management portion:
CBR 3: RISK MANAGEMENT
Basics of Business & moneymaking
A vehicle on road cannot move unless it has fitted with tyres irrespective of nature of vehicle be it personal use or commercial use.
TVS Shrichakra is involved in manufacturing in 2 and 3 wheelers tyres. 2 wheeler are used for personal convenience where as 3 wheelers are multi purpose. Some 3 wheelers used for ferrying people, some for goods. The flexibility of 3 wheelers for city usage and nuke and corner of streets is higher due to it small size. Small cities have a passenger demand using 3 wheelers.
TVS Shrichakra is part of century old TVS group. The group interest extends to manufacturing 2 wheeler and 3 wheeler, auto electronic equipment’s, enterprise solution for automotive, auto finance, auto distribution, auto brakes, turbo charges for engines. TVS have almost integrated all of automotive requirements when it comes 2 or 3 wheelers.
TVS Shrichakra’s main source of revenue is by selling tyres. Tyres are either sold to original equipment manufacturers who makes these vehicles or for after market use where tyres are replaced with new tyres. After market sales offer better margins due to dealer network and fragmented users. OEM offers low margin due to bargaining power of buyers as consolidated contracts. Tyres are one time sale but comes with 5 year warranty (six months for 3 wheelers) where manufacturing defect can be replaced. Other defects are taken on pro rate basis where inspection results are important.
The average life of 2 wheeler tyre is around 25000 km. Three wheeler around 8000 Km.
Major cost is raw material; a significant component goes for rubber followed by carbon black, chemicals and steel.
There are two types of tyres, bias tyre and radial tyre. Majority of the tyres manufactured for 2/3 wheelers is radial tyres. TVS Shri claims to have 2400 dealers and 300 depots.
Over view of tyre industries
39 tyre companies, 60 plants with a turnover of 48000 Cr. The total export for last year was 10200 Cr. 123 million tyres were produced.
Raw material cost is around 70%. Rubber constitutes 42% of raw material cost. 26000 Cr investment proposed during last year. The demand supply gaps are around 9.5% (demand is higher by 202485 MT).
The OEM segment is growing at 5% where as after market is growing by 15-16% CAGR. The after market tyres have high margin but requires brand building and distribution.
Tyre manufacturing process
Tyre manufacturing goes through five stages
Stage 1 is called compounding and mixing where raw materials are brought together and mixed at high temperature in a machine called massive mixer. The output from this stage is called cooled rubber slabs.
Stage 2 is called as component preparation. The rubber slabs goes through extrusion where heat and pressure applied to create tread and sidewall. Calendaring is where fabric and steel is introduced. Also bead is build.
Stage 3 is tire building where components are preshaped to proper positions.
Stage 4 is known as curing where a tyre attend final shape and tread pattern. Cured at high temperature , tires popped from molds.
Stage 5 is final stage where tire inspection is carried via machine for durability, strength etc.
Customer view of business
The customer finally is an end user. But first delivery takes place via vehicle manufacturers. Further replacements are done by end user themselves.
Customers are price conscious when it comes to 2 and 3 wheeler replacement. There is a sense of affiliation with the next door mechanic where each customer races. These mechanics dictate the brand and buy from dealers. The scene is slightly different in urban land. With integrated service centers, better customer awareness the fragmentation is less than rural world.
In the OEM world there are limited number of customers, for TVS Shri , associate company TVS Motors is also one of manufacturers. The after market world is fragmented and spread across.
Dealers do not influence the psychy of mechanics, though mechanics can influence end user.There is very little inter action with end user and Company. Tyre companies are launching promotional awareness, campaign to make them more familiar. Tyres are need to have products.

TVS Shrichakra Financials Overall View
The Balance Sheet


Key Balance Sheet items:
reserves
Long term borrowings
Short term borrowings
Trade Payables
Other current liabilities
Fixed asset
Intangible assets
Inventories
Debtors
Trending of Key Balance Sheet Items
Shareholder fund has gone up from 17 to 29% during last five years. The decrease in current liabilities is supported by mild increase in non current liabilities and minority interest.
The decrease of current liability is supported by decreasing short term borrowings, reduced trade payables. However other current liabilities have shot up.
Within non current liabilities long term borrowings has been steady.
From asset side company has become more asset centric i.e. 25% to 41% of total asset in 5 years. This increase was supported by a equal decline in current assets.
The addition to fixed assets comes from tangible, and fresh new addition of intangible assets from 2012 onwards.
Sharp decline in inventory contributed to fall of current assets.
Key take away:
Owners are gaining ground in ownership where they have increased their stake from17% to 29%. This gain came with reduced current liabilities. The working capital management has contributed this rise (reduced inventory, short term borrowings and trade payables).
Long term borrowings has not changed much since 5 years, but new loans were added and old ones getting paid.
Tangible asset have been increased dramatically by 20 basis points. The rise gives much needed cushion for a manufacturing industry. Again this is primarily possible by stringent working capital management can be seen in both debtors and inventories.

The Profit and Loss Account


Key profit and loss account items:
Revenue from operations
Cost of materials consumed
Purchase of traded goods
Employee Cost
Other expenses
Finance costs
Depreciation
Taxes
Dividend
Exceptional item in 2015
Trending of PL Account
Revenue from operations dominates top line, indicates TVS Shri has spend all the money in capex requirement or other business reinvestments.
Profit before tax has started showing upward curve, primarily due to decreased cost of raw materials.
Trading goods introduced during 2015, we need to check this bring additional margin or a low margin business.
Exceptional item of 11 Cr during 2015.
Key take away:
We have to find out the decline in raw material cost. Was it the imports which reduced the bill or trading goods is replacing manufactured goods? If yes what is the impact of fixed costs born by plant.
The decline in raw material has not added to margin, but expenses otherwise has been steady. The inventory balance has created the additional 2-3 basis points for margin. It also indicates TVS Shri does not enjoy pricing power, the battle is managing the bottom line.
Significant item of balance sheet- Reserves
TVS Shri reserve includes 4 catgeories:
Capital reserve- exhausted and insignificant
Securities Premium Account- active account but insignificant amount
Surplus on amalgamation- small amount
Surplus or retained earnings- the accumulated profits
The owner earnings has been steadily rising which reduces outside exposure and increase the health of clean funding. Question is have this retained earnings delivered returns?

That’s stunning way of reinvesting earnings which has generated 28% return. This has catapulted the EPS 6 times in 6 years. Question would be is this sustainable going forward?

Significant item of balance sheet- Trade Receivables

Receivables overall is going down in tandem with sales, last year shown some sharp up moves …we can see days sales outstanding down to 41 from levels of 46-48.
The transactions with associates are almost absent, I think TVS Motor is shown as non associate.
Bad debts have mildly increased, however over all debtors has nose dived to all time four year low.
On a industry scale except Balkrishna all other 3 guys including MRF moves neck and neck though TVS Shri has made a stellar come back during 2015.
Significant item of balance sheet- Inventory
TVS Shrichakra inventory includes raw material, finished goods, trading goods and spares. Inventory valuation is done at cost with weighted average.
Nature of inventory- rubber, chemicals and carbon black. Rubber is key component which is a seasonal product, with so many competitors enjoys good liquidation value.

The inventory composition has seen major changes in last five years, raw material share has been going down from 65 to 47. The deficit is compensated by rising trading goods stock. Is this a temporary phenomenon? The rise in trading goods is rising steadily year after year.
Whether management moving to more trading model, if yes then what happens to fixed cost management?
Who supply these trading goods?
Inventory holding have gone down drastically from 79 to 37.
TVS Shri is an outstanding winner in inventory management. It almost managing less than half of its nearest competitors is doing. Is this temporary?

Pasting one by one, hope it will help.


What exactly is earning visibility?
(Suvi) #14

Significant item of balance sheet- fixed asset
TVS Shrichakra fixed asset includes multiple categories of assets:
Land, building, plant & machinery, furnitures & fixtures, vehicles, office equipment, electrical installation. Land at Madurai is owned by company where as Uttarakhand plant is on lease.
Addition to this TVS Shri have intangible which includes goodwill, software.
Fixed assets are shown at cost, depreciation at SLM.
Fixed asset share has been going up as we discussed earlier, all internal cash flow from operations has pumped to expansion. Very high as much as 78% share is tangible asset which reflects the nature of tangible asset driven company.

Building share is going up which gives better realization within tangible asset.
Now lets look health of assets for two major asset i.e building and Plant& Machinery

Fresh building and approaching ageing plant and machinery. Is repairs and maintenance to plant and machinery increasing as well, lets check it out.

Actually repairs has come down during last year as there was substantial asset addition, may be replacement of assets. There is scrap amount of loss covered as “loss on sale of fixed assets”.
Growth and maintenance capex to support fixed assets I will cover separately.
Goodwill account- TVS Shri started showing goodwill value from 2012 onwards. A foreign subsidiary company has purchased another company which resulted goodwill. 2015 company written down 11.26 Cr as not recoverable.
Significant item of balance sheet- Other Current liabilities
TVS Shrichakra fixed asset includes multiple categories of assets:
Other current liabilities seen a big rise from 2014 onwards as expenses called other creditors introduced. Details are not available to verify.
Significant item of balance sheet- Trade Payables
TVS Shri portion of trade payables has come down by half. However there is a marginal loss in supplier bargaining power as supplier’s outstanding days have been coming down. But looking at debtors days TVS Shri almost gaining 40 days of buffer.
What about competitors:

Very healthy supplier management in terms of financial aspects, clear leader but Balkrishna and Ceat also catching up.
Significant item of balance sheet- Short term borrowings

Short term borrowing has gone down over the years that has resulted reduced exposure within total liabilities portion.
The working capital loan is hypthoticated on raw material, goods, debts etc. Also second charge is created on lease hold land.
Significant item of balance sheet- long term borrowings
Long term borrowing predominantly include term loans from bank. There use to be a loan from other parties which were repaid during 2014.
Multiple banks have provided the loan basis charge on tangible assets.
The financial health is checked separately including term loan repayment schedule.

TVS Shri sells tyres either by manufacturing them or trade them. The ratio of manufacturing to trading with a bias towards trading started going down till last year when it got stagnated.
I checked whether information is available to differentiate margin between trading and manufacturing.

Two year data available which shows almost same revenue sharing as I said earlier getting stagnated.
The margin for trading slumped by 50% where there was a big bump in manufacturing margin. So it’s possible that manufacturing margin is going higher. As individual quantities are not available, I couldn’t conclude whether there is a pricing power.
The return on capital employed for manufacturing moved higher where was it decreased for trading. But I do have a doubt as to how did the company split capital employed between trading and manufacturing. With all capital intensive items used for manufacturing and 87% revenue sharing a number of 67% capital employed is doubtful . I will go however with margin numbers as these are straight forward profit center numbers.
Significant item of profit and loss- Cost of materials consumed
TVS Shri manufactures 2, 3 and farm tyres. One of segment is involved distribution of commercial vehicle parts outside India.
The cost of material has been going down over the years. The price of rubber is going down, this would have benefitted company.
I explored where exactly the benefits is coming in:

As expected rubber the prices have gone down.
I tried to check dependency on import, this is what could be available:
The import share dropped dramatically in 2015 due to domestic favorable price.
Significant item of profit and loss- Employee Cost

Sales per employee is going down, perhaps new expansion is yet to blossom fully. Sales per employee has gone down a bit.
Significant item of profit and loss- Other expenses
Major components of other expenses are:
consumption of stores and spares
Power & fuel
Business Promotion
Fright Out
Commission and discount
Power and fuel has gone down, other expenses are at same level. The contribution of these expenses are around 14-15% of sales. Employee expenses include director as well, meaning these commission have gone to genuine agents, dealers. No commission is paid to related party either.
Significant item of profit and loss- finance costs

Interest cost has gone down with repayment of debt from 3.65% of sales to 1.40%. The rate of interest is around 12-15% except during 2013 it went up to 21%.
Significant item of profit and loss- taxes
There is a difference between actual tax paid and provision amount almost every year. Is this aggressive accounting?
Effective tax rates dropped by half in current year. Is TVS Shri enjoying tax benefit?
Significant item of profit and loss- exceptional item
Amortisation of goodwill reversed on acquisition.


(Suvi) #15

Cash flow statement and Capital Allocation Decision

Apart from 2015 TVS Shri has struggled to manage cash flow and capital allocation.
During 2012 TVS Shri obtained borrowings for growth capex. 2013 saw additional cash flow from operations which was paid mostly to borrowers. 2014 saw again company going to door of borrowers fro growth capex and started paying in 2015.
There was little room for any major decision making such as acquisition or buy back. Dividend was paid consistently. This is to keep shareholder happy,2014 with poor cash flow company has paid 50% of CFO as dividend.
I tried to find out the fluctuations in cash flow in operation particularly in 2014.
increase of receivables by 100 Cr against 100 Cr decrease in 2015.
Increase of payable by almost 100% than 2014.
Whether this is a management follow up, we need to check in current year.
Analysing TVS Shri- Growth
Is there a revenue and profit growth, lets check out.
Revenue has grown steadily some time bit slowed down. Operating income has performed better except 2013 when it went to red. Net income has been patchy due to interest payment. Which has impacted EPS as well. Operating cash flow has been good as well.
Source of Growth
Selling more goods and services: quantity is not available to spot whether more tyres has been sold. The marginal increase of raw material consumption (at consistent level of closing inventory) shows no major increased quantity of sale.
Raising prices: in absence of quantity exact number of pricing power was not possible. The margin has expanded in manufactured tyre mostly due to better working capital management. Pricing power is not clearly visible.
Selling new goods or services: no
Buying another company: no.
Quality of growth
The growth has not been consistent. Interest is single determinant factor changing the bottom line. Example during 2009, 2012 ,2013. Despite of higher revenue and operating income growth , net margin and EPS fallen to negative territory growth. When interest costs come down it has bigger multiplier effect e.g. 2010, 2014; the growth in EPS and net income is faster than revenue or operating income.
The interest payment fluctuates as debts are taken for expansion, once paid off interest cost comes down.
Whether this quality is across the industry, lets check one major competitor MRF

One thing we can see clearly these companies are not that badly hit by cyclical turn. Take for example during the year 2008 , 2011 MRF was doing bas where was TVS Shri was doing good. Similarly during 2009, 2012 and 2013 TVS Shri was making negative growth where as MRF was clocking high numbers in 2009 and 2013.
Analysing TVS Shri- Profitability

Return on Assets
The return on assets for MRF tracks much higher than TVS Shri due to higher margin, this means MRF is able to sell at more prices or making more bottom line that TVS Shri. When it comes to usage of assets both of them stands on same footing.
Return on Equity
For last several years TVS Shri enjoying a higher Return On Equity despite having a lower return on assets. The additional punch had come from financial leverage.
Let’s give a thought whether we can rely this use of debt by TVS Shri:
during last decade TVS Shri has used debt to its own advantage. Company had always higher financial leverage and multiplied ROE.
ROA has suffered due to bad margin, one of the reason of poor margin is higher interest payments.
When it come to using operational efficiency of assets both companies are on same footing.
Can we cross confirm both MRF and TVS Shri have competitive level of operating margins if net margin for TVS Shri is distorted by interest.
The five year average growth of operating profit for TVS Shri is 28% against 18% of MRF.
Then point to think is TVS Shri is intentionally using debt for expansion to generate excessive returns.
Free cash flow
Discussed earlier, free cash flow growth has been patchy. Despite a positive growth in cash flow from operations continuous spend in capex knocks off free cash flow to negative territory.
FCF and ROE together: high ROE and low FCF company. This means TVS Shri is reinvesting all their cash to expansion but still able to generate high shareholder return on equity. This is vetted by stellar 28% efficiency matrix on reinvestment of earnings.
Return on Capital Invested

ROIC have been very flat and inconsistent lots of time except 2 good year when perhaps debt was low.

Debt ratio have started going from 2012 onwards. Hence 2012 pumped the ROIC higher. But why mediocre ROIC in 2013 and 2014 despite comparatively lower level of debt. Operating margin dropped due to increase in other expenses (mainly to increase commission and business promotion). The temporary suffering may be due to brand building which management is emphasizing in communication.
Analysing TVS Shri- Financial Health
Impact of Financial leverage
TVS Shri paid the high interest during 2012 and 2011. Did it impact the margins, yes net margin was at lowest though operating margin was steady. But the high financial leverage does not impact return to shareholders, the low cost debt is leverage against reinvestment earnings for the benefit of shareholders.
Debt to Equity Ratio

Both long term and short term debt has been reducing. With LTD/STD factor at same level of 2014, the year 2015 managed to churn higher profits. Once the factor crosses 0.80 or high the profit starts falling perhaps due high interest of long term debt.
Times interest earned

The coverage made a jump during 2015, other wise the coverage on earnings was bad. With cash flow it was absolute poor. Is it a sign of turn around? A post base assessment is required.
Current ratio and quick ratio

Due to low holding of cash and investments there is not much difference between current and quick ratio. Infact overdraft during 2011 resulted a higher quick ratio. These ratios are not of high benchmark, however a low current ratio with good working capital management can be compensated. We will check working capital management in due course.
Limited Debt
The current debt is 241 Cr including both secured and unsecured, last year cash flow was around 159 Cr, it’s a maximum 2 year debt. I can call it as limited debt.
Question is did the company took advantage of debt?
Yes TVS Shri has spend a lot of money on branding and campaign to boost after market sales. Expanded capacity which results can be seen with increasing bottom line. Majority of the year TVS Shri has been able to spend lot of money on growth capex.
Off balance sheet liabilities
The major 2 liabilities are unexecuted contracts and LC which are operational in nature due to time lag effect.
Capex Management

If we see the rise of capex in 2014 and 2012 a majority of them came from growth capex. That’s the reason also we saw immediate rise in FCF next year.
If we take out growth capex , maintenance capex is around 1.5% of sales.
Long term financial need
If we look at TVS Shri debt requirement it had always went after debt for expansion. This shows company does not have need for permanent capital which indicates better long term liquidity.
Debts are secured via mortgage on land, property and plant etc. These are recourse debt.
Debt Maturity Schedule
Although the dates of term loan maturity has been given amounts are not there. However I could see –
Term loan 1 expiring in 2015. Term loan 2 goes up to 2020. Term loan 3 up to 2017.
Within next five years all the term loans will be settled. With a total debt of 241 Cr and free cash flow of 159 Cr I am sure company will be able to pay it off.
Fixed interest rates are taken, hence there is no uncertainty in forecasting interest payments.
Motivation for debt
Debt is taken to mainly to fund capex plans. Most of the repayment periods are between 5-7 years.


(Suvi) #16

Financial Integrity
Declining Cash Flow

There is no consistency between cash flow from operations and net income. Take 2015, cash flow jumped 18 times against income growth of 53%. Revenue has grown 22% as well. The sudden drop of 100 Cr debtors has fuelled the cash flow position. This indicates the cash flow is going to fluctuate in future as well. Take the case of inventory on a downward trajectory, perhaps covering old inefficiencies.
Serial Charges
TVS Shri has been showing reversal of goodwill recognized on acquisition. There has been no consistency on this. 2014 written off, 2015 reversed.
Serial Acquisitions
Subsidiary company have acquired some distribution network, impact is minimal in terms of size and ignored.
Tenure of Auditor and CFO , remarks
Auditor has been there all along, does all TVS group accounts. Rule book observations has been noted.
CFO doesn’t influence company much, can be seen from dismal compensation structure. Even the balance sheet is not signed by CFO.
Collection strategy

AR to sales gap is rapidly decreasing from 16 to 9% almost. However all happened during 2015 with the massive decrease of debtors. This can be seen in movement where 2014 took a up move in debtors before falling down in 2015. Possible one of big customers delayed the payment for some reason.
Impact of changes to accounting policies, estimates and assumptions

Expense estimation
I checked the useful live, depreciation and impairment policy of company for last five years. There has been no change of words as stated by management, neither mentioned by auditors.
Revenue growth and frequency
Revenue
Exposure to Foreign Markets
Exports is around 2-3 Cr every year, this is not even 0.1% of turnover. The exposure to foreign market is minimal.
Tackling inflation
Ability to pass increased prices- yes and no, beyond a point may not work due to rivalry. But pooling can increase the price.
Ablity to reduce cost- yes but again limited because of capex requirements and debt.


(Suvi) #17

FUTURE CATALYSTS
Future growth in underlying business
Growth prospects of the future of business
May 2015 news- company will expand to 2.3 million tyre from 2 million.
Feb 2016- to 3 million
June 2015- production unit dedicated for Michelin tyres this will jack up 3.6 million.
The capacity expansion from 1.7 Million to 3.6 is more than double.
What happens with capacity expansion? Cost per unit goes down, margin improves. But on flip side interest will start eating bottom line. Nine months results didn’t show much appreciation in revenue, apparently the expansion is in progress.
Second catalyst is massive spending on business promotions and advertisements. This is to capture high margin after market tyres.
Third TVS Shri also started producing radial tyres.
R&D expenses have been around 2% of revenue last year and few previous years. Most likely its on improving quality as manufacturing technology is off the shelves not proprietary. In addition we are talking about products which doesn’t require any changes either in shape or size. The tyre sizes has been standard which are linked to vehicle manufacturers.
The company hasn’t change the business model, as a matter of fact TVS group specializes in automobile only.
TVS Shri has started targeting the after market segment and its natural. With a natural hedge from parent which manufacture vehicles the company should have targeted earlier as well.
Dividend pay out has been 24-25% accords the years, one can argue why paying dividend at difficult times. But some of PE expansion also comes by paying some amount of dividend.
There has been no change in management and unlikely also, as managed by owner operator.
Best part the business model can be repeated , we can see from multiple expansion. Though there is a risk of radial tyre knocking off bias tyres but that’s for everyone.
If we go back to our growth drivers the source of growth was always by producing higher. The quality was not suffered due to creative accounting practices but higher interest burden.
The growth is cyclical with defensive lenience. The defense comes from facts as:
the existing vehicles need tyres to be replaced as the life vehicle is far greater than life of tyres.
The tryre market within 2 wheeler and 3 wheeler is expecting to grow by 10-11% CAGR. TVS Shri growth has been organic all the way.
Growth at disciplined rate
TVS has expanded recently capacity thrice to make it double. A plant at Uttarakhand was added few years back. Operations wise yes.
Other aspects like finance, HR, marketing India provides abundant supply of human resources. Skilling can be a misfit but there is no shut down point. Technology for this industry has been off the shelves meaning inventors and users are separated in value chain.
TVS Group has been south India centric with all most all of their business interest in automobile industry and TVS Shri can take advantage of such situation. The last expansion at Uttarakhand may be catering to north India OEM and retailers.
Expansion have taken place repeatedly to garner market share, money spent on business promotion to increase presence in after market. Though interest and depreciation has knocked off the margin management has been successful calling out their growth models. This is demonstrated through the superior usage of assets (asset and fixed asset turnover).
Organic cash flow has been always insufficient for TVS Shri due to big amount of capex requirement. But if we go back to last expansion not only it resettled the debts it made good amount of profits as well.
One other thing we can cover when we speak about organic cash flow, the cash conversion cycle:

The cash conversion cycle for the available period is rapidly slowing down. Management is trying to make as much as money from working capital.
Historic profitability
Tyre industry has its own challenges and earnings and revenue fluctuated as well but have seen decades of tested period. Being defensive cyclical it enjoys existence patronage. Earnings has been fluctuated more due to debt management than top line.
Management incentive for growth
Management has been associated with company and sector for long timer. They have big stakes in share holding as well. The contribution can not be questioned.
Future growth in industry
Tyre industry is time and tested industry, its not a surfing situation anymore.
Management Catalysts
Activist investors: One Nilesh Shah is holding 138996 shares, not sure whether he is an activist shareholder.
Business catalysts
Change from negative to positive free cash flow- yes
Increase in FCF- yes
Increase in profit margins- yes
Increase in revenue –yes
Improving efficiency ratios- yes
But is this turnaround supported by valuation and foreseeable earnings for next 3-5 years?
Retreading difficulty for radial tyres- radial tyre manufacturing process is different than bias tyres. The retreading will take some time to catch up where as they tyre manufacturers will continue to sale.


(Suvi) #18

I think I have covered all of my document except Margin of safety. As its getting into valuation specific I want to avoid using information here. However I can share what valuations I used for this:

I checked price behaviour to identify fundamental growth and speculation growth. I checked this with Price to Sales, Price to Book, Price to Earnings. For me relative valuation is one of small key driver. I also do cash return and yield.

From intrinsic valuation perspective:

I start with liquidation value.

I do two DCF - one at normal, second at conservative rates.

Next I move to Asset Reproduction valuation, earnings power and franchise power ( I am a great believer of Bruce Greenwald)

Last I do Growth Drivers base valuation by bringing risk management, this includes:

p- adjustments to reproduction and earnings power
the base case valuation
value drivers analysis- asset, earnings and franchise
Introduce risks to value drivers and adjust the numbers

What are my risks: complexity, business environment, cognitive biases, operational

I end up finally to check the valuation with stages of business cycle just to get a comfort.


(Gaurav Agarwal) #19

Company posted a very good set of numbers. Key highlights

Revenue grew to 2503cr from 2339cr in Fy15.
Net profit grew to 186cr from 100cr in Fy16 a whooping jump of 86%.

Long term debt reduced to 31cr from 130cr
Short term debt reduced to 89cr from 113cr.

Cash + Investments increased to 109cr from 65cr

No equity dilution.

Management is optimistic of retaining the performance. According to management two wheeler growth in fy16 was 2% which is projected at 7-8% in fy17. Good monsoon can give major fillip.

Company is expanding from 2.3 milllion tyres/month to 2.5 million tyres/month in next 3-4 months.

Assuming 7% revenue growth, constant net margin and no increase in debt. The stock is grossly undervalued.

Invested.


(Kunal Parikh) #20

Hi,

The recent results were flat with no Q-o-Q growth. Here is the link. But I would like to point out about the drop in rubber prices which might impact the company positively in comping quarters. Here are two interesting articles:

  1. Tyre stocks surge; Balkrishna Industries hits fresh 52-week high

  2. Farmers feel disappointed after meet on rubber

Although, the PE of the entire segment is quite less, ROE for the company is very high. Currently, the MCap/Sales is 0.94 and the Div Yield is highest compared to peers at 2.35%.

Discl: Invested