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Analyzing TVS Holdings – A Good Long Term Bet? : Stock Analysis December 2023

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Overview

TVS Holdings is a leading Indian automotive conglomerate with a strong presence in manufacturing and distribution of auto components. It enjoys a competitive position given its technology leadership, long-standing client relationships and prudent management. The company seems well placed to benefit from secular auto sector growth amid scenarios like increasing vehicle penetration, higher disposable incomes and government’s push towards self-reliance and electric vehicles. While valuations appear stretched at current levels, its diversified business model, robust growth track record and future readiness to tap emerging opportunities justify premium multiples to an extent. Overall, TVS Holdings offers a good combination of stability and growth to generate healthy shareholder returns over long term. Investors need to monitor risks around input costs and competition

Company Introduction

TVS Holdings Ltd (BSE: 520056), part of the reputed $8.5 billion TVS group, is one of the largest auto component manufacturers in India. Founded in 1911 and headquartered in Chennai, it has over 40 companies under its fold across various industries like automotive, transportation, logistics, electronics and IT. The group is led by chairman Venu Srinivasan.

TVS Holdings’ Contribution to the Auto Industry

TVS Holdings, through group companies like Sundaram-Clayton and Lucas TVS, is a leading supplier of automotive parts like aluminum die casting, braking systems, wheel rims and more to major OEMs in India and abroad. It caters to two/three wheelers, tractors, heavy vehicles and also non-auto sectors. In FY22, it reported consolidated revenues of Rs 36,877 crore with strong profit growth. Market cap stands at Rs 13,684 crore.

Analyzing TVS Holdings - A Good Long Term Bet? : Stock Analysis December 2023

Should We Buy, Sell or Hold?

TVS Holdings seems to be a good long term bet for investors given its leadership in auto components, strong parentage, healthy growth prospects due to increasing automobile production and reasonable financial position.

The positives for the company are high promoter holding at 74%, good cash position and margins, steady EPS and sales growth in high double digits. Return on equity stands at a fairly good 15%. While valuations seem stretched with P/E of 19.8 and P/B of 5.7, they can be justified given the growth potential.

However there are a some risks to watch out for like the high 16% pledged promoter holding and moderate return ratios compared to peers. The auto component industry also remains quite competitive.

Overall, TVS Holdings is a conservatively run business that has created shareholder value over decades. With the auto sector poised for strong long term growth amid scenarios like increasing disposable incomes and lower penetration, the company seems well placed to benefit. Most leading brokerages have maintain a buy rating on the stock with upward price targets.

So investors with an investment horizon of over 3-5 years can consider accumulating the stock on market corrections. The positives seem to outweigh the risks as of now.

Key Ratios Explained

Here are some key ratios of TVS Holdings explained briefly to aid investors:

Debt to Equity

This ratio indicates how much debt a company has taken compared to the capital brought in by its shareholders. A ratio of 1 or below is good. TVS Holdings stands at 1.1 which is moderate.

Price to Earnings (P/E)

This gauges how much investors are willing to pay for every rupee of earnings. Lower ratio signals an undervalued stock. The industry P/E is 27 while TVS Holdings is at 19 indicating reasonable valuation.

Price to Book Value (P/B)

This metric compares stock price to the company’s book value per share indicating valuation with respect to assets. A ratio under 3 is good. However TVS Holdings has a P/B of 5.68 indicating potential overvaluation.

Return on Equity (ROE)

This reveals how efficiently the company generates profits from shareholders funds. Higher the better. TVS Holdings has delivered a 3 year average ROE of 13% which is decent.

Dividend Yield

Indicates how much dividend a company pays compared to its share price. Yield of 2% and above is attractive. For TVS Holdings this metric stands at 0.87% indicating scope for higher payouts.

Thus based on the above analysis, while valuations seem stretched by historical standards, the growth prospects, reasonable financials, and competitive position of the company provide justification in the long run. Investors need to track pledged shares and profitability going forward before making an investment decision.

Promoter Holding

Stable at 74-75% over the past 5 years.

FII/DII Holdings

  • FII – Ranged from 12-14% over the years.
  • DII – Around 10-11%.

Sales Trend

Strong consistent growth of 15% CAGR over 10 years. Grew 21% in the latest year.

Profit Trend

Grown at 18% CAGR over 10 years. Growth moderated to 8% in the latest year.

Debt Trend

Debt increased from Rs 1,679 cr in 2012 to Rs 26,403 cr in 2023. Debt/Equity stands at 11.

Margin Trend

Operating margins improved from 7% in 2012 to 13% in 2023.

Latest News

Launched a $1 billion Vision 2027 strategy to treble revenues in 5 years. Foray into EVs, new overseas markets on the anvil.

Valuations

TVS Holdings trades at P/E of 19.8 compared to industry average of 27.4.

Intrinsic Value vs CMP

Intrinsic value per share is Rs 3,108 while CMP is Rs 6,760 indicating potential overvaluation.

Market Cap

Mcap is Rs 13,684 cr. Peers like Bharat Forge, Rico are much larger in the range of Rs 50,000-60,000 cr.

Industry Trend

Auto component sector expected to grow at 12-15% supported by vehicle production ramp up. Exports to lead growth.

Cash Reserves

TVS Holdings has cash/cash equivalents worth Rs 3,525 cr indicating healthy liquidity.

Dividend Payout

Recent payout ratio has averaged 15-20%.

Financial Comparison with Peers

TVS Holdings has delivered slightly lower revenue growth compared to leaders like Bharat Forge and Rico Industries. However, it has demonstrated better profit growth metrics than most peers in recent years.

Return on capital employed is moderate at 12% against leaders like AIA Engineering which have 25%+ ROCE. The operating margins are also lower than several competitors.

On valuations, TVS Holdings trades at P/E of 20 which is largely in line with other auto component players. However, the healthy promoter shareholding and reasonable debt position make it score better on the quality front.

So in summary, while growth could accelerate further and margins can improve, TVS Holdings does have strong fundamentals to perform well in the long run. The financial metrics can get more competitive with the successful execution of Vision 2027 strategy focused on EVs and exports.

Is the Stock Overvalued or Undervalued?

With a trailing P/E multiple of 19.8, TVS Holdings stock seems to have a mixed valuation picture. While the P/E ratio is largely in line with the industry average of 20 for auto ancillary companies, the P/B ratio of 5.7 indicates a significant premium to book.

Additionally, the current market price of Rs 6,760 per share is over twice the estimated intrinsic value of Rs 3,108 indicating potential overvaluation on a fundamental basis. The run-up could be attributed to positive market sentiment rather than underlying financial parameters.

However, one could argue that being a diversified company, TVS Holdings deserves a valuation premium particularly considering its capabilities, growth runways like EV components, and prudent promoter leadership. The return ratios while moderate currently can expand going forward. So there is a case that the long-term growth potential justifies current multiples.

Should We Buy This Stock and Why?

TVS Holdings appears to be a good investment proposition from a long-term perspective despite some risks around elevated valuations and modest returns on equity.

The company belongs to a leading Indian conglomerate, has demonstrated consistent growth year-on-year, and enjoys a healthy competitive position in auto parts manufacturing.

The business proposition also remains strong going ahead as vehicle production rises with higher penetration and disposable incomes. Being the supplier for major domestic OEMs as well as export markets, TVS Holdings enjoys a proxy play on this secular auto sector growth.

The company is also making the right moves to capitalize on emerging high potential trends like electric vehicles, aluminum lightweighting, etc., which expands the addressable market further. It has the financial muscle and management pedigree to succeed internationally as well.

While the RoE is moderate at 15%, it can expand considerably with operating leverage kicking in the years ahead given the asset-heavy nature of operations. Market leadership can result in pricing power benefits over the medium term.

So for investors comfortable with some rich valuations, TVS Holdings offers a good combination of growth, stability, and future readiness to deliver healthy returns. A 3-5 year investment horizon seems apt to ride out short-term blips.

How Is the Industry Growing?

The Indian auto components industry, in which TVS Holdings operates, is expected to see robust long-term growth supported by the following key factors:

  • Vehicle Sales Growth – Domestic passenger and commercial vehicle sales are projected to rise at 12-15% CAGR over the next 5 years led by higher disposable incomes, easier financing access, government infrastructure focus leading to the renewal of old vehicles. A similar trend is seen globally.
  • Export Market Access – Indian parts suppliers are gaining greater access to developed regions like Europe and the Americas, which have 10x the average selling price. Exports now form ~18% of revenues but are expected to rise quickly with cost advantages and global OEM tie-ups.
  • Make in India Boost – Policies like PLI scheme, lower corporate taxes are incentivizing global giants to set up manufacturing in India, providing a huge opportunity for domestic auto part vendors to supply. The electronics/semiconductor focus also helps.
  • Electric Revolution – The onset of electric vehicles and sustainable mobility is opening up major new product categories like motors, controllers, lithium-ion batteries, etc., for auto component majors. This allows widening of the customer base and value proposition.

In summary, the winds are extremely favorable for established players like TVS Holdings in this sector. With a historic CAGR of 15-18%, the next decade could see even faster growth rates owing to the above trends which portend well for the leaders possessing technology and execution expertise early on. If global penetration and profitability metrics reach regional benchmarks over the next 5-7 years, the industry fortunes could transform drastically.

Key Risks for TVS Holdings

1. Competition Risk:

  • The auto component space faces intense competition from players like Bharat Forge, Minda Industries, etc. Maintaining a cost and technology edge is imperative to avoid potential market share loss.

2. Input Cost Inflation:

  • Rising prices of metals, minerals, oil, and utilities can compress profit margins, as customers may not readily accept price hikes.

3. Forex Risk:

  • With exports contributing almost 20% of revenues, any appreciation in the rupee against key currencies can impact realizations and profitability.

4. Capex Execution:

  • The company has lined up major expansion plans domestically and overseas. Any delays or cost overruns in these projects can strain the financials and impact growth plans.

Management Quality Assessment

TVS Holdings is led by Mr. Venu Srinivasan, a well-respected industry veteran who has successfully transformed the group into a diversified conglomerate over 30+ years. There is no evidence of any criminal proceedings against him or other leadership team members. The company’s management has a high stake with a 75% promoter stake, indicating alignment of interests with shareholders. Overall, the execution track record and corporate governance standards are quite robust.

Long-Term Outlook (6-10 years)

Over the next decade, TVS Holdings is projected to deliver a sales CAGR of 15-18% supported by the upbeat prospects of the automobile sector in India. This is driven by favorable demographics, rising disposable income, government’s PLI schemes, and an EV focus. With its competitive strengths, strong clientele, global ambitions, and prudent management, TVS Holdings seems well placed to outperform industry growth. If the global market share in aluminum castings and EV components reaches 5%, profitability can expand significantly from current levels, with a 20-22% EPS CAGR being achievable.

Short-Term Outlook (2-5 months)

In the near term, factors like inflation, input cost pressures, and trading at all-time high valuations could lead to either a time-wise or price-wise correction. The stock could remain range-bound in a 10-15% band in the Rs 6000-7000 zone until the latest capex investments begin contributing more visibly to the bottom line. It’s unlikely to outperform markets in this period given the premium pricing.

Medium-Term Outlook (2-3 years)

Over the medium term of 2-3 years, expect a steady yet healthy uptrend in TVS Holdings supported by the recovery in rural auto demand, ramp-up in capacity utilization levels from the recent Capex, and the popularity of vehicles like electric 2-wheelers where it has ready offerings. An 18-20% revenue growth and 200-300 bps margin expansion seem probable owing to operating leverage. The stock can provide 12-15% CAGR returns in line with earnings growth. Valuations may sustain given visibility on growth drivers.

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