Stock Fundamentals

Investment Focus - TVS Motor: Buy

Parvatha Vardhini C. | Updated on September 10, 2011 Published on September 10, 2011

Rising inflation, interest rates and fuel prices have moderated domestic auto industry growth in recent times.

However, given the lower dependence on financed purchases and improved rural incomes, two-wheelers have continued to grow at a brisk pace.

In the April-August 2011 period, two-wheeler sales outpaced the industry, growing by 16 per cent. The upcoming festival season, a favourable demographic profile and greater urbanisation would continue to drive two-wheeler sales.

In this backdrop, an investment in the TVS Motor stock is recommended for investors with a perspective of one to two years.

Diversified portfolio pays

The strengthening of TVS's portfolio in bikes and scooters, a foothold in the higher margin three-wheelers and good prospects for exports are positives for the company.

At Rs 60.65, the stock trades at a PE of about 11 times its estimated FY12 earnings, at a justifiable discount to bigger peers such as Bajaj Auto (16 times) and Hero MotoCorp (19.6 times).

Although the company faces stiff competition in the motorcycles segment, TVS has managed to marginally improve its market share by 50 basis points to seven per cent in FY11.

In 2010-11, the company strengthened its line-up by launching the Apache RTR-180 ABS in the premium segment and the Max 4R and Jive in the executive segment.

While the Max 4R addressed the need for carrying loads in the rural market, the Jive (110 cc) addressed an attractive price point between the entry and executive bikes. These, along with another expected launch in FY12, are expected to keep up the momentum in volumes.

Scooters share up

Another favourable trend is the improving share of scooters in total two-wheeler industry sales.

From about 14 per cent in 2007-08, scooters now account for 17.5 per cent of the total two-wheelers sold. This bodes well for TVS as it is the second largest player and has a wide range of products from 60-110 cc (Scooty Teenz to Wego) in this segment.

A third supporting factor is TVS's diversification into three-wheelers, which bring higher margins and also have good export potential. Exports, especially to emerging economies, also help counter a domestic slowdown.

The company is already exporting three-wheelers to Sri Lanka and Bangladesh and has added Egypt to the list recently.

For two-wheelers too, Africa remains a big market accounting for more than 40 per cent of its exports.

A withdrawal of the DEPB incentive for exports may impact earnings in the near term. However, the company plans to pass it on gradually to customers.

For the quarter ended June 2011, net sales grew by 25 per cent year-on-year to Rs 1,707 crore and net profits by 45 per cent to Rs 59 crore. Operating margins remained stable at 6.8 per cent.

A lowering of interest burden due to repayment of debt and easing out of input cost pressures are expected to aid margin expansion.

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