TVS Motors: Hold

The TVS Motors stock has dropped by 43 per cent from September 2011 levels of Rs 60. When we last recommended the stock at that level, the company's presence in the high-margin three-wheeler segment and good prospects for exports were expected to act in its favour. Two-wheelers too registered better volume growth than other segments such as cars and commercial vehicles.

However, a few factors have worked against the company since then. First, the two-wheeler industry itself did not keep up the growth momentum seen in the first half of FY12.

Secondly, the company succumbed to competitive pressures, losing market share in both motorcycles and scooters during the year. Finally, three-wheelers too faced a tough year. But these factors have battered the stock's valuation to attractive levels since then. Now, launches lined up for FY13 could strengthen the product mix, help the company regain lost market share and shore up its volumes and realisations.

Hence existing investors can continue to hold the stock. But with the economic uncertainties and competitive pressures continuing, fresh exposures need not be considered at this point in time.

At the current market price of Rs 33, it trades at a PE of six times its estimated earnings for FY2013. This is at a justifiable discount to bigger peers such as Hero Moto Corp and Bajaj Auto, which trade at around 12-13 times.

Sluggish volumes

After growing at a brisk 17 per cent (year-on-year) in the first half of FY12, volume growth for the domestic two-wheeler industry has slackened.

With motorcycles leading the moderation, the third and fourth quarters witnessed industry growth drop to 11 per cent, pulling down the overall growth for FY12 to 14 per cent. TVS performed worse than the industry during this period, with its two-wheeler volumes growing only by 7.4 per cent.

The slowdown continued into April 2012 as well. Dwindling economic growth, inflationary pressures and petrol price hikes imply that this moderation may continue. Besides, domestic three-wheeler volumes have taken a knock with the expected release of permits in Karnataka and Delhi delayed due to legal issues. TVS' volumes in this segment fell by 36 per cent compared to last year.

The respite could come from continued good growth in exports. TVS is the largest exporter of both two- and three-wheelers after Bajaj Auto. Exports grew by 23 per cent in 2011-12.

Exports generally bring in higher margins and at a time when the rupee is depreciating, it will improve realisations further. That emerging economies of Africa and Asia are the company's biggest markets bodes well for TVS. They remain in a way shielded from the slowdown in developed economies. April exports though have taken a beating, partly due to lower demand from Sri Lanka. The country had earlier raised duties on vehicle imports.

Will launches rescue?

In the motorcycles segment, Honda has posed stiff competition to TVS and has taken over as the third largest player after Hero and Bajaj. TVS' market share reduced by 80 basis points in 2011-12 to 6.2 percent, while Honda's stood at 7.6 per cent. To regain its place, TVS has planned refurbishments and new launches. The company has launched refurbished versions of all its Apache models (RTR 160, 180 and 180 ABS) recently. Earlier in the year, the 2012 edition of the Star City (110 cc) was also launched. Besides, it will launch a new 125 cc bike this month and will re-launch the Victor by December 2012.

How much these launches will help the company shrug off the slowdown, remains to be seen. Similarly, while TVS has a wide range of scooters from 60-110 cc (Scooty Teenz to Wego), it has faced stiff competition in this segment too.

Its market share has come down from 21.6 per cent a year ago to 19.4 per cent now. Honda's (Activa, Aviator and Dio) market share jumped from 43 per cent last year to 47.8 per cent now.

Recent launches such as the Maestro (Hero) and Swish (Suzuki) are also doing well. With the share of scooters in total two-wheeler sales increasing each year, the company is launching a new 125cc scooter in December to fight it out on the field. A hybrid scooter will also be test marketed soon.

Financials

For the year ended March 2012, net sales grew by 13 per cent to Rs 6994 crore and net profits, by 28 per cent to Rs 249 crore. EBITDA margins were flat at around 7 per cent.

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