TVS Motors: Sell

After a sedate performance till mid-2013, the going has been good for TVS Motors in the last two quarters. In a tough environment for the two-wheeler industry, the company managed to achieve a healthy 13-17 per cent growth in net sales and a 31 per cent growth in adjusted profits in both the September and December quarters. The market has also rewarded the stock generously.

Those who stayed invested in the stock after the ‘hold’ recommendation in June 2012 at ₹33 would have gained over 100 per cent by now.

Investors can book profits in their holdings at the current price, as valuations have moved up significantly.

The stock now trades at about 21 times its trailing 12-month earnings. Although the company’s prospects seem good, much of it seems to be captured in the price, with valuations close to the five-year average of 22 times. It is also higher than players with bigger market shares and much better operating margins, such as Bajaj Auto and Hero MotoCorp, which trade at 17-18 times.

Two-wheelers (scooters and bikes) have been among the better performing segments of the auto industry in this slowdown, with domestic volumes so far this fiscal growing 5.4 per cent.

TVS’ domestic volumes though, dropped 3.5 per cent in this period even as its new scooter, Jupiter, and the executive segment bike, Phoenix, kept customers engaged.

Much of the boost for volumes came from the export of two- and three-wheelers. While Bajaj Auto faltered, TVS managed to notch up double-digit volume growth helped by good demand from its overseas markets.

The depreciation of the rupee during this period also gave a leg-up to export realisations.

Besides, price hikes and tighter control over input costs have helped the company keep its operating margin intact at around 6 per cent in the last two quarters.

The company’s profit also received a boost from a sharp drop in interest costs compared with the previous year. It expects to be free of long-term debt by the end of the next fiscal (2014-15).

One trend that clearly emerges this season is the strong demand for scooters, even as bike sales remain subdued. In the first nine months of 2013-14, scooter volumes grew 20 per cent year-on-year.

Scooters constitute a fourth of the total two-wheelers sold today. The company hopes to cash in on this trend with the refreshed Scooty, which is expected to be rolled out shortly and the all-India launch of the Jupiter.

With these initiatives, TVS hopes to increase its market share in the scooter segment to 20 per cent, from 13 per cent currently.

The company is also looking to enrich its product mix, with a view to improving margins. For one, a diesel variant of its three-wheelers is on the cards. Secondly, TVS is also keen on capturing more of the executive segment volumes.

The 110-125 cc category of bikes has seen increased interest in the last two-three years, suggesting that customers upgrade from entry-level bikes. Besides, the category provides a good middle-of-the-road option for aspirants of premium segment bikes, considering that they will be lighter on the pockets, especially during times of high interest rates such as now.

With perhaps this trend in mind, TVS Motors is launching a new Victor in the beginning of next fiscal. The first of the sub-500 cc bikes from the BMW Motorrad partnership will also come out later in the next fiscal year.