Competitive pressures, weak two-wheeler demand weigh on TVS Motor

Brokerages had turned cautious on the stock which led to recent correction

From its highs a couple of trading sessions ago, the stock of two-wheeler major TVS Motor Company is down 13 per cent. Despite positives such as the extension of its agreement with BMW announced recently, the stock has been unable to arrest the losses. In addition to competitive intensity in the electric vehicle (EV) space, weak two wheeler demand and expensive valuations have prompted some brokerages to maintain a sell rating.

The near term trigger for the stock is the agreement with BMW Motorrad, the two wheeler arm of BMW, to jointly develop new platforms and future technologies. The two companies will co-develop, manufacture and export electric two wheelers. The deal follows the strategic partnership eight years ago and the collaboration led to the development of three products on the 310cc platform and included the TVS Apache RR 310.

In addition to BMW agreement, the company has made investments in auto tech start ups. It is taking a majority stake in Swiss technology company EGO Movement which makes e-bikes, e-cargo bikes and e-scooters. The company is eyeing a EV capacity jump from 1,000 units a month currently to 10,000 units next year and will also have a distribution network in 33 cities by the end of the current financial year.

However, Citi Research, which has a sell rating, believes that the company is the most vulnerable to onslaught of new EV models by competitors in the scooters segment. In the current portfolio, scooters account for 27 per cent of TVS Motor volumes. In addition to competitive pressures, Citi believes that iQube, the company’s electric scooter, is relatively weaker in terms of specifications as compared to peers.

Morgan Stanley has an underweight rating due to rising EV competition, weak underlying demand in two-wheelers and premium valuations. The brokerage expects a slew of EV announcements including those from Hero MotoCorp in partnership with Gogoro and Bajaj Auto (from the KTM/Triumph stable) over the next year.

In addition to EVs, the ongoing slowdown in two wheelers will be an overhang on the sector as well as TVS Motor. In November, the company posted a 15.5 per cent drop in volumes. This was on the back of a 29-40 per cent y-o-y decline in sales of scooters and mopeds. The two segments account for 43 per cent of volumes.

While the downtrend in November for the sector was due to rising cost of ownership and channel destocking the outlook appears muted with analysts at Kotak Institutional Equities expecting a downgrade of FY22 volume estimates of two wheeler makers.

Valuations could also have been a reason for the correction in the stock prices. The stock gained 43 per cent since the start of September to its highs in November. Since then, it has corrected 18 per cent and is trading at 21 times its FY23 earnings estimates. While further correction will bring valuations at a discount to historical averages, investors should await recovery in volumes before considering the stock.