TVS Motor Company buoyant on hopes of volume and margin expansion

Plans in EV space is another trigger; but investors should await better entry point

TVS Motor Company’s stock has risen 5 per cent over the past couple of trading sessions on expectations of fund-raising for its electric vehicle (EV) business, volume gains on the back of successful launches, and improving profitability.

As a result, some brokerages have upgraded the stock, highlighting it as their top pick in the automotive sector.

The company is looking to raise up to Rs 5,000 crore ($650 million) to expand its product pipeline and global presence in the EV segment. The company is looking to expand capacity to 10,000 EVs per month by the end of the current quarter (Q1FY23) and has an aggressive launch pipeline across segments.

The company’s two-wheeler EV offering, iQube, had an order backlog of about 12,000 units at the end of March. It trails market leaders Hero Electric, Okinawa, Ola Electric, and Ampere, which account for about 70 per cent of industry volumes.

The company, which hit a peak market share of 4.6 per cent, has seen its shares fall over the past few months. Volumes of the iQube will need to be tracked, as the industry has seen a 21 per cent fall in volumes since March because of fire-related incidents and semiconductor chip shortages.

The company’s new launches in the traditional business, such as the commuter bike Raider and variants (Jupiter) are also gaining traction. What should aid volumes for the sector and TVS is the fall in running costs, with the reduction in excise duty and value added tax on fuel by the Centre and multiple state governments.

In addition to volumes, the Street will track the improvement in profitability. The company was able to maintain double-digit operating profit margins for the third consecutive quarter with the March numbers coming in at 10.1 per cent. What should help the company in improving it further are lower commodity prices, such as steel, which is down 8 per cent month-on-month.

Ronak Sarda and Poorvi Banka of Systematix Research believe the company’s success in diversifying volumes across segments and geographies has helped improve its profitability. Its operating profit per vehicle is now comparable with that of Hero MotoCorp.

The brokerage, which believes that there are signs of bottoming out in the volumes of the two-wheeler sector, has raised the company’s operating profit estimates by 8 per cent each over the next couple of years.

The analysts have upgraded the stock to ‘buy’ from ‘hold’ and increased the target price to Rs 835 a share, against the earlier target of Rs 695. The company is also the top pick of UBS in the two-wheeler space with the brokerage pegging the target price at Rs 1,000. Since the stock has rallied 26 per cent from its lows in May (37 per cent in three months) to its current level of Rs 763, investors should await a better entry point.