Analysis: Difficult year ahead for TVS despite August performance

While exports have stood out, domestic performance continues to be weak

Falling domestic two-wheeler sales and losses at its Indonesian subsidiary has seen the TVS Motor scrip lose nearly a quarter of its value over the last one year. The stock had spurted a bit last week after the company reported positive sales growth for August as well plans to export bikes jointly developed with BMW. While domestic volume numbers continue to be tepid, the company will have to maintain the export growth levels to minimize the slowdown impact.

Exports in August at 27,425 units were up 53 per cent year-on-year and 5 per cent over July. Thanks to this growth overall volumes at 1.55 lakh were up 0.5 per cent over the year ago period. Analysts however don’t think that higher exports will have a meaningful impact on financials.

S Arun and Ashish Kumar of BofA Merill Lynch say that the 23 per cent year to date growth has been a surprise, both in two and mainly three wheelers. Though the analysts will revise their growth assumptions, they felt there is unpredictability and growing competition in the export market. Moreover at 15% of the company's sales, this is unlikely to be game changer for overall operations, they add.

At the current price of Rs 30.55, the stock is trading at 9.5 times its FY15 estimates. While the valuations are undemanding analysts are not too excited by the company’s prospects given a steady decline in market share. Most analysts have a target price of Rs 32 which from the current price offers upside of about 6 per cent.

Sales volume dips

While exports have done well, domestic sales have fallen 7 per cent year to date. Due to the fall in sales volumes, the company’s market share in most segments has seen a fall. In scooters where it is the third largest player the company lost market share to the tune of over 300 bps with Hero MotoCorp and Yamaha (launch of Ray) making the most gains.

In the motorcycle segment, the gains were marginal at 40 bps. Analysts at Prabhudas Lilladhar Research estimate that the company will lose about 150 bps in scooter segment market share y-o-y to end up at 13 per cent for FY14. TVS Motor is the third largest player in this segment which is dominated by Honda Motorcycles and Scooters India with a share of nearly 50 per cent.

Going ahead, while the company plans to increase market share in scooters by launching new models, margin growth is expected on the back of volume gains and sales of three wheelers.

However, given the muted volume show, analysts have cut their volume estimates for FY14. Instead of a volume growth of 4 per cent, Axis Capital now believes that the company will show a volume fall of 5 per cent for the current fiscal to reach a figure of 20.17 lakh.

Outlook and valuation

The combined effect of lower volumes as well as losses in the Indonesian subsidiary could lead to Ebidta margins dropping to 40 bps from earlier estimates to 5.8 per cent and net profit by a steep 14 per cent to Rs 198 crore. BofA Merrill Lynch analysts say that the Indonesian business will continue to sustain losses and erode around 25-30 per cent consolidated profits annually.

Though analysts have also cut Bajaj Auto and Hero MotoCorp’s estimates as well, given the respective rural, three-wheeler and higher export income niches and strong brand franchise, its larger peers will still end up with 15-20 per cent Ebidta margins and net profits in the range of Rs 2,200 crore to Rs 3,400 crore range.