TVS Motor: No room for error

Analysts sceptical of company's high valuations, volume and revenue growth prospects

The TVS Motor scrip fell nearly two per cent on Monday, on worries related to valuations and its ability to match investors' expectations on volumes, revenues and margins. So far, the success of its new launches, strong double-digit volume growth and expected uptick in margins had helped the stock more than triple over the last one year. The stock trades at 21 times its FY16 earnings estimates.

What will help TVS sustain valuations and meet expectations is its ability to meet its sales targets in the backdrop of a slowing economy and high competition. Some market experts, however, are sceptical.

Emkay Research says companies such as TVS Motor, which have a product portfolio dominated by rural-centric or entry-level products, are likely to face the brunt of growth moderation in rural areas. Analysts led by Dhananjay Sinha of the research firm say while a normal monsoon in FY16 could control the worsening of the situation at hand, the structural negatives of reduced cash flows for the farm households from the strategic change in central government policies are likely to impact rural growth trajectory for more than just a year.

  Others like those at Ambit Capital sound confident. They say the company will continue to outperform the sector on the strength of its scooter portfolio. If the current trend of strong scooter sales continues, TVS Motor stands to gain the most, unlike Bajaj Auto or Hero MotoCorp.

The second trigger for TVS is the likely growth in margins given the restoration of input value-added tax credit (three per cent) by the Tamil Nadu government last week in its Budget. The move will help remove some of the investor concerns around TVS’ Ebitda (earnings before interest, tax, depreciation and amortisation) margins remaining low at 5.9 per cent in the first nine months of 2014-15, despite strong volumes (up 27 per cent year-on-year) and revenues (up 32 per cent) during this period. Analysts at Goldman Sachs, who have a buy call on TVS, say normalised Ebitda margins for the company in the June quarter of FY16 as compared to the December quarter of FY15 are expected to expand by 100 basis points both on account of the recent provision and a rise in excise duty from January 1. By FY18, though, margins are expected to touch 10 per cent led by leverage, higher volumes and product mix. Whether the company can achieve this still remains a question given its not so impressive track record.