The heat is rising for TVS Motor Company, India’s third largest two-wheeler maker, as the competitive landscape in expected to worsen. Its stock (now at Rs 42.95), on a downtrend in recent weeks (down 11 per cent in a month), is likely to remain an underperformer, even as the price/earnings (PE) valuation of 8.5 times 2012-13 estimated earnings looks attractive.
Poor sales in recent months, rising competition, slowing two-wheeler sector growth and lack of new products are cited as reasons for the dismal show on the bourses. March 2012 volumes were down 4.5 per cent, the second in a row when it reported falling sales.
“To arrest the fall of market share and increase volumes, the company is looking at leveraging its existing models (Star, Wego, Apache), while banking on new launches (new Victor, a 125cc bike, a scooter) to boost sales,” says a TVS Motor spokesperson. However, analysts such as Vijay Sarthy T S and N Ravindranathan of Spark Capital are circumspect about TVS’ chances, given its history of brands which failed to sustain after the early launch phase.
| PROFITS HEAD SOUTH | |||
| in Rs crore | 9MFY12 | FY12E | FY13E |
| Net sales | 5,392.0 | 7,261.0 | 7,814.0 |
| % change y-o-y | 17.9 | 1.2 | 7.6 |
| Ebitda | 373.1 | 539.7 | 536.6 |
| % change y-o-y | 19.7 | 18.3 | -0.6 |
| Ebitda (%) | 6.9 | 7.4 | 6.9 |
| Net profit | 191.8 | 263.9 | 236.4 |
| % change y-o-y | 27.1 | 35.6 | -10.4 |
| P/E (x) |
- | ||
Muted volumes, lower share
Over the past couple of quarters, TVS sales volumes have disappointed. After grossing 200,000 units in September, volume growth has paled when compared with peers. Competition, especially from Honda Motorcycle and Scooter India (HMSI), has been eating into market share. In the domestic scooter segment, a quarter of its volumes, the company’s market share has declined to about 15 per cent (February) from 21 per cent a year before. HMSI’s rose to 51 per cent from 38 per cent over the same period. In volumes, TVS reported a 7.5 per cent year-on-year rise in domestic two wheeler sales for 2011-12, lower than its bigger peers Hero MotoCorp (15 per cent) and Bajaj Auto (13 per cent). HMSI reported a 50 per cent jump in two-wheeler volumes to 220,487 units in March, far ahead of TVS’ 180,274 units.
While faster growth helped HMSI clock two-wheeler volumes of 21,07,291 in 2011-12, marginally lower than TVS’ 21,56,399, at this rate it should overtake TVS in 2012-13 for the third slot. This will be aided by a new plant at Bangalore, expected to come up this financial year and which would fix the Japanese major’s capacity constraint issues.
Also, TVS’ export volumes of late have also been a dampener. Theses were down 25 per cent year-on-year in February and fell 22.6 per cent in March.
Will new products help?
The company is likely to have a tough time outmanoeuvring competition in its product segments. As many as nine launches are expected in 2012 in the scooter segment. ICICI Securities analysts, Sanket Maheshwari and Vijit Jain, say 2012-13 could be even tougher as Hero, Suzuki and Mahindra & Mahindra launch new scooter models and Yamaha & Vespa enter the segment. In motorcycles, it will face competitive pressure not only from Bajaj and Hero but also HMSI, which has planned to launch a 110cc ‘Dream Yuga’ in May.
TVS, though, expects to maintain sales momentum by launching two new models each in the motorcycle and scooter segments in FY13 — a 125cc motorcycle, the 110cc Victor bike (both in the executive segment), a 125cc scooter and test-marketing of its hybrid scooter, the Qube.
Analysts are cautious. Given the rising competition and recent dip in sales volumes, they have across brokerages revised downwards their FY13 volume estimates for TVS by 2.5-7 per cent.
Margins likely flat
Standalone Ebitda (earnings before interest, taxes, depreciation and amortisation) margins for 2011-12, likely to be in the 7-7.4 per cent range, are likely to fall below seven per cent in 2012-13, feel analysts.
Weak volumes, a low-margin moped business (40 per cent of overall volumes) and higher advertising spending to prevent loss of market share will exert downward pressure on margins, feels LKP Securities analyst Ashwin Patil.
On the other hand, there are doubts over the turnaround of its Indonesian subsidiary which the management believes will achieve breakeven in FY13. Analysts though say it is unlikely to break even (target of 60,000 units) in the current financial year and is likely to add to its margin woes.
