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The sixfold rise in the TVS Motor Company stock — from Rs 30 in September 2013 to Rs 219 now — has its roots in events last year. After nearly three years of a slowdown in new launches, the Chennai-based TVS stepped up the pace of bringing out new vehicles from the second half of 2013-14. As a result, the company’s overall market share improved to 12.6 per cent in the June quarter (now, it is 13.2 per cent). For the company, another major event in 2013-14 was its tie-up with BMW to jointly develop high-end motorcycles (up to 500cc).
Chairman and Managing Director Venu Srinivasan has said the rise in market share results from the engineering the company has done, adding this will help it grow faster in the future.
The volume and market share gains can be attributed to a series of launches, especially in the second half of 2013-14, led by scooter TVS Jupiter, as well as Star City+. Other new products and variants include TVS Sport, TVS Phoenix 125 and TVS Apache.
In addition to the launches, the company has been plugging gaps in its product portfolio, launching the Jupiter in the heavy scooter segment and a more powerful smaller scooter, the Scooty Zest, targeted at women. Through launches such as that of the Scooty Zest, TVS plans to capture 14 per cent share in the domestic market this financial year, selling about 2.2 million two-wheelers, against 1.75 million in 2013-14.
The gains are primarily due to investments in research and development, which increased four per cent year-on-year to Rs 130 crore (1.8 per cent of revenue) for FY14. Advertisement and marketing expenditure increased 37 per cent to Rs 280 crore (3.5 per cent of revenue, against 2.9 per cent last year).
In a report, Bank of America Merrill Lynch said, “We expect TVS Motor’s lifecycle of brands within its portfolio to increase from historical levels due to better execution on coming launches. This reflects our revised growth assumptions of 26 per cent each for FY15-16. Based on this projection, we think the company should be able to increase market share by 300 basis points to about 15 per cent.”
Analysts at Reliance Securities expect TVS’s volumes to rise 24 per cent to 2.58 million in FY15 and 19 per cent to 3.08 million in FY16.
“Today, we are at the fourth position. We aim to be in the top three players in India, with a stream of product launches every quarter for the next three years, which will significantly strengthen our position,” Srinivasan had told shareholders recently. “One weakness people pointed out was we didn’t have a regular product launch programme. But it was by design, not by accident,” he said.
“It is because we feel we don’t want to launch a product unless we master the field of consumer-led engineering, having deep understanding of consumer psychology and consumer aspiration and convert that to hard engineering and style. Just launching more and more new models will not necessarily improve market share; in fact, it will have bad impact on the bottom line.”
While analysts say the company will meet the Street’s expectations on the volume front, margins remain a concern. For the June quarter, the margin had fallen to a four-quarter low of 5.69 per cent, while revenue rose 31 per cent, helped by volume growth of 22 per cent, compared to the year-ago period.
In a recent report, IDBI Capital said, “While the management sounded extremely optimistic on volume growth momentum continuing across segments (along with market share gains) for TVS, it was equally unconvincing when it came to an explanation for the weak margin in first quarter. We didn’t really get clarity on the road ahead. It does expect to achieve a double-digit margin over the medium term. However, we are not too convinced on the ‘how’ part of it.”
A Karvy report said the company’s margins fell sequentially and remained flat year-on-year, despite a favourable currency. Investors were concerned, as the management said gain in market share was its priority, not margins.
The key to further re-rating will be TVS Motor’s ability to improve its margins, currently lower those of Hero MotoCorp (15 per cent) and Bajaj Auto (20 per cent). While traditional strongholds of executive and premium bikes have helped peers improve volumes and maintain pricing power, TVS Motor has suffered on account of a weak franchise network.
At 16 times, valuations are on a par with those of Bajaj Auto and Hero MotoCorp. Typically, companies with weaker margins and return ratios trade at a discount to category leaders. A lot will depend on TVS’s ability to improve its volume growth. While its plan to launch a product every quarter should help on this front, a large part of margin gains will depend on operating leverage and costs savings. If it manages to improve its margins to double digits and raises market share, it should be counted among the leaders, not an ‘also-ran’.
