Dual gains ahead for TVS Motor

Lower commodity costs should aid profitability and market share is expected to improve on launches

The TVS Motor stock has gained 19 per cent over the fortnight, expectation of strong volume growth and better than expected September quarter results, led by margin gains. Its October sales grew 14 per cent over a year, above estimates, led by scooters, which grew 30 per cent. While export growth continues to be strong at 20 per cent, domestic sales were higher 13 per cent year-on-year (y-o-y), driven by festival demand. New product launches have also helped gain market share, especially in the scooter segment. Three-wheeler sales grew 16 per cent, led by export markets and increase in supply, as the company expanded capacity in this high-margin segment.

Growth is expected to come from the refreshed 'Victor' and the company will target the executive segment, which contributes 60 per cent of the motorcycle volumes but where TVS has not been strong. The company will also try to consolidate its position in the premium segment, with a new Apache variant. Both these bikes will be launched in the March quarter. The management is banking on these and the current base of products to improve its market share in the two-wheeler segment, from 13 per cent in the first half of FY16 to 15 per cent in full year FY16. What will add to its range will be the top-end bikes from the alliance with BMW. A new product from this alliance is expected to be launched in FY17.

  The key area where the company has been lagging larger peers Hero MotoCorp and Bajaj Auto has been profitability. The company's operating profit margins are roughly half of Hero and a third of Bajaj Auto. However, higher realisations in the quarter, coupled with benefits of lower raw material costs, helped improve profitability. Margins were up 129 basis points (bps) y-o-y to 7.4 per cent, which Goldman Sachs says is a 22-quarter high. Expect the number to go up, as the company gets the full benefit of lower raw material costs.

While the domestic performance and exports (which account for a quarter of revenues) are likely to post double-digit growth, valuations, given the recent rally, have run-up significantly. At the current price, the stock is trading at 23 times its FY17 earnings estimate. Investors could look at the stock on dips.