As normalcy returns, market share gains to continue for TVS Motor in FY22

Improving product mix and rising exports to aid margins

New launches, market share gains over the last year and robust exports bode well for TVS Motor. Analysts also expect the company to post improvement in margins due to higher volumes, cost controls and improving product mix.

The company has been gaining market share in FY21 with the trend continuing in February. Even as overall two-wheeler sales were up by 8 per cent y-o-y, TVS posted a 21 per cent rise in sales with volumes in the domestic market growing by 15 per cent. The two segments, which have helped it recoup its 100 basis point market share it lost in FY20 were mopeds and scooters. 

Higher demand from the rural segment due to multiple favourable factors such as monsoons, government measures led to the growth in mopeds. In the scooter segment steady growth of Ntorq and Scooty Pep led to market share growth, its share of the scooter market crossed the 20 per cent mark for the first time, according to Centrum Broking. Anish Rankawat of the brokerage expects scooters to grow faster in FY22 driven by gradual opening up of schools, colleges and offices in the IT industry. 

With crude oil prices rising sharply, the company will benefit from higher exports to oil-dependent economies. Exports were up 23 per cent in February and are expected to post a growth in FY21 as compared to a 12 per cent decline for domestic sales.

Exports, which accounted for less than 15 per cent of overall volumes four years ago, now account for 34 per cent. While demand trends are favourable, the street will keep an eye out for supply constraints as the management highlighted that the scarcity of containers is impacting volumes. 

Improving margin profile is another trigger. Operating profit margins expanded 70 basis points to 9.5 per cent in the December quarter due to better than expected gross margins, lower marketing spends and cost savings. With volumes expected to grow at 15-20 per cent over the next few years and product mix improving, analysts expect margins to trend upwards. Higher share of exports, scooters and premium motorcycles (recently launched the Apache RTR 160 4V) should aid in profitability improvement. From FY20 levels of 8.2 per cent, margins are expected to improve by 150 basis points over the next two years. In the near term, however, a sharp rise in commodity costs could cap the gains. 

At the current price, the stock is trading at over 30 times its FY22 earnings estimates. This is at a significant premium (90 per cent) to larger peers Bajaj Auto and Hero MotoCorp. Investors will have to await sharp corrections and reasonable valuations before adding the stock to their portfolios.