TVS Motor: Zest in scooter sales, bikes to follow

Valuations, however, seem to have factored in most of the gains

TVS Motor’s stock is up 27 per cent over the past two weeks on higher sales momentum from its scooter portfolio, launches and brokerage upgrades. The latest upgrades, which came in September after the launch of Scooty Zest and robust August sales numbers, estimate higher volumes and margin gains over FY14-17. This is likely to reflect in higher earnings growth of 36 per cent during this period, say Sharekhan’s analysts.

The first trigger is volumes, which have grown 29 per cent year-to-date against the sector's 17 per cent. Led by higher operating leverage and cost savings, margins are to gain 300 basis points in three years. Bank of America Merrill Lynch (BofA-ML) analysts believe margins will touch a double-digit number by FY17, from 6.1 per cent in FY14.

Given the volume momentum, market share gains, success of launches and expected earnings improvement, most analysts have a ‘buy’ on TVS, with an average target price of Rs 240, about 10 per cent return from the current levels.

Given the stock has doubled in the past six months, valuations at 16 times FY16 earnings are at par with bigger peers such as Bajaj Auto and Hero MotoCorp (15.75-17 times). However, given weaker margins and return ratios (versus peers), the stock should trade at a discount. This means the stock is already factoring in future marketshare and margin gains. Hence, there is a need for investors to be cautious.

Analysts say the lower margins were an aberration due to promotion costs, launch pricing, and rising raw material costs. The company's strategy to launch one product every quarter has worked well, starting with the launch of the Jupiter scooter in September last year and following it up with Start City+, Wego refresh and Scooty Zest. The launches have also helped TVS gain 240 basis points year-to-date in the scooter category, taking its market share in the segment to 15.1 per cent.

Scooters account for 30 per cent of the total volumes. Motorcycle volumes should look up, as TVS lines up an executive motorcycle launch in the December quarter and an Apache refresh in March. The launch of a premium bike, in association with BMW in FY16, will also aid its overall motorcycle volumes.

The company has a market share of 5.5 per cent in the motorcycle segment. This, according to BofA-ML analysts, would improve to 8.5 per cent by FY17 on the back of launches in the commuter segment where it is weak currently and improving position in the premium segment.