Volume recovery, margin expansion hopes drive gains for TVS Motor

Robust export sales, higher investment in electric vehicles are positives

The TVS Motor Company stock gained over three per cent in trade on positive management commentary and strong growth expectations of brokerages over the next two years. After a subdued June quarter, demand trends in July indicate that retail sales are moving closer towards March 2021 quarter levels; volumes are expected to return to normal levels by September.

Among the triggers for the improvement in domestic demand would be positive rural sentiment on the back of normal monsoons and reservoir levels. Return of personal mobility in the urban segment too is expected to support demand. While volumes in the June quarter had risen 146 per cent over the low base last year to 657,000 units, they were down 29 per cent from March quarter sales given the lockdown in multiple states.

Improvement in demand from overseas markets is another trigger as exports account for half of TVS Motor volumes. Demand from major markets has improved given the rally in crude oil and other commodities and improvement in forex availability for importers in these markets. Even as domestic sales in the June quarter were down 45 per cent on a sequential basis, exports were up 2 per cent limiting the overall volume decline.

Among the major rerating triggers is the ability of the company to keep margins in the double digit territory on a sustainable basis. Margins in the June quarter were down by 310 basis points to 7 per cent on a sequential basis due to lower volumes and higher raw material costs.

Part of the raw material inflation was offset by price hikes, cost cutting initiatives and a favourable product mix. Despite these measures, there is still a 50 basis points gap under-recovery in costs. The company has, however, maintained that its margins will stay above the 10 per cent mark once volumes go back to higher levels. The premiumisation trend and higher sales of Apache, Ntorq and Jupiter ZS in local and export markets should support the margin improvement going ahead. Price hikes, product mix helped the company post a 4.3 per cent increase in realisations on a sequential basis.

New product launches and development especially in the electric vehicle space would be a medium term trigger. The company had announced an investment of Rs 1,000 crore in electric vehicles for product development, capacity expansion and distribution infrastructure. While the company has plans to launch electric two and three wheelers, its current portfolio comprises TVS iQube which is available in six cities; it plans to expand its presence to more cities by the end of the current year.

The company is the top pick in the two wheeler space for analysts at JM Financial. The reason for optimism on the stock is the successful product track record, premiumisation in the industry and improving profitability, according to Vivek Kumar and Nitinn Aggarwala of the firm. The brokerage expects revenues and earnings to grow by 20-56 per cent respectively over the FY21-23. However, analysts at Motilal Oswal Research have lowered their target multiple to 18 times from 20 times earlier given that the company has the highest exposure to scooters with internal combustion engine technology and the segment accounts for 30 per cent of its volumes. This makes it the most at risk to electric vehicle scooters among listed players, they add. Investors should await an improvement in volumes and steady margin expansion before considering the stock.