TVS Motor: The scooter is just puttering along

While exports have stood out, domestic volumes hinge on the performance of launches

The TVS Motor stock is up nine per cent over the last couple of days, after expectations that domestic sales would perk after the company launched a scooter called Jupiter. The company, positioning itself as a vehicle for male drivers, expects to increase market share in the scooter segment from 13.5 per cent currently to 16.5 per cent. This is the second time in a fortnight the stock has seen buying action, with the earlier spurt due to positive sales growth for August, as well as plans to export motorcycles jointly developed with BMW. While domestic volume numbers continue to be tepid, the company will have to maintain the export growth levels to minimise the slowdown impact. Exports in August at 27,425 units were up 53 per cent year-on-year and five per cent over July. Thanks to this growth, overall volumes at 155,000 were up 0.5 per cent over a year ago.

Analysts however don’t think higher exports would have a meaningful impact on financials. S Arun and Ashish Kumar of BofA Merrill Lynch say that the 23 per cent year-to-date growth has been a surprise, both in two- and mainly three-wheelers. Though the analysts will revise their growth assumptions, they believe there is unpredictability and growing competition in the export market. More, at 15 per cent of the company's sales, this is unlikely to be a game-changer for overall operations, they add.

At the current price of Rs 33.85, the stock is trading at 10.4 times its FY15 estimates. Falling domestic two-wheeler sales and losses at its Indonesian subsidiary has seen the TVS Motor scrip lose a quarter of its value over the last year. While the valuations are undemanding, analysts are not too excited by the company’s prospects, given a steady decline in market share. Most analysts have a target price of Rs 32. The trigger though could be a revival in domestic sales and launches could help on this front.

Domestic biz holds key
While exports have done well, domestic sales have fallen seven per cent year-to-date.  Due to the fall in domestic sales volumes, the market share in scooters, which forms 25 per cent of two-wheeler volumes, has fallen 300 basis points (or three percentage points), with Hero MotoCorp and Yamaha (launch of Ray) making the most gains. In scooters, which forms 60 per cent of the two-wheeler volumes for TVS, the company lost a market share of 300 basis points (or three percentage points), with Hero MotoCorp and Yamaha (launch of Ray) making the most gains. In the motorcycle segment, the gains were marginal at 40 basis points. Analysts at Prabhudas Lilladher Research estimate that the company would lose 150 basis points in the scooter segment market share year-on-year, to end at 13 per cent for FY14. TVS Motor is the third-largest in this segment, dominated by Honda Motorcycle and Scooter India, with a share of nearly 50 per cent. To regain share, the company plans to launch models, and with Jupiter out, it is aiming to launch a model every quarter.

However, given the muted volume show, analysts have cut their volume estimates for FY14. Instead of a volume growth of four per cent, Axis Capital now believes the company will show a volume fall of five per cent for the current financial year to 201,700. The combined effect of lower volumes, as well as losses in the Indonesian subsidiary, could lead to earnings before interest, taxes, depreciation and amortisation (Ebitda) margins dropping 40 basis points from earlier estimates to 5.8 per cent and net profit by a steep 14 per cent to Rs 198 crore. BofA Merrill Lynch analysts say the Indonesian business will continue to sustain losses and erode 25-30 per cent consolidated profits annually. Margins, though, could get some support from rising scale (on the back of volume gains) and increasing sales of three-wheelers.

Though analysts have also cut Bajaj Auto and Hero MotoCorp’s estimates, given the respective rural reach, three-wheeler and higher export income niches and strong brand franchise, its larger peers will still end up with 15-20 per cent Ebitda margins and net profits in the range of Rs 2,200-Rs 3,400 crore.