TVS Motor pulls multiple levers to regain ground

More upside depends on gains in market share and margins

A slew of re-ratings on expectation of higher volume growth and improvement in margins has helped two-wheeler maker TVS Motor's (TVS) stock gain 22 per cent over the past month. This is impressive, given the stock had already run up over three times since its September 2013 lows of Rs 30. The thing to watch out for is the firm's ability to notch up higher volumes which have remained flat during FY12-FY14.

Analysts at Motilal Oswal Securities expect TVS to post 16-22 per cent volume growth over FY15 and FY16. Among the launches for the current financial year are Star City Plus (already launched), Victor (motorcycles), Zest (new product), Wego refresh (scooters) and a 4-stroke moped. This should help TVS gain marketshare in the two-wheeler segment, which has steadily declined from 23 per cent in FY03 to 11.8 per cent in FY14. The company is banking on the motorcycle launches to regain share.

TVS is also launching a diesel three-wheeler, which constitutes 65 per cent of the three-wheeler market and where the company did not have presence thus far.

In scooters, TVS is focusing on bigger vehicles in line with the market trend. While its sales of Scooty fell in FY14, higher powered scooters portfolio (Jupiter, Wego) have done well. The Jupiter launch in September 2013 helped the firm gain market share by 120 basis points to 13 per cent in the scooter segment.

It is the launch and higher share of premium scooters, coupled with three-wheeler sales, that is expected to improve TVS's margins by about 100-200 basis points by FY17 from the current six per cent.

Margins would also get a lift from operating leverage due to higher volumes.

While there have been significant gains for the company in FY14 on various counts, the sharp stock price spike captures most of the gains. At Rs 144, it is trading at about 15 times its FY16 earnings estimates, a 20 per cent discount to market leader Hero MotoCorp.

While recent analysts' recommendations have target prices ranging from Rs 170 to Rs 200, the average target price of recommendations in June is Rs 135. A further re-rating will depend on marketshare gains in motorcycles, higher three-wheeler sales and reduction in losses in its Indonesian business, which contributes very little to the overall revenues but has seen cumulative investments of Rs 524 crore.