TVS Motor: Volumes may come under pressure

If volumes don't grow at estimated 12-15% in FY16, margins won't touch 10% by FY17

Some companies that tend to divide the analyst community. TVS Motor is one such company because with its March quarter performance, the community is split over future performance. Towards the end of the third quarter, when the performance of motorcycle sales started stuttering, analysts rushed to upgrade the earnings as the company has a strong scooter portfolio, which continues to grow in double-digits. At the time, assumptions were that the company would capture higher market share and improve margins, too, in the coming quarters. However, despite a seven per cent year-on-year volume growth and 14 per cent sales growth in the March quarter, some analysts believe the company has disappointed and will not be able to capture higher market share as indicated earlier.

Though TVS Motor is expected to launch two new platforms by the first half of FY16, the Street is not confident about the company's ability to increase marketshare, as rivals such as Hero and Bajaj have not managed to hold on to theirs in the face of Honda's launches. Emkay Global remains "slightly cautious about the very high optimism in the Street surrounding TVS' new launches". Currently, the top five brands in the space control 60 per cent of the market. Analysts also believe the company's Jupiter, Star City Plus and Zest are losing steam.

The firm has indicated that it intends to take its marketshare up from 13.2 per cent to 15 per cent in FY16, implying a volume growth of 12-15 per cent. Reliance Securities, however, expects the firm to grow volumes by 12 per cent on the back of the launch of the new Apache and TVS Victor. In addition, launching a 300-cc motorcycle with BMW would further aid volumes. The more optimistic analysts expect the company to grow exports by 22 per cent compounded annual growth rate over FY15-17, as it enters new markets and launches new products.

The margin is another area where the market differs. The company exited FY15 with operating margin of 6.6 per cent even though the management continues to believe it will hit double digits by FY17. However, there was a one-time adjustment, which impacted margins. After adjusting this, margins stood at 6.6 per cent.

The company's investment in subsidiaries and operating losses at the Indonesian subsidiary are expected to continue in FY16, too, which would be a drag. Analysts believe even if TVS manages to grow volumes and expand margins, it currently trades at 21 times its FY16 earnings, which is expensive.