TVS Motors: Scooters to drive earnings trajectory

Improved product mix, rising share of scooters in overall volumes to drive margins

TVS Motor’s sales in November may have been below estimates at 220,046 units but analysts remain bullish on the stock. According to Motilal Oswal Securities, the company is expected to exit FY15 with 33 per cent volume growth. Broadly, the market expects its volume growth to be ahead of Bajaj and Hero MotoCorp’s.

A large part of this is expected to be driven by the scooters segment, which grew 62 per cent over a year in November to 62,223 units, thanks to robust demand for the Jupiter and Scooty Zest (110cc variant). Also, the launch of Star City Plus is expected to give a boost to motorcycle volumes, which grew by 40 per cent y-o-y to 86,424 units.

Scooters are expected to drive growth in the coming years for TVS Motor, believe experts. There is a clear shift in the two-wheeler market, where the share of scooters is moving up among overall volume. From 14 per cent of total volumes in FY10, scooters now account for 24 per cent of volumes. This is expected to go up to 30 per cent, believe analysts. TVS has the highest exposure to scooters at 26 per cent of total volume.

Goldman Sachs expects this to touch 35 per cent in FY18. Among rivals, Bajaj Auto does not have scooters as part of its portfolio and their account for only 10 per cent of Hero’s volumes. Goldman Sachs believes TVS is also doing several things to plug product gaps in its portfolio. The re-launch of Victor suggests the company is looking at building traction in the executive segment, where its presence is negligible. Also, TVS intends to roll out the high-end Apache from its alliance with BMW in the second half of FY15.

Two other factors make TVS an interesting investment proposition. First, the margins could rise, as the share of scooters, a high margin segment, continue to rise in its overall portfolio. With this and higher operating leverage, margins are expected to rise four percentage points to 10 per cent by FY18. Exports have been growing in double-digit this year, which should sustain, believe analysts. With earnings growth revving up on strong revenue growth, analysts expect return on equity to double to 40 per cent. The stock trades at 15.7 times FY16 and 12.6 times FY17 earnings, relatively more attractive than peers.