Navigating the profit turn: Bajaj leaves TVS Motor in the rearview

Pune-based 2W maker outrides TVS Motor with sharper margin gears

There is not much to fault in the October-December quarter results of the country’s two largest listed two-wheeler exporters — Bajaj Auto and TVS Motor Company. While the operational performance for both was strong, the latter missed estimates of some brokerages by a small margin. Although export recovery will be a key monitorable for both companies, Bajaj Auto’s margin performance despite the inferior product mix has been a talking point.

Analysts at Elara Securities, led by Jay Kale, state, “Bajaj Auto’s margin resilience has been impressive despite an adverse mix (three-wheeler volume contribution down 300 basis points, or bps, sequentially). This validates the fact that its margin performance is not overly dependent on three-wheeler performance. The company indicated that in recent years its domestic two-wheeler profitability delta has been the highest owing to a superior mix. Domestic two-wheeler retail market share gain has been impressive at 150 bps year-on-year to 12 per cent year-to-date 2023-24 (FY24).”

Furthermore, domestic product segments of the Pune-based company are expected to perform well, especially in the premium segments in two-wheelers where it has a high market share, as well as three-wheelers. Given the impressive margin performance and outlook, the stock of the two-wheeler major was up 5.35 per cent, while TVS Motor dipped by over 3 per cent.

TVS Motor delivered an inline performance with its margin performance also being robust. The company delivered an all-time high margin of 11.3 per cent. Despite strong gross margins, a richer product mix, and cost controls, this was marginally below estimates due to higher marketing costs.

The domestic market growth for the sector and across the product segments will be the key triggers for the listed players. While two-wheeler volumes grew in double digits in the October-December quarter, the sector is expected to witness an 8-10 per cent growth going ahead. The positive for Bajaj Auto is the rising share of higher-powered motorcycles and a higher proportion of its portfolio which is geared towards that. The company expects to outpace the sector, given that growth is led by the premium segment, which comprises bikes above the 125cc capacity.
 

The share of bikes in this category has increased to 70 per cent of its domestic sales compared to 60 per cent in 2022-23. The company is eyeing multiple product launches, including product refreshes as well as a higher-powered Pulsar. Rising compressed natural gas penetration and better retail finance penetration could help improve its sales in this segment.

JM Financial Research is positive on the stock, given the successful track record of product intervention in the past few years. Margins in the medium term are likely to draw support from a favourable mix and higher operating leverage, say Vivek Kumar and Ronak Mehta of the brokerage.

Motilal Oswal Research remains positive on the volume and earnings growth of TVS Motor. Amber Shukla and Aniket Desai of the brokerage say that volume growth is likely to be driven by a recovery in the domestic two-wheeler market, new products, and a recovery in exports. The company is enjoying the benefits of economies of scale and operating leverage, which help it sustain an operating profit margin at a double-digit level. However, the company earns 40 per cent of its overall operating profit from the domestic scooter business, making it vulnerable to electric vehicle (EV) disruption, they add.

HDFC Securities is positive on TVS Motor, as the company continues to outperform the industry on the back of healthy demand for its products like Raider, iQube, and Jupiter 125. The brokerage has raised its estimates by 2-9 per cent over FY24 through 2024-25, given its steady margin improvement in each quarter in FY24 and continued market share improvement.

Export recovery might take longer, which will impact both companies. While the lack of container availability due to the ongoing Red Sea crisis is leading to longer shipping times, higher inflation and currency devaluation in some markets may have an impact on demand.

While some brokerages continue to maintain a ‘buy’ rating on the two stocks, the strong rally has made valuations expensive, forcing analysts to stay ‘neutral’ or place a ‘sell’ rating.

On Hero MotoCorp, most brokerages have a positive outlook and a ‘buy’ rating given the uptick expected in the premium segment. Jefferies Research believes that the new 125cc bike fills a key product gap and could help Hero gain some share in the segment. It has a ‘buy’ on Hero given the cyclical recovery in two-wheelers with potential success in premium bikes and EVs expected to enhance its growth outlook.

The Street is cautious about Eicher Motors given new competition from Harley-Davidson as well Triumph could lead to market share loss for the premium bike maker.