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ET Intelligence group: TVS Motor management’s commentary for the March quarter has been quite encouraging, at a time when volume growth estimates have been slashed at a frightening speed.
However, the optimistic outlook and market share gain in the increasingly competitive two-wheeler market is unlikely to change much for the stock, a market performer for the past three months.
The premium valuation at which the maker of the Apache motorcycle and Jupiter scooter is trading compared with mass-markets rivals is the biggest hurdle for the stock.
The stock is trading nearly 80 per cent premium to mass-market motorcycle makers.
TVS has enjoyed premium valuation owing to industry-leading volume expansion and it being proxy to growth in scooters.
TVS trades at 30 times its projected earnings for the next fiscal and is one the most expensive auto stocks.
The degree of premium valuation may shrink as volume growth in the next fiscal year is expected to slow to a single digit after expanding 18 per cent in FY18 and almost 17 per cent so far in FY19.
In the first nine months of FY19, total volume grew 16.7 per cent to 30.06 lakh units.
Domestic and export volume rose 12.9 per cent and 36 per cent in the same period.
Domestic volume accounted for nearly 81 per cent of the total.
The company is expecting the newly launched executive motorcycle, Radeon, to boost volume growth.
It currently gets demand for around 11,000 units a month.
The company is targeting doubling the volume of Radeon.
However, sustaining the targeted run-rate would be an uphill task given the competitive intensity in the market.
Scooter segment growth has been supported by the acceptability of the newly launched Ntroq in the 125cc segment.
Its domestic scooter volume grew 30 per cent and 18 per cent in the third quarter and first nine months, respectively.
Consequently, TVS’ market share in scooters gained 220 basis points YoY to 18.4 per cent in the first nine months of FY19.
While scooters account for nearly 40 per cent of its total domestic volumes, it may see strain here as competition is gradually picking up in the 125cc scooter segment too.
Hero MotoCorp will launch a 125cc scooter in the fourth quarter, while Suzuki and Aprilia already have their presence in the segment.
TVS was able to withstand competitive intensity in the two-wheeler space in the December quarter because of better price realisation and a richer product mix.
The average selling price in the domestic and export markets rose 2.1 per cent and 5.6 per cent, respectively, in the quarter, and the percentage of mopeds in the total domestic volume declined.
These two factors helped offset the impact of higher raw material cost, and the operating margin expanded 30 basis points YoY to 8.1 per cent.
The company has been able to pass on incremental cost to customers.
It hiked prices by 0.6 per cent in the December quarter and a similar percentage in the first half of FY19.
However, pressure on margins is likely to remain on two-wheeler makers.
Anti-lock braking systems will become mandatory from April 2019, which is likely to lift the cost per vehicle for manufacturers.
Vehicle makers are unlikely to pass on the entire incremental cost of regulatory changes to customers given fragile demand environment.
TVS Motor is having one of the lowest margins among listed two-wheelers makers.
Therefore, any emerging cost pressure makes the company’s margins more vulnerable.
Stock Market
High valuation, cost pressures may limit TVS Motor upside
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