The scooter segment, TVS Motor’s mainstay, makes up nearly one-third of domestic volumes.
Getty ImagesTVS had a hedge against domestic cyclical troubles in its export business.
ET Intelligence Group: TVS Motor Company is expected to face several headwinds in volume growth in both domestic and overseas markets in FY21, which is likely to erode significantly its premium valuations.
The stock is currently trading at 22 times one-year forward earnings, a 21% premium to its long-term average, making it the second most expensive two-wheeler stock after Eicher Motors. The company is seen as a proxy play on growing demand for scooters and its premium price-earnings is on account of improving export business share and scope of a sizeable improvement in operating margins.
These three factors — scooter demand, rising exports and operating margins — which buoyed the stock could be on the wane in the near-term. In addition, the company’s weaker balance sheet compared to its peers during the current downcycle may further weigh down the high valuations.
The scooter segment, TVS Motor’s mainstay, makes up nearly one-third of domestic volumes. This is expected to see a higher demand contraction in the overall two-wheeler space. Domestic volumes fell 18% in FY20 broadly in-line with the industry, but it could maintain its share due to the 21% growth in sales of its premium model Ntorq. The scooter segment has been primarily driven by urban demand, which is likely to fall for the third year in a row. Recovery could take longer than motorcycles, where rural demand is the driving factor. The Street estimates 10-15% volume decline in FY21 for scooters.
The company’s margins could come under pressure due to lower utilisation and rising competition in the motorcycle segment. TVS Motor has an operating profit of ₹3,870 per vehicle in the March 2020 quarter, the weakest among peers. Another headwind is the incremental cost due to BS-VI emission norms, which in a fragile demand environment would be tough to absorb. Then there is the threat of price wars to gain market share.
TVS Motor’s market share has dropped 100 bps to 13.8% in two-wheelers in FY20 due to rising competition and weak moped demand. Operating margins stood at 7% in the March 2020 quarter versus Bajaj Auto’s 18.4%.
TVS had a hedge against domestic cyclical troubles in its export business. While domestic volumes fell 23%, exports rose 10%. This, too, may falter due to the pandemic-induced disruptions. The Street is pricing a 15% drop in export volumes for FY21.
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