TVS Motor Company - “Consistent underperformance” ::LKP research

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Volumes fail again

A continuous muted volume performance by TVS over the past few months has backed our negative view on the stock to a higher extent. In the month of October, the company had guided to sell more than 2 lakh units per month after a stellar performance in September (2.19 lakh). However, in October TVS sold just 1.83 lakh units, which since then have been dipping consistently. In February, the company posted a sales decline of 3% yoy and 1% qoq at 172,061 units. In view of slowdown in the 2W segment and cut throat competition, TVS is consistently losing ground and has slipped from its third largest player status in India to fourth place as Honda has been overtaking TVS since last 3months. The gap between TVS and Honda’s 2W volumes has also been widening as this gap which was of ~18,000 units in January has more than doubled to ~37,000 units in February.  We have cut our volume estimates for TVS and now expect them to grow at 7% in FY 12E v/s YTD growth of 8.5% and 5.5% in FY 13E.

Margin performance not expected to see a traction

In line with the lack of operating leverage on the 3W side and slowing demand, we believe the margins which have been always below 8% may not cross this figure although some softening of raw material may slightly help the cause. Volume weakening on 2W side in the wake of competition also may lead to margins getting weakened. Although the company has a 100% market share in moped segment (40% of total volumes), is a drag on the margins as moped is a low realization business. Higher ad spend stemming from prevention of market share decline may also hurt the margin performance. We further cut our margin estimates for TVS’s standalone business from 7.6%/7.8% to 7.4/7.5% in FY 12E/13E respectively as we see an insignificant improvement in pipeline.

Outlook and valuation

Given the weakening operational performance and challenging competitive environment, we are continuing our negative view on the stock. We have cut our earnings estimates in the wake of the expectations of domestic as well as exports underperformance and faltering performance in Indonesia, which we believe may not breakeven even in FY 14 given the competition from Honda, Yamaha and Bajaj Auto and significantly low scale of operations of TVS. Hence, we are cutting our target price from Rs 55 to Rs 50, valued at 10x times (30% discount to Hero) FY 13E consol EPS of Rs 5.02 and maintain out Underperformer rating on the stock.