Multiple risks may limit upside for TVS Motor

Stock more vulnerable than peers, given weak margins, volumes

The TVS Motor stock has gained about 33 per cent since its lows in mid-march on a better-than-expected operating performance in Q4FY20, rising dispatches and recovery in export markets. Some of the optimism is reflected in twowheeler sales in June. Total two-wheeler sales at 191,000 units have now reached about 67 per cent of the year-ago levels. Domestic sales have increased more than threefold from May’s figure. Analysts say the swift recovery in the twowheeler market was led by opening up of dealerships, pent-up demand, improving rural sentiment, and the wedding season.

The company is optimistic about a recovery in the second half of FY21 and expects its premium products (Apache and Ntorq) to do better than other segments. Though the company’s presence in the entry-level motorcycle segment (sub125 cc) is in low single digits, it has gained market share in the premium segment, from 11 per cent in FY17 to 15 per cent in FY20. While this may help the company in the medium term, given the economic downturn, downtrading and a shift towards the entry-level segment can hit its volumes in the premium segment. While the company is witnessing some traction in the moped segment, aggressive pricing by competitors and price hikes by

TVS may hit sales.

The other trigger for TVS Motor could be the export market, which accounted for just over a quarter of its sales in FY20 and outperformed overall sales growth. Given the recovery in crude oil prices, key export markets, such as Africa and West Asia, are expected to see an uptick in demand. While analysts expect the export market to outperform TVS Motor ’s domestic growth in FY21, they don’t expect a sharp growth. An analyst at a domestic brokerage believes the twin impact of Covid-19 and a fall in crude oil prices will have a medium-term impact on incomes, and a recovery, barring a few markets, will take time. He expects exports to fall in FY21 after reporting robust 19 per cent growth in the FY16-19 period and 10 per cent in FY20.

Most brokerages believe TVS is more vulnerable in a slowdown than its peers. This, according to Jefferies, is due to inferior margins, balance sheet, and cash flows. The company is the only listed two-wheeler maker, which has debt on its books and has higher sensitivity to earnings from any margin contraction amid demand slowdown and higher costs. Despite the headwinds, the stock at 42x its FY21 earnings is trading at a premium to its better-placed peers, and thus, may face downward pressure.