TVS: Riding on the premium segment

Higher volumes, premium launches seen as key drivers of earnings

A gradual recovery in domestic volume growth performance and new launches in the premium category, both in scooters and motorcycles, is expected to help TVS Motor post strong volume growth and improve margins, going ahead.

Domestic two-wheeler volume growth has been disappointing in May, as sales dipped to 2.4 per cent year-on-year, before recovering partially in June to about 8 per cent.

Some of the slowdown in volumes is due to the one-time impact on account of transition to the e-way bill under the goods and services tax ( GST) regime.

Overall sales for June were, however, up 15 per cent due to strong exports as well higher three-wheeler sales. Bharat Gianani of Sharekhan said the sales performance of TVS Motor over the last couple of months was a temporary aberration, and growth is expected to pick up in the days ahead.

A key trigger for the stock is the premiumisation of its portfolio, with the launch of premium motorcycles and scooters. While BMW, its partner, will launch two models this month, TVS launched the Apache 310RR in December 2017 and has registered good demand for the same.

The launches from the company, as well as its partner, will help TVS improve its share of the 200cc and above segment that has doubled over the last three years, and now forms 8 per cent of motorcycle volumes. The company also launched the premium segment scooter Ntorq in February which, coupled with motorcycle launches, should help improve realisations.

Margins that are currently at 7.5 per cent, are expected to improve by 200 basis points to 9.5 per cent over the next two years.

Given the new launches as well as expansion of distribution network, the company is expected to gain market share in two-wheelers. Given the expectations of double-digit growth and gains from operating leverage, analysts believe the company can post net profit growth upwards of 35 per cent, over the next two years. This is more than the 12-17 per cent earnings growth for its peers Bajaj Auto and Hero MotoCorp.

The higher earnings growth expectations perhaps explain why the TVS stock is trading at a 25 per cent premium in comparison to its larger peers.