The TVS Motor stock has gained about a third since its lows in mid-March on better-than-expected operating performance in the March quarter, rising dispatches and recovery in export markets. Some of the optimism is reflected in two-wheeler 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 are up more than three fold over May. Analysts say that the swift recovery in the two-wheeler market was led by opening up of dealerships, pent up demand, improving rural sentiment and the marriage 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. While the firm’s presence in entry-level bikes (sub-125 cc) is in lower 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 could help the company in the medium term, given the economic downturn, downtrading and shift to the entry-level segment could 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 could hit sales.
In addition to domestic 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 the 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 Motors’ domestic growth in FY21 they don’t expect a sharp growth. An analyst at a domestic brokerage believes that the twin impact of Covid-19 and fall in crude oil prices will have a medium-term impact on incomes and recovery barring a few markets will take time. He expects exports to fall in FY21 after reporting a 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 to 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 of earnings to any margin contraction amid demand slowdown and higher costs. Despite the headwinds, the stock at 42 times its FY21 earnings is trading at a premium to its better placed peers and thus could face downward pressure going ahead.