TVS Motors Ltd - Navigating disruptions
Company Name – TVS Motor Company Ltd (TVS Motors)
Current Share Price – INR 857 (July 13, 2022)
Market Cap – INR 40,714 cr
1. What is interesting about the stock?
As we all know the auto industry has performed very badly in the last 3-4 years due to various reasons. But now the cycle seems to be turning and it’s a good time to bet on a company that is gaining market share and is introducing new products in 2W EV, tapping into every segment of 2W. In this article, we’ll discuss the TVS motor which is navigating the disruption swiftly.
The domestic two-wheeler industry recorded a sale of 13.4 million units in FY22, a decline of 11% from 15.1 million units in FY21 (FY21 was a 13% decline over FY20). This decline was due to weakened demand in both urban and rural markets, with the rural markets being severely impacted. While the monsoon remained favorable, the non-agri rural services sector underperformed significantly. This manifested itself in lower demand in the entry and mid-level segments of commuter motorcycles and mopeds. The rural markets felt the combined effect of savings depletion, income erosion, broad inflation,
fuel inflation and rising vehicle prices due to commodity cost increases.
Electric two-wheeler today accounts for 4.5% of the total two-wheeler registrations. However, this underrepresents the consumer mind space that it enjoys. The last year has seen the consumer perspective of the transition to EV move from "If" to "When". Large numbers of consumers today are actively considering EVs for their respective needs. The industry saw a robust growth of ~5.6x.
Two wheeler market had a unique FY20-FY22 for the following reasons:
Divergent growth vs other auto segments: 2W segment has been generally resilient during the period of sharp economic slowdown. However, in FY20 the decline was similar to that of Passenger Vehicles (PVs). More importantly, during the past recovery periods, 2W has typically done well vs PVs. FY21 and FY22 are an exception, where 2W continue to decline while other sub-segments like PV and CV recovered.
Diverse trends within the 2W industry: Up until FY18, 2Ws were witnessing a premiumization trend. However, the trend has stopped in 2W.
In June 2022, the 2W segment witnessed partial recovery due to good rural demand and the festive season. Additional tailwinds supporting the industry are:
Banning of export of steel will help reduce key raw material cost
Softening of other commodity prices
TVS Motors was initially set up as a Moped division of Sundaram Clayton Limited (SCL) – a collaboration between Clayton Dewandre Holdings, UK, and TVS Group – in 1979. The idea was to create a product that could comfortably carry two people at a low cost in the hills of Tirupati. TVS-50 – a 2-seater, 50CC 2W moped – was thus launched in 1980.
In 1982, SCL entered into a JV with Suzuki Motor, Japan to form Ind-Suzuki Motorcycles Limited (ISML), which kick-started the motorcycle revolution in the country with the launch of 100 cc Indo-Japanese motorcycles. ISML was later merged with the Moped division of SCL in 1986 to form TVS-Suzuki Ltd. The TVS-Suzuki JV ended in 2001 and the name of the company was changed to TVS Motors Company Ltd.
Company made two acquisitions to augment electric vehicle plans in FY22:
USD 100 million for 75% stake in Swiss E-Mobility Group
USD 18 million for 80% stake in GO Corporation
Private equity giants TPG Capital and KKR & Co likely are in talks with TVS Motor to invest at least USD 300 million for the expansion of the EV business.
On an overall basis, Company incurred a capex of INR 730 cr and investments of INR 1,350 cr in FY22. The Company plans a capex of INR 700 cr in FY23.
TVS Motors has three segments mopeds, scooters, and motorcycles with negligible presence in the three-wheeler market:
Moped: TVS Motors has a near monopoly in this segment However, the segment has been slowing due to rising urbanization, higher costs post BS-VI transition, and aggressive pricing from new entrant Bajaj. Company, however, has transitioned nicely by switching focus to exports which has helped them effectively use their expertise while negating the domestic market headwinds.
Scooters: Company achieved sales of 8.6 lakh units in FY22 and registered a decline of 7% over FY21. However, Scooters segment for TVS Motors performed better than Industry (decline of ~11%) with the launch of new products like Jupiter 125 and Ntorq 125 special editions. The decline in scooters was primarily led by the pandemic impact and subsequent stringent lockdown norms.
Motorcycle: Company achieved sales of 7.02 lakh units in FY22 and registered a growth of 12% over FY21. The TVS Apache, performed better than the Premium motorcycle industry with sales of 3.2 lakh units, posting a decline of only 1% while the Premium Motorcycle industry declined by 24% in FY22 against FY21. The Premium motorcycle segment decline was primarily due to the semi-conductor shortages that have affected the supply chain. The Company sold 3.77 lakh units of commuter motorcycles in FY22 which is a growth of 26% over FY21. The Commuter Motorcycle segment’s relative resilience on the other hand reflects the continuing need for mobility to fulfill economic and social responsibilities. However, there is an increased tendency of postponement of purchase, especially in replacement buyers and down-trading due to escalating vehicle acquisition costs has impacted volumes
Why invest in TVS Motors?
Presence in all three segments. Bajaj recently withdrew its entry model CT-100 from the market, the cheapest entry-level bike now available in the industry is from Hero MotoCorp and TVS Motors
Successful export strategy
Increasing focus on the electric 2W segment
Partnership with BMW to manufacture motorcycles in the 200-500cc segment. It is a win-win for both TVS – which manufactures up to 250cc and BMW – which manufactures 600cc & higher. It also has the potential of opening up a completely new export market for TVS Motors, if executed correctly.
2. Key Historical Financials
Revenue has remained stagnant after the FY19 peak due to BSVI norms, covid-19 outbreak, and chip shortages, However in FY22 TVS reported a 25% increase in revenue from the FY2021 level
EBITDA margin has been stable at ~11-12% during FY19-22
Net profit grew by 27% in FY22
ROCE/ROE had deteriorated in FY20-22 vs FY19
Net debt/equity is quite high at 3.1x in FY22 with interest coverage at 2.9x which is not comforting
Cash flow convertibility (CFO/EBITDA) has been poor since FY19 with CFO being negative in FY22 due to significant loans and advances
3. What is my view on company valuation?
TVS Motors trades at a PE (TTM) multiple of 54x vs Hero MotoCorp at 25x, Eicher Motors at 48x, and Bajaj Auto at 21x.
TVS Motors has an EV/EBITDA (TTM) of 19x vs Hero MotoCorp at 15x, Eicher Motors at 29x, and Bajaj Auto at 16x.
So, the Company is overvalued at the current levels and high leverage doesn’t help. However, it could be an excellent investment opportunity with a strong business and management team at the right entry price for long-term investors.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Barring Mopeds, Company does not enjoy a leadership position in the domestic market in any of these sub-segments. Additionally, the market is highly competitive
TVS Motors has no products in the low-speed electric 2W market
Economies of most of TVS’ export destinations in Africa and Latin AM are vulnerable to crude and commodity price volatility
About the Author
I am a CA aspirant currently in the first level of CA. I have spent 1.5 years in Indian equity markets.
I love to analyze various companies which I can understand easily and have an interest in watching documentaries, reading books, and knowing ancient history.
You can check out my blog at https://shauryayadav.substack.com/.
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.