BackTVS-BMW deal holds good potential in the long term
Since the benefits may be visible only in the long term, will TVS shares give up some more of their gains?
Premium(Hemant Mishra/Mint)
Shares of TVS Motor Co. Ltd have risen by 22% in the past four trading sessions after hitting a one-year low early last week. News of the company’s tie-up with BMW Motorrad, BMW AG’s motorcycle division, had hit the Street much before the company formally announced the deal.
So will the deal structure, announced on Monday, excite investors? TVS shares closed 7.5% higher at ₹ 38.85 on the National Stock Exchange; but it must be noted that the deal was announced around 3pm, before which the stock climbed to over ₹ 42. TVS shares gave up a bit of their gains after the deal was announced. Of course, it must be noted here that one can never make much from share price gyrations in the last half hour of trading.
While the deal undoubtedly holds great potential for both TVS and BMW, the gains, if any, will only be visible in the long term. BMW’s current portfolio includes motorcycles with a capacity of 650 cubic centimetres (cc) and above, and the premium bike maker sold only 117,000 vehicles in 2012. In comparison, TVS, despite having a small share of the Indian market, sold 770,000 motorcycles between April 2012 and March 2013.
BMW Motorrad reported revenue of €1.49 billion (around ₹ 10,595 crore today) and earnings before interest and tax of merely €9 million for 2012. According to analysts, the firm now looks to be making a shift in strategy given the motorcycle division’s weak financial performance. BMW’s desire to develop and manufacture bikes with a capacity of less than 500cc is a sign that the German firm’s change in strategy involves products that promise higher sales by volume. Needless to say, TVS investors will be more than pleased to partner with BMW in jointly developing products.
In India, bikes with a capacity of over 150cc have accounted for about a fifth of total sales in the past two years. While the segment has been under pressure lately, it holds good potential given the demand from current users who are looking to upgrade.
Given the fact that the benefits from the deal may be visible only in the long term, will TVS shares give up some more of their gains? Despite the recent rally, the shares trade at only 6.6 times estimated earnings for the year ending March 2014. So from a valuation perspective, there is no compelling reason to sell; and given that the deal has some positives, it’s unlikely the TVS stock will witness a sell-off.
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