FY2009 began with positive y-o-y growth for the Indian two-wheeler segment albeit on a low base. In FY2008, the segment reported 4.9% y-o-y decline in sales volume due to high inflation, rising Interest rates and contraction in availability of finance.
Growth started picking up in 1HFY2009 aided by the overall 12.6% y-o-y growth in Motorcycle sales.
While tight availability of Finance did impact purchases, cash purchases increased due to higher agricultural income in the Northern states and return of customers who had deferred purchases in FY2008.
Nonetheless, inventory buildup hit two-wheeler volumes in 2HFY2009 and the industry growth for FY2009 stood at a mere 4.5% y-o-y.
We believe though the substantial ownership base of two-wheelers results in reduced headroom for higher growth rates and increases dependence on replacement demand to sustain volumes.
The rural markets are expected to register better growth on account of the new demand arising from the relevant rural population, which is expected to help companies to maintain their growth momentum registering 7% CAGR in volumes over the next few years.
TVS Motor has been a clear underperformer in the two-wheeler industry in the last one year. The company was hit the hardest on account of heightened competition, industry slow down and sharply declining margins compared to peers.
We believe the overall scenario remains tough for TVS in terms of challenging demand scenario, competition and credit accessibility.
At current levels, the stock is trading at 10.3x FY2010E EPS, which we believe is un-justified due to the afore-mentioned concerns.
Given the overall concerns and expensive valuations, we downgrade the stock from Neutral to REDUCE with a target price of Rs18.