Markets
TVS must burn the rubber on volumes
Summary
- Electric vehicle adoption is on the rise. TVS’ market share stood at 4.3% in FY22
- Overall, in FY22, TVS expanded margin but reported negative free cash flow
Among the listed two-wheeler (2W) incumbents, TVS Motor Co. Ltd held the highest market share of 4.3% in the electric vehicle (EV) segment in FY22, according to Vahan registration data. The company’s market share in the high-speed electric scooter segment was 19%, according to its FY22 annual report. In general, EV adoption is on the rise with new entrants holding a significant market share.
Bhavish Aggarwal, chief executive officer at Ola Electric, which had a market share of 6.2% in EV segment in FY22, recently said that he believes India will not sell any petrol 2Ws by the end of 2025. Such rapid penetration of EVs would pose a high risk to TVS as it gets a sizeable portion of its revenue from the internal combustion engine (ICE) scooter segment.
Analysts reckon Aggarwal’s view to be a highly optimistic one, given the hurdles in EV adoption. Charging infrastructure is yet to be widely established, which has led to range anxiety. Also, the recent cases of electric 2Ws (e-2W) catching fire have added to the fears.
In any case, TVS has started its e-2W journey well. “TVS Motor has a holistic approach to the EV segment as it is working on the entire ecosystem through partnerships and its group companies. Hence, any reduction in ICE scooter volumes would be compensated by an increase in EV volumes for the company," said Kumar Rakesh, an automobile and technology analyst at BNP Paribas Securities. Overall, TVS has gained market share in the 2W segment in FY22 versus FY21. According to Society of Indian Automobile Manufacturers, the domestic and export market share of TVS rose by 90 basis points (bps) and 120 bps to 15.2% and 24.5% respectively. Moreover, the company saw margin expansion helped by effective cost control measures amid high inflation and better product mix. In FY22, Ebitda margin stood at 9.4%, up 90 bps year-on-year (y-o-y). On the other hand, Bajaj Auto Ltd and Hero MotoCorp Ltd saw 190 bps and 153 bps drops in Ebitda margin, respectively. However, increased investments in FY22 meant negative free cash flow. TVS reported about 3.3 times y-o-y rise in investments in subsidiaries and associates to ₹1,355.43 crore. Thus, TVS saw negative free cash flow of over ₹630 crore.
“A sharp rise in investments and weak profitability metrics of the acquired entities remain an area of concern. The firm remains optimistic on their current investments. However, the profitability of Swiss E-Mobility Group, as well as that of global motorcycle original equipment manufacturers remains uninspiring," said analysts at Kotak Institutional Equities in a report on 20 June. Swiss E-Mobility is a TVS subsidiary.
TVS is optimistic on business prospects in FY23 in view of expected recovery in rural demand and growth in urban demand as restrictions ease. Further, prices of commodities such as steel and aluminium are softening and this augurs well for margins. Meanwhile, the shares of TVS have appreciated by nearly 21% in the past one year, beating Bajaj Auto and Hero MotoCorp, whose shares have declined by nearly 13% and 14%, respectively.
According to Bloomberg data, TVS stock trades at almost 22 times its FY24 estimated earnings while Bajaj Auto and Hero trade at 16 times and 13 times respectively. As per Kotak, reverse discounted cash flow valuations imply 25% market share in the domestic 2W segment, which is much higher than current levels. They believe achieving this to be a daunting task for the firm and hence have a Sell rating on the stock. Sustained growth in volume would remain key. Note that the total 2W volumes of TVS in April and May 2022 combined are lower by 5.5% vis-a-vis 2019 levels.
