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Photo: Hemant Mishra/Mint
Photo: Hemant Mishra/Mint

TVS Motor’s Q1 skid poses risk to its valuation premium over peers

Rural sales are expected to aid demand, but the premiumization drive has been pushed back a few quarters

The brakes were slammed on TVS Motor Co.’s growth engine in the fiscal first quarter. Sales volumes declined by about 71%, dragging the firm into operating losses. But investors took the weak numbers in their stride as the stock wriggled up marginally on Thursday.

Still, there are several challenges. TVS Motor’s costs were much higher than what the Street was factoring in, partly because of the transition to BS-VI emission norms. TVS did raise prices marginally, but it was not enough.

“Gross margins were weighed by a weaker product mix and the impact of BS-VI cost inflation, as contribution margins are yet to be passed through," said analysts at Motilal Oswal Financial Services.

TVS did cut some costs, but the operating de-leverage hit Ebitda, which showed a loss of 49 crore, compared to a profit of 356 crore a year ago. Ebitda is earnings before interest, taxes, depreciation and amortization.

Analysts say the margin profile of TVS is not as strong as its competitors. Note that Bajaj Auto Ltd posted an operating profit despite the lockdown.

Still, rural sales are likely to drive demand in the fiscal second half. TVS’s product mix, comprising variants of scooters and mopeds, are expected to do well on increasing demand for individual mobility. But the company’s drive toward premiumization has been pushed back a few quarters. While valuations remain higher than peers, some of the above-mentioned concerns are getting reflected in its stock performance in recent months. Shares of TVS fell about 14% in 2020, while Bajaj Auto slipped 4%, and Hero MotoCorp gained 11%. Even after the drop, the stock quotes at a price-earnings multiple of 27 times FY22 earnings, while Bajaj and Hero trade at 17 and 18 times, as per Bloomberg consensus estimates.

Given the sputtering improvement in operations, this premium could come off. “Over the past four years, the company has gained market share by only 40 basis points in the domestic two-wheeler market and improved its Ebitda margin by only 90 bps. Hence, it should not command a premium valuation to Bajaj or Hero," said analysts at Kotak Institutional Equities.

One basis point is one-hundredth of a percent.

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