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After a lull, the festive season has lifted the two-wheeler segment. In their respective September quarter (Q2FY23) earnings calls last week, Hero MotoCorp Ltd and TVS Motor Co. Ltd said they saw volume growth in the festive period from a year earlier. During the 32-day festive period, Hero saw a 20% rise in retail and the inventory levels dropped to one of the lowest post-festive seasons. Similarly, TVS had stocks for less than one month after the festive season.

Both two-wheeler makers are hopeful of better demand for their products after the festive season. Indeed, chip shortage is a concern, but the situation is improving.

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Catching up

TVS has the edge over Hero, given the K-shaped recovery in the automobile industry. Premium vehicles are seeing increased traction and TVS’ products, such as Ronin, would aid volume growth. The outlook for Hero, which primarily operates in the entry-level segment, is not rosy especially given the subdued rural markets. Thus, while Hero is losing, TVS continues to gain or maintain market share in the domestic two-wheeler segment.

Investors acknowledge this. The share performance of both companies reflects these variations in the demand environment. In CY22 so far, shares of TVS have appreciated by as much as 78%, while Hero has gained only by 5%. This comes on the back of a 29% gain in TVS shares in CY21 and an almost 21% drop in the Hero stock in CY21.

Weak rural sentiments will continue to be a key overhang on the Hero stock. However, the company’s efforts to strengthen its foothold in the premium segment will aid investor sentiments. The festive season saw good demand for Hero’s premium variants, with its XTEC variants forming 20% of the retail sales. The company plans to launch more premium models hereon.

Coming to Q2 earnings, the Ebitda margins of both companies disappointed, missing consensus estimates. TVS saw a slight widening in the measure from a year earlier, while Hero’s Ebitda margin narrowed. Ebitda is earnings before interest, tax, depreciation, and amortization.

Margins in the second half of FY23 are expected to benefit from the softening of commodity costs. Even so, currency headwinds could play spoilsport. As such, the levers for margin growth appear to be a bit more for Hero than TVS.

“Hero’s margins would benefit as its premium vehicles come into play. While TVS’ products are seeing increased traction, its efforts to ramp up the electric vehicle (EV) segment would have a bearing on its margin performance," said Varun Baxi, an analyst at Nirmal Bang Equities.

Investors have rewarded TVS’ drive for the EV segment versus its peers. The sales volume of its EV, iQube, stood at 8,103 units in October. It has an order backlog of 25,000 units. TVS aims to deliver 10,000 units per month by the end of Q3 and 25,000 per month by the end of FY23.

On the other hand, Hero has been a laggard, just launching its EV, VIDA V1, last month. As it is priced in the upper end of the electric two-wheeler segment, getting a wide response would be tough.

As things stand, shares of TVS are only about 5% below their 52-week highs, while the Hero stock is nearly 12% down so far. “It seems all near-term positives are priced in," Dolat Capital Market’s analysts said about TVS shares. Valuations of TVS are expensive and Hero provides comfort here. According to Bloomberg data, TVS trades at 29 times its FY24 estimated earnings, while Hero trades at almost 14 times. The near-term upside for the two stocks depends on how demand pans out after the festive season.

ABOUT THE AUTHOR

Vineetha Sampath

Vineetha Sampath is a chartered accountant and is experienced in the field of research analysis. She joined Mint's Mark to Market team recently and this is her first stint in journalism.
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