>TVS MOTOR COMPANY LIMITED: Competition to hurt across the segments, new launches may help a little

■ Volumes fail again
A continuous muted volume performance by TVS over the past few months has backed our negative view on the stock to a higher extent. In the month of October, the company had guided to sell more than 2 lakh units per month after a stellar performance in September (2.19 lakh). However, in October TVS sold just 1.83 lakh units, which since then have been dipping consistently. In February, the company posted a sales decline of 3% yoy and 1% qoq at 172,061 units. In view of slowdown in the 2W segment and cut throat competition, TVS is consistently losing ground and has slipped from its third largest player status in India to fourth place as Honda has been overtaking TVS since last 3months. The gap between TVS and Honda’s 2W volumes has also been widening as this gap which was of ~18,000 units in January has more than doubled to ~37,000 units in February. We have cut our volume estimates for TVS and now expect them to grow at 7% in FY 12E v/s YTD growth of 8.5% and 5.5% in FY 13E.


■ Competition to hurt across the segments, new launches may help a little
Scooters - Devoid of any significant launches over the past few quarters, and w0ith an aged product portfolio with gaps in it, TVS lost market share in each of its segments of operation. In the bread and butter scooter segment, the company has been continuously losing market share to its closest rival Honda. Honda’s Activa which has been facing capacity constraints is sorting out these issues as its capacities are continuously ramping up to the north of 100,000 units. With new plant coming at Bangalore, its FY 13 numbers are expected to widely outperform TVS’s sales numbers. New 2-3 launches from Yamaha which were displayed in the auto expo will get launched in FY 13. Also Suzuki Swish 125, Hero Maestro, Vespa’s comeback with a scooter and a refreshed version of Honda Activa will provide tough competition to TVS’ new scooter planned to be launched by the end of CY 2012. The hybrid scooter Qube which was showcased during the auto expo will be launched in CY 13 along with Hero’s hybrid scooter
Leap which will again face the heat.


Motorcycles- In the motorcycle segment, two new launches from Hero (Ignitor 125 cc and Passion X Pro 110cc) will crowd the executive segment along with Honda’s Dream Yuga (110 cc) and Bajaj’s upcoming launch in this segment, w0hich will make TVS difficult to reproduce Victor’s magic when it will get relaunched by the end of CY 12. The Radeon 150 cc bike from TVS pitted to get launched in mid 2012 against the likes of Hero, Bajaj and Honda’s premium bikes is not expected to bring anything strikingly different from its competition to the table. Market share losses in this segment are expected to get rapid once the competitive launches start gaining momentum.


3Wheelers- On the 3W side, the company has seen demand reducing for its much hyped 3W King as its sales have gone down from levels of +4500 to sub 3000 levels. Even the strategy of 3W production getting ramped up from 6000 to 8000 shortly will not help the company as demand itself is weakening for TVS 3 wheelers. This will in fact add to the pressure on operating leverage thus hurting margins which are struggling to touch 8% at the EBITDA level. Opening of government permits in various states is pending since a long time but there is no clarity on the same.


Exports – Exports of the company are also shrinking thick and fast (10.4% of volumes in Feb v/s 13.5% yoy), as it can be seen that since August 2011, the exports have fallen by 40% from ~30,000 to 17,960 units. This signifies that competition from the market leaders like Honda, Yamaha and Bajaj in markets like Africa, South Asia, Latam and South East Asia, where TVS has its presence are exerting pressure on TVS. Indonesia, where the company has its subsidiary is also bleeding in losses and is struggling to touch the breakeven 60,000 units target.


■ Margin performance not expected to see a traction
In line with the lack of operating leverage on the 3W side and slowing demand, we believe the margins which have been always below 8% may not cross this figure although some softening of raw material may slightly help the cause. Volume weakening on 2W side in the wake of competition also may lead to margins getting weakened. Although the company has a 100% market share in moped segment (40% of total volumes), is a drag on the margins as moped is a low realization business. Higher ad spend stemming from prevention of market share decline may also hurt the margin performance. We further cut our margin estimates for TVS’s standalone business from 7.6%/7.8% to 7.4/7.5% in FY 12E/13E respectively as we see an insignificant improvement in pipeline.


■ Outlook and valuation
Given the weakening operational performance and challenging competitive environment, we are continuing our negative view on the stock. We have cut our earnings estimates in the wake of the expectations of domestic as well as exports underperformance and faltering performance in Indonesia, which we believe may not breakeven even in FY 14 given the competition from Honda, Yamaha and Bajaj Auto and significantly low scale of operations of TVS. Hence, we are cutting our target price from Rs 55 to Rs 50, valued at 10x times (30% discount to Hero) FY 13E consol EPS of Rs 5.02 and maintain out Underperformer rating on the stock.
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