Stock Pick From The 2/3 Wheelers

HERE IS WHY:

• Improved product mix provides earning visibility.
• Focus on improving margins going forward.
• Consistent dividend payment history.

TVS Motor Company (TVSL) remains one such company that has bucked the trend among its peers if we look at the monthly sales figures for the last few months. While its peers in the listed space viz. Hero Motocorp and Bajaj Auto are struggling and are posting flattish growth numbers, this company has been putting in double digit growth for some months now. So will this trend continue and what are the reasons behind the same? Is this company a worthwhile candidate to find its place in ones portfolio? Well the answer to the latter is yes. Why? Let us take a look at the investment rationale and see why we feel this company to be an ideal stock to pick at this juncture.

TVSL is the fourth largest two-wheeler manufacturer in India. What is important to mention here is the prominence that the company enjoys in the scooter segment which has put it a step ahead of its peers in the recent past. With around 23 per cent volume growth in FY14, the scooter segment has been the one that has driven the company’s performance. The better performance on the scooter front witnessed by the company is a result of the efforts that the company has taken to boost its scooter sales. With the launch of Jupiter in October 2013, the company has balanced its scooter portfolio and the monthly scooter volumes have seen a spurt since October 2013. The company has scaled the combined capacity requirement for Jupiter and Wego from 25,000 units per month to 45,000 units. Additionally, the company will be launching a refreshed Wego in Q1FY15 followed by a new Scooty Zest in Q2FY15.

If we look at the past financial records of the company, it can be seen that the margins that the company had enjoyed were much lower than its peers. This is mainly due to high dependence on entry-level motorcycles and mopeds that have thinner margins. However, going forward, as the company has mentioned in the public domain that it is going to work on improvement of its product mix by means of new launches primarily and focus on export are going to impact the margins positively going forward.

For Q4FY14, the revenues grew by 23.3 per cent on YoY basis to Rs.2156 crore. The sales volumes for the quarter were up 10.1 per cent on YoY basis to 560,446 units. Growth was seen mainly in the scooter and three-wheeler segments. Given the better product mix, the EBITDA margin expanded by 107 bps on YoY basis which has come despite Rs.11.3-crore compensation to dealers on account of an excise duty reduction announced in the interim budget earlier this year. On valuation front, the stock trades at a PE of 20x. The focus is on bringing down the debt to equity below 0.1x by the next fiscal is a positive connotation. We recommend a buy with a price target of Rs.135 for a time frame of one year.