Slowing run in scooter segment to dent TVS’ valuation premium

ET Intelligence Group: For years, scooters have been adding much-needed zip to TVS Motor. In a three-pony race, new-age scooters have given the southern challenger the prescribed horse power to engage meaningfully with leading bike-makers Bajaj Auto and Hero MotoCorp, which have more evenly spread networks across the country.But the scooter’s seemingly ubiquitous run as urban India’s favoured personal-transport medium is under threat – and so is TVS Motor’s valuation premium over peers.The stock’s consensus earnings for FY20 have been trimmed 12-15 per cent since the beginning of the year. It trailed the Sensex by 6 per cent and 28 per cent, respectively, in the past three and twelve months.Sale volumes fell 5 per cent in June to 297,102 units. Scooter sales declined 3.6 per cent to 99,007 units. Industry growth for scooters has been contracting since FY19 as major markets such as Maharashtra, Gujarat, Karnataka and Kerala are witnessing a slowdown. Scooter sales dropped 0.6 per cent in FY19, the first such contraction in 13 years.The Street is pricing in local scooter volume growth below 5 per cent in FY20.Motorcycle volume growth has been relatively better. However, any significant deviation from normal monsoons may impact volumes in the rural market that makes up half the numbers. Indian Meteorological Department says June rainfall has been 33 per cent deficient. So, the Street is factoring in domestic motorcycle segment volume growth of 5 per cent and 7 per cent for FY20 and FY21.In the first three months of FY20, TVS volumes fell 1 per cent to 8.84 lakh units. The guidance is for 6-8 per cent volume growth, achieving which appears to be an uphill task.First, inventory continues to be higher than average. The Bajaj Auto management said dealer inventory is 7-8 weeks, compared with the usual inventory of 4-5 weeks. Higher inventory also stretches the receivables cycle of the company. TVS Motors’ receivable days rose to 29 days in FY19 from 23 days in FY18.Second, competition will likely increase in the second half due to the transition to BS-VI norms. TVS Motor’s operating margins are among the industry’s lowest. So, it is the most vulnerable to increased competitive intensity.Third, the stock is trading at a 48 per cent premium to mass market two-wheeler makers. This appears rich in a volatile market. In the past few years, TVS enjoyed premium valuation due to the increase in scooter penetration. However, in the past 15 months, the long-term growth trajectory for scooters has reversed. So, the P/E premium of TVS Motor over its peers may also narrow.

from Economic Times https://ift.tt/2FM7oKW