We have a ?buy? rating on TVS Motor with a discounted-cash-flow-based target of R52 per share, implying an 8.0x FY15 EPS, a discount of 40% to Hero MotoCorp and Bajaj Auto?s multiples, but higher than TVS Motor?s current consensus one-year forward multiple of 6.6x. We assign a higher multiple because we expect TVS Motor to regain market share in domestic motorcycles. We deduct the investments to be made in the Indonesia 2W subsidiary and other entities to arrive at a target price, which is 54% upside from current market price.
An upturn in industry demand, market share gains in the motorcycles segment and a potential tie-up with BMW Motorrad are key positive catalysts. With the market speculating about TVS Motor?s potential tie-up with BMW Motorrad, we highlight in our initiation note the other levers that this company can crank up to re-establish its place in the motorcycle market. With balance sheet in good shape, new product launches on anvil and with Hero MotoCorp in the midst of transition, TVS Motor is an attractive investment.
Our primary data sources indicate that TVS Motor’s market share in the motorcycle segment has slipped from 19.5% in FY03 to 5.5% in ytd FY13, owing to a smaller product portfolio, lower frequency of launches versus peers, and product-related issues.
However, going forward, the company could regain its market share through the new launches in the ?executive segment? (60% of the motorcycle market) and more frequent launches/refreshes (enabled by a now well-established product platform straddling across all motorcycle segments). Also, the market leader, Hero MotoCorp, is going through a transition phase (after its split with Honda), thus creating an opportunity for TVS.
Contrary to consensus expectations of market share loss, we expect TVS to gain 46 bps share over FY14-15. TVS Motor’s margin has declined from 10.2% in FY03 to 6.1% in ytd FY13 due to a 2,000-bps rise in the share of low-margin products. However, going forward, we expect the sales mix to improve, owing to the increasing revenue share of motorcycle & 3Ws (due to new launches) from 45% in FY13 to 48% by FY15 and margin increase in the motorcycle segment due to the share of entry-level motorcycles dropping from 72% in FY13 to 56% by FY15.