We have cut our earnings estimates by 16-35% for FY20-22E due to cut in our volume and Ebitda margin estimates because of concerns on the Covid-19 outbreak and sharp rise in costs related to BS-VI norms.
Near-term catalysts for demand are absent due to Covid-19-led economic impact; however, we believe demand should gradually recover in H2FY21E. TVS Motor is unlikely to grow at a faster pace than Hero or Bajaj, hence, we believe the premium valuation multiple for TVS is not justified. TVS also has a weaker balance sheet than peers, which makes it more vulnerable in an economic downturn. Revise fair value to Rs 240 (from Rs 350 earlier). Maintain ‘sell’.
TVS Motor has a weaker balance sheet than Hero Motocorp and Bajaj Auto with standalone net debt likely to be around Rs 18 bn by the end of March 2020, even as Hero and Bajaj have significant amount of cash on their balance sheets. In a lockdown situation, Hero and Bajaj are better placed to navigate the challenges faced by its suppliers and dealers, while TVS will need to raise more debt to navigate this difficult period.
Even as we rule out a scenario of Hero and Bajaj resorting to heavy discounts post- lockdown to gain market share, this could be a potential risk for TVS Motor as it does not have the balance sheet to reciprocate the aggression of its competitors. We believe TVS has strong R&D capabilities, which has helped it gain market share over the past five years but we have questioned the sustainability of its market share due to lack of pricing power and a weaker balance sheet than peers. TVS Motor will also have to support TVS Credit (captive finance arm) as funding may become difficult with tightened liquidity conditions and will also have to support losses in the Indonesian operations. We, thus, prefer Hero Motocorp and Bajaj Auto in the two-wheeler segment compared to TVS Motor.
We have cut our earnings estimates by 16-35% for FY20-22E due to cut in our volume and Ebitda margin estimates because of concerns on the Covid-19 outbreak and sharp rise in costs related to BS-VI norms. We have, thus, cut our fair value to Rs 240 (from Rs 350 earlier), which is based on 13X March 2022E standalone EPS. We are also now valuing TVS Credit at Rs 26/share (versus `52 earlier). The stock trades at 14X on March 2022E standalone EPS (excluding value of TVS Credit stake).