Near-term concerns over Covid-19 remain; ‘Buy’ retained with unchanged TP of Rs 447
TVS Motor Company (TVSM) has announced its acquisition of iconic British motorcycle, Norton, as it purchased assets of Norton Motorcycles (in administration), in an all-cash deal worth GBP16 mn. TVSM has been progressing well in the domestic premium product market (>150cc) with brand Apache in a tie-up (for sub-500cc segment) with BMW.
In the medium term, the deal provides: (i) strong brands, which aid entry into the lucrative cruiser bike segment; (ii) established engine (>500cc) technology; and (iii) new export opportunities.
In the near term, however, top investor concerns revolve around:
(i) the possible impact of COVID-19 on the sector and (ii) whether cashflow constraints could affect business in the medium term. We believe TVSM is likely to encounter these headwinds; however, the Norton deal indicates management focus remains on creating long-term value. We maintain Buy.
Brief about Norton: (a) The all-cash deal with Norton Motorcycles is valued at 2x its EV/revenue on FY18 basis; (b) Norton has brands in segments ranging from performance bikes to cruisers; (c) revenues grew 20% y-o-y in FY18 to GBP6.7 mn; (d) revenue mix is well diversified with exports accounting for ~79%; (e) Norton has been investing in new products; (f) it went into administration following a winding-up petition filed by the UK tax authorities; (g) in the last few years, Norton had been gaining entry in Asian markets which can now be boosted by TVSM.
Deal boosts premium capabilities: We believe the Norton acquisition should be looked at from a typical capital budgeting lense (buy vs build). In the context of capabilities and opportunities, it provides TVSM with a much cheaper route to elevate its position. It could provide it a firm launchpad to combine its strong cost and quality focus with Norton’s products, technology and brands to explore the premium domestic market as well as export opportunities on a larger scale. We have unchanged TP of Rs 447/share (valuing standalone business on 22x FY22EPS).