Mid-Cap Mantra

TVS Motor, the smallest of the three leading players in the domestic two-wheeler market, has been grappling with investor’s apathy, at a time when auto finance rates are on an upward bias, coupled with the recent hike in auto fuel retail prices. The stock ended 0.6% higher, at . 52.5, on Monday’s trade, and hovered above its 52-week low of . 43.7, reached in early February. This stock has also under-performed the broader market over the past three months. 

Investors have been rather concerned that TVS Motor’s ability to manage commodity input costs has been mediocre compared to its larger peers. It reported the lowest operating margins compared with its rivals. For instance, for the twelve months ended March 2011, TVS Motor’s operating profit margin was at 7.4%, a fall of 50 basis points y-o-y, despite a 42% growth in net sales. Its rival Bajaj Auto reported operating margins of 20.5% during FY11, a fall of 140 basis points yo-y, when net sales grew 39.3%. No doubt, key commodity input prices have shown signs of easing over the past few weeks, but they still remain at elevated levels and it remains to be seen how TVS Motor deals with the situation. 

Apart from that, foreign players are getting rather aggressive in the domestic two-wheeler market, and analysts fear they could erode TVS Motor’s market share. For instance, Honda recently expanded its scooter capacity and this could dent the near 21% market share that TVS Motor enjoyed in this segment at the end of the March 2011 quarter. Also, retail petrol prices have already risen nearly 19.5% over the past one year in key southern cities, like Chennai, for TVS Motor.

Analysts are apprehensive that the latest hike in fuel prices could push the broader inflation in double digits, and it could lead to consumers delaying their purchase of two-wheelers. TVS Motor’s total vehicles sales grew 18.4% y-o-y in May 2011, and 14% y-o-y in April, which was well below the growth in vehicles reported during the year ended March 2011. In case of Bajaj Auto, sales growth reported in the first two months of current financial year was lower than that reported during FY11. TVS Motor trades at a P/E of 13 times on a trailing fourquarter basis and we are neutral on the stock. Bajaj Auto trades at 12 times.