TVS Motor on a weak footing in two-wheeler space as rivals get preference

While all the two-wheeler stocks were up, gains for Hero MotoCorp and Bajaj Auto at 12 per cent each were more than twice that for TVS Motor
Two-wheeler stocks were among the biggest gainers on Tuesday on beaten-down valuations and expected recovery in the segment. 

While all the two-wheeler stocks were up, gains for Hero MotoCorp and Bajaj Auto at 12 per cent each were more than twice that for TVS Motor. 

Given the uncertain near-term outlook, brokerages prefer market leaders with financial muscle, such as Hero MotoCorp and Bajaj Auto, over TVS Motor.

Nishit Jalan and Nikhil Kale of Axis Capital highlight that TVS Motor is the weakest in the two-wheeler sector in terms of balance sheet strength, as well as margins. 

They believe the only leveraged player in the two-wheeler space is more vulnerable to the steeper industry slowdown and competitive pressures. 

 

 
While Bajaj Auto's and Hero MotoCorp’s margins for 2019-2020 (FY20) are estimated at 14-16 per cent, for TVS Motor the metric is expected to be half of that.

The weaker positioning of the company has also prompted analysts to cut their earnings estimates for 2020-2021 and 2021-2020. After commercial vehicle majors Tata Motors (standalone) and Ashok Leyland, TVS Motor’s earnings per share estimates have seen the sharpest downgrades — 25-33 per cent.

While brokerages expect volumes to recover gradually in the second half of the current financial year on the back of pent up demand, TVS Motor will have a difficult time defending its market share. 

While Hitesh Goel and Rishi Vora of Kotak Institutional Equities rule out any aggressive discounting by the larger players, they indicate this would be a potential risk as TVS does not have the balance sheet strength to reciprocate. TVS Motor is likely to end FY20 with standalone net debt of around Rs 1,800 crore. 

Bajaj Auto is expected to have net cash of Rs 14,000 crore, while for Hero the cash levels are pegged at Rs 8,000 crore for FY20, according to Axis Capital.

Finally, despite the weak earnings outlook, the stock is trading at a premium to peers. TVS Motor is trading over 25X one-year forward earnings estimates, which is at a 70 per cent premium to Bajaj Auto and Hero MotoCorp.



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