Why TVS Motor commands such high valuation when compared to peers

UBS analysts have also noted that, while TVS has a high share of internal-combustion engine (ICE) vehicles, it may be able to protect itself from the EV disruption because of its investment in newer and premium models.(Photo by Mike B/Pexels)

Shares of TVS Motor have shot up in value over the past four months.

The stock climbed past its earlier all-time high of around Rs 770 (December 2017) and recent high of Rs 729 (November 2021) towards the end of June. It is now trading at Rs 1,149.5.

With a TTM P/E of 50.92, the stock commands a much higher valuation that its peers such as Hero MotoCorp with a TTM P/E of 19.44 and Bajaj Auto with 18.17.

Why is the market so optimistic about the stock?

In June, the Chennai-headquartered company was reported to have started the process to raise $300-350 million for its EV vertical. Six months earlier, the auto major had set up TVS Electric Mobility as a subsidiary for the EV business.

Also read: TVS-backed Ultraviolette to launch premium electric bike next month

It was after reports of the fund-raising started to increase in number that the stock began its upward trajectory. While Hero MotoCorp entered the two-wheeler electric vehicle space by tying up with Ather as its strategic partner in 2016 and Bajaj Auto launched Chetak in 2020, TVS Motors began to look like the most aggressive player in the market.

In its latest report, investment banking firm UBS said that the auto major will emerge as the market leader in the EV segment in the medium to long term. In fact, it has revised its target price upwards to Rs 1,385. The report said to expect five EV launches over the next 12-15 months.

Early this year, a UBS report had explained why the auto major is likely to benefit the most from the EV disruption. It pointed to the resources the company was investing in to develop software and telematics capabilities in-house.

“The software for the ride modes on TVS Apache series motorcycle was developed in-house, as were the telematics for its debut EV model iQube,” wrote the analysts.

Even Sharekhan, in a September 21 report, noted the company’s ramping up of “investments in EVs and connected technologies through multiple routes – investments in R&D and auto technology start-ups”. The company management expected the EV capacity to double to 10,000 units per month in January 2023 from 5,000 units per month currently, it said.

After TVS Motors relaunched iQube this May, its share in the EV2W market has climbed steadily from 1.13 percent to 12.56 percent in September 2022.

Aniket Mhatre, Research Analyst at HDFC Securities, in an interview with Moneycontrol, said that the company has got the pricing of its iQube right. The e-scooter has three variants priced between Rs 1 lakh to Rs 1.15 lakh. “With that, they are able to get a larger set of customers,” he said. Competitors’ models are priced higher, by Rs 40,000-Rs 50,000, which can deter first-time buyers.

The UBS analysts have also noted that while TVS has a high share of internal-combustion engine (ICE) vehicles, it may be able to protect itself from the EV disruption because of its investment in newer and premium models.

Mhatre said that the company has been innovating consistently for the past few years. “It has been the only player who has launched a new product and gained market share almost consistently for six to seven years,” he said. On the other hand, Bajaj Auto and Hero MotoCorp have two to three key brands and they keep launching within these, he added.

Over time, it has increased revenue share of its premium products and diversified its offerings by expanding into exports.

Flying high

“Hero is a major player in the entry level and Bajaj Auto has diluted its Pulsar proposition, they started with 180cc and then came down to 125cc. Today, if you want to play anything in excess of 180cc or 200cc, then that would be TVS Apache. That has played out well in TVS’ favour,” said Mayur Milak, Senior VP – Auto and Aviation, Asian Markets Securities, and added that their export strategy has also worked out well.

Mhatre gives a rough breakdown of revenue shares of different categories: Apache makes for 50 percent of its overall volumes, and it was less than 40 percent a few years back; and exports is now almost 30 percent of its volumes which was below 20 percent a few years back.

“Both these categories are growing and last year they launched TVS Raider that is selling another 10,000-15,000 units per month and this year they launched TVS Ronin. That will further improve the mix in terms of premiumisation,” he said.

“Its exports push is largely like the Bajaj Auto model where Africa is the largest market, followed by the LatAm and ASEAN markets,” Milak added.

The third factor, according to Milak, is the company’s ability to improve its operating margins. Peers have seen their EBITDA margins shrink—Bajaj Auto used to post 20 percent EBITDA margin, it has come down to 15-16 percent; and Hero MotoCorp’s 14-15 percent has come down to 11-12 percent. “TVS Motors on the other hand used to do 6-7 percent of EBITDA margins, it was an underperformer (in that). But they have moved up to 10 percent,” he added.

Also read: Automakers to double spending on EVs, batteries to $1.2 trillion by 2030

In an October 11 report, Sharekhan’s analysts have forecasted that the company’s EBITDA margins will improve further to 11.5 percent, which is a QoQ increase of 150 bps and YoY increase of 148 bps. They stated that the margin increase will be led by “improved product mix, softening raw material prices and operating leverage benefit”.

According to Mhatre, the margin improvement comes from company’s reduced dependence on imports and localisation of component-sourcing. A Business Responsibility Report released by the company on for FY22 states that 94 percent of the input material and services (by value) were produced from local vendors.

In all, while the auto major’s EV announcements seem to be driving the market sentiment, its turnaround has been in the making for a while with the premiumisation of its product portfolio, diversification its revenue mix with exports and improvement of operating margins. Whether the market is rewarding TVS Motors disproportionately for its EV strategy, we will have to wait and see.

(Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.)