TVS Motors trebles: Is it a good time to buy now?

Menaka: What is your view on TVS Motor?

Suvanam: I have a sort of negative view at the moment.

Menaka: Why is that?

Suvanam: It has been tripled, that is one reason to be negative.

Menaka: So you think it has run up already as much as it could?

Suvanam: Yes and I have an interesting theory when it comes out to stocks. Buying into motor stocks is coming in phases. Initially we saw a big buying into low value add stocks like Motherson Sumi Systems etc. Then we are looking at two wheelers. That phase is also over now and investors will start focussing on higher value stocks, maybe four wheelers and commercial vehicle stocks going forward.

Menaka: This you are basing on some fundamental reading of consumer pattern?

Suvanam: Exactly, because if you remember last year most people were saying it is a difficult time to buy new vehicles. So people would go for replacements. So Motherson Sumi and Apollo stocks have gone up significantly last year and then the same theory persisted. People were saying economy still hasn’t picked up but people are willing to spend money. In fact we have seen TVS sales also has gone up significantly. Earnings per share (EPS) has doubled year-on-year (Y-o-Y) basis. So there is a significant improvement of fundamentals as well but most of it has already been priced into price of TVS especially and going forward the growth that we could expect in four wheelers is not yet priced into four wheeler auto companies.

Menaka: So relatively speaking you prefer four wheeler stocks over TCS?

Suvanam: Four wheeler stocks and given that the price has already gone up so much there will be some cuttings.

Menaka: Would you agree that TVS price has run up way too much and it is now the turn of four wheeler stocks, passenger car stocks to shine?

Deewan: Actually I am bullish on two wheelers and four wheelers both. Four wheelers can do better in the short term but I will divide this in two parts. If this was a portfolio investment and someone is holding on to TVS my view is that anything in the portfolio which is performing should be kept. So this is one of the performers in the portfolio which I will not really sell out of my portfolio but if someone is a new buyer who wants to buy TVS Motor now I will advice then I will agree that you can wait for dips in the stock.

Yes, definitely it has run up fast but if you see last quarter-on-quarter (Q-o-Q) performance, June quarter 2013 to June quarter 2014 the volume growth was about 22 percent and the realisation growth was 6.6 percent but if you see only July and August months the volume growth is 39 percent. So if actually this trend is to be believed and the volume growth can be so high going ahead then even the analysts should be out for a surprise with the number that they have predicted for this year. So one is to keep it in the portfolio and you should look at opportunities to buy this stock on dips.

Anuj: The problem for TVS that it doesn’t get the market cap is because its margin profile is low but if it is improving don’t you think there is this scope for Rs 10,000 crore to even become Rs 20,000 and still trade at considerable discount to Bajaj and Hero?

Suvanam: It is still trading at Price/Earnings (P/E) multiple of 37 to 40 whereas the industry is trading at 27 to 28. So it is not that it is trading at a discount. There is huge expectation of growth. Maybe 50 odd percent growth in terms of EPS over the next couple of years and that is highly unrealistic given that it has a very small niche portfolio of products given Hero Motor or Bajaj. So that is one of the reasons that growth will be sort of caped but then again if we see some significant build up in EPS, let’s say, a kind of 25 percent over the next couple of quarters that could be taken as a cue for maybe increasing exposure if the price does not run up equally.

Anuj: What is your sense, do you think this company can command a market cap, say, not immediately but over next two or three years a market cap of, say, half of either Bajaj or Hero MotoCorp? Right not it is about one fifth of both these companies?

Deewan: Yes, if not half at least it can double from these levels. In the next two to three years the market cap can double. A couple of reasons; one, like I mentioned about volume growth, they have well diversified portfolios into scooties, scooters and motor cycle, they also have a slew of new vehicle which is going to come into the market, they have launches which are scheduled for this year also and plus there is an Indonesian subsidiary where there were losses. As per the management guidance the losses should come down this year and further reduce substantially next year also. So that will also add to the EPS plus they are even repaying the loans, so this year and next year will be huge cash generation and then loan can be really reduced to a great extent that will also add to the margins. But the kind of the volume growth we are seeing and the kind of fillip to the economy which we are expecting to increase going ahead this stock definitely over two to three years can double.

Anuj: In two wheeler space would you not pick any stock or is a call on TVS just a stock specific call?

Suvanam: In general I have more bullish view on four wheeler segment than on two wheeler segment and we have seen some amount of pick up in volumes in sales but that is not still reflected in four wheeler so that is a reason it is not completely priced into the price yet. There is a small bit of risk of economy recovering but if you are willing to take that risk there will be much better fillip to investing into a four wheeler company than in two wheeler company.