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TVS: 'Centra' of attraction

Mar 17, 2004

Close on the heels of success of 'Victor', TVS seems to be back in the limelight. This time however, it's the positive vibes emanating from 'Centra', the company's latest offering in the executive segment, that seems to be creating all the excitement. Let us analyse the company's recent performance and see how is it placed vis--vis its rivals. On account of lack of competitive models in the 4-stroke category, the company's market share in the motorcycle segment faced a continuous decline from FY98 to FY02. However, the decline was stemmed in FY03, when the company's offering in the executive segment, 'Victor' became hugely popular and sold almost 0.5 m units within 21 months of its launch. As a result, the market share of the company improved by 400 basis points and touched 19% in FY03. Inspired by the success of 'Victor', the company has recently launched 'Centra' a 100cc 4-stroke motorcycle targeted at the same executive segment buyers. The initial response to the same has been positive and the company has been able to sell 20,000 units of 'Centra' in a short span of 40 days. Therefore, if the initial response is any indication, 'Centra' seems well placed to spiral the growth of the company in the coming months.

As far as the non-bike segments are concerned, the company's market share in the moped segment is expected to stabilize at around the 80% levels. On account of depreciated assets and no significant capital investments required for the same, the segment is likely to remain as a cash generator for the company. The scooter segment on the other hand, is undergoing a structural shift as in the last five years, the ungeared scooters have managed to increase their share in the total scooter market by more than 40% and currently account for 61% of the total scooters (geared and ungeared) sold in the country. The company is well positioned to capitalize on this shift as it has a product called 'Scooty' targeted at this segment. It has steadily improved its market share in this segment over the last five years and accounted for almost 18% of all the scooters sold and 29% of the ungeared scooters sold in the country in FY03. The same stood at 5% and 27% respectively in FY98.

Going forward, we believe that the scooter segment is likely to witness tough competition on account of newer models from more focused players like Honda and Kinetic. Therefore, while volumes may grow in the region of 8%-10%, the market share is likely to come under pressure on account of relatively higher industry growth rate.

As far as the operating performance is concerned, we believe the operating margins have a fair degree of correlation with the volumes of motorcycles sold and its contribution to the overall revenues of the company. This could be because motorcycles command higher sales realisations as compared to other two-wheeler segments such as scooters and mopeds. This explains why Hero Honda, which is predominantly a bike manufacturer enjoys better operating margins as compared to its rivals, Bajaj Auto and TVS, which have other products in their portfolio. Therefore, going forward the growth in the operating margins of TVS would depend upon the number of motorcycles the company is able to sell vis--vis its other products.

On account of the termination of its alliance with Japanese auto major, Suzuki, in FY02, TVS was left to its own devices. This forced the company to develop its own R&D expertise and this meant sizeable investments. The move however, paid off as the company's first fully in house developed motorcycle 'Victor', drew a huge response and brought back cash into the company. However, in order to match the product range of its bigger and deep-pocketed rivals such as Hero Honda and Bajaj, the company will have to continue making investments in R&D. Therefore, if any of its products fail to make a significant impact, it might strain the cash flow patterns and force the company to tap the capital markets for debt. Higher financial leverage arising from this, would ultimately mean pressure on the bottomline.

The stock is currently trading at Rs 85, implying a P/E of 15.2x its annualised 9mFY04 earnings. At current levels, the company is trading at a premium to its stronger rivals like Hero Honda and Bajaj Auto. Moreover, with 'Victor' reaching a stage of maturity, much will depend upon its latest offering 'Centra' to push the company into a higher growth orbit. The risk therefore is on the higher side.


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