The last one-month or so has seen significant buying interest in TVS Motors, India's third largest two-wheeler company. Witnessing a strong 20% gain in market capitalisation, the company has managed to get past its more fancied rivals like Bajaj Auto and Hero Honda, companies that suffered a decline of 2% and 6% each. These events makes one wonder whether the current interest in TVS is really justified?
If one looks at the growth in topline of the three companies over a period of five years, it is clear TVS Motors has been pretty erratic in comparison to the other two. While Hero Honda benefited from the early mover advantage, Bajaj Auto managed to reduce its dependence on scooters and has emerged as a strong contender to Hero Honda in the motorcycle segment. TVS, on the other hand, had to grapple with a couple of issues. First was the severance of its ties with Suzuki and second was the dependence on two-stroke motorcycles. While the company did launch 'Victor', which witnessed a strong growth in sales and enabled the company to post improvement in financial performance in FY03, it has been a downward slide since then. Although the company has couple of new products in the market and few more are in the offing, it remains to be seen whether it can grab some market share.
As seen from the charts above, over the past five years, TVS has always lagged the other two in terms of both operating as well as net profit margins. While Bajaj Auto has closed in on the leader Hero Honda (on the operating margins front), difference between these two and TVS has actually increased in the last couple of years. This could be attributed to superior product mix, whereby motorcycles sales have grown at a much higher rate for Bajaj Auto and Hero Honda as compared to TVS.
As far as the return ratios are concerned, here again, Hero Honda leads the pack. While TVS is a distant second, low return ratios for Bajaj Auto could be attributed to company's policy of having a large investment portfolio unrelated to core business activity. Going forward, with competition intensifying, onus would be on new product introductions and ability to withstand price related pressures. This in turn would mean stronger balance sheets and the capacity to generate more cash from operations. Of the three companies, while Hero Honda and Bajaj Auto generated Rs 12 bn and Rs 8 bn worth of cash from operations in FY03 alone, at Rs 3 bn during the same period, the gap between TVS and the other two is uncomfortably high and makes the latter more vulnerable to cut throat competition.
Thus while investors seemed to have cozied up to TVS, the statistics point to a different direction altogether. Yes, there is enough reason for them to argue that worst seems to be over for the company and trail ahead looks ripe for growth. However, when companies with consistently better track record are available at almost the same valuations or may be even cheaper, why should one take that risk? Indeed, with a P/E of 16x 1QFY05 annualised earnings, TVS is trading at a premium to both Bajaj Auto and Hero Honda, for whom the corresponding metric stands at 14x and 12x respectively.
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