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TVS: Pressure time - Views on News from Equitymaster
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  • Sep 30, 2002

    TVS: Pressure time

    After having lost market share in the motorcycle segment to its peers like Bajaj Auto and Hero Honda, TVS Motor Company (formerly TVS Suzuki) has managed to turn the tide. ‘Victor’, the company’s indigenously developed motorcycle model, has sold more than 200,000 units within a span of 8 months of launch. With one of the best research and development facility among two-wheeler companies, it hopes to increase market share through a slew of new introductions. But will it translate into higher profitability?

    Consider the growth of the motorcycle industry first. While the two-wheeler industry, as a whole, grew at a CAGR of 7% in the last five years, growth is sharper in the motorcycle segment (CAGR of 29% in the last five years). The growth is palpable when one considers industry volumes in absolute terms. Against sales of 575,000 units in 1995-96, motorcycle sales stood at 2.8 m units in 2002. During the same time, TVS grossly under-performed the industry.

    Lack of competitive models, predominantly southern oriented sales and diversification into other segments like scooters had a negative impact on topline growth. The company’s motorcycle market share that stood at almost 23% in FY99 declined to 16% in FY02. But ever since the launch of ‘Victor’, TVS has managed to arrest the slide in market share and in 1QFY03, its share in the pie has touched 18%.

    But the important question is where to from here? Though ‘TVS Victor’ has been well received by the market, the past track record on the product front fails to inspire confidence. TVS had earlier discontinued production of ‘Shaolin’ and ‘Shogun’ due to their unviability. Besides, its ungeared scooter ‘Spectra’ was re-launched for the third time in a span of three years. Though it is acclaimed for its R&D facility, in a competitive industry, such failures in the future could severely dent profitability.

    Realising the growth prospects of the motorcycle segment, a number of players have entered the fray and have launched atleast two new models in FY03. Some players like Bajaj Auto and Hero Honda can afford to play the pricing game due to their strong balance sheets. While we expect price realisation to improve in FY03 for TVS, further upward trend would require constant investment in new models that requires capital expenditure. TVS’s presence in moped and ungeared scooter segments would also limit overall margin expansion.

    The stock currently trades at Rs 405 at a P/E multiple of 10x FY03E earnings. It plans to invest Rs 5 bn towards new product development and R&D facility in the next three years (Rs 2 bn in FY03 or 9% of estimated sales). If the new models fail to boost volume growth, it could have material impact on profitability.



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    Aug 16, 2017 (Close)


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