TVS Motor is a good example of how a stock, which was once a darling of the market, went on to become a pariah, and is now back to being a darling again.
The fact that TVS Motor is up 334% YOY is enough to put off a lot of investors. However, this should not deter you because the surge has been on a low base, from when TVS was a pariah owing to low market share and margins. Since then, the stock has staged a remarkable turnaround in its business model. At the present CMP of Rs. 142, TVS is quoting at 14x FY15E and 10.8x FY16E, which is not at all unreasonable when you consider its growth prospects.
Saurabh Mukherjea and Ashvin Shetty of Ambit Capital deserve credit for being the early spotters of the opportunity in TVS. In April 2013, when the stock was languishing at Rs. 34, Ambit recommended a buy (pdf). Ambit pointed out that apart from the news about TVS Motor’s potential tie-up with BMW Motorrad, there were other levers that the company could crank up to re-establish its place in the motorcycle market. TVS is an attractive investment which is trading at a 50% discount to its larger peers, the report said.
Later, in March 2014, when TVS was at Rs. 86, Saurabh Mukherjea said TVS was “the next Eicher” and recommended a buy on the ground that there is “plenty of upside”.
Well, he was dead right, as we can see at today’s CMP of Rs. 140.
Anyway, now the question is whether there is any more juice left in the stock for us.
Fortunately, the answer is in the affirmative.
Saurabh Mukherjea, in his latest interview of May 2014, noted that the stock has trebled since his last recommendation but said that “there is another 40-50% upside here quite comfortably”. His logic was the same: Increasing exports, good balance sheet, decent launch of bikes & scooters, BMW deal being a game-changer etc. “There is plenty of headroom for margins and plenty of headroom for market share” he said and urged investors to have a strong look at the stock.
The same view has been taken by a number of top brokerages. Lets take a quick note:
Motilal Oswal: Benefit of two major motorcycle launches not priced in – Improved industry outlook and recent launch success drive upgrades
Karvy: To Enter New Margin Territory Backed by
Healthy Volume Growth
Sharekhan: We remain positive on the stock and expect the company to deliver earnings CAGR of 28% over FY2014-17.
At this stage, we must also note that according to experts, cyclical stocks, especially the customer-discretionary ones, are supposed to be bought at the beginning of an economic upturn, which is now.
Rakesh Jhunjhunwala clearly indicated this when he suggested that investors buy cyclical automobile stocks like Tata Motors & Escorts. His prophetic words were:
“When you are talking of cyclicals the biggest beneficiary in India of cyclical market is Tata Motors. When you talk of cyclicals the biggest seller of trucks, the next persons market share is 20 percent. So, therefore you should buy Tata Motors if you want to buy cyclicals.”
(Note: Tata Motors DVR is up 28% since that day (12.05.2014) though Tata Motors is flat)
Shrikant Bandaru of Avendus Capital also gave a clear hint that the time is ripe is load up on consumer discretionary stocks like Auto stocks.
Speaking for myself, I am playing the auto boom with three top-quality stocks: Atul Auto, Amara Raja Batteries & Tata Motors DVR. Needless to say, all three have rewarded me handsomely and I intend to keep nibbling at them. Now, I am feeling tempted to also give TVS Motors pride of place in the portfolio. Maybe I will bid adieu to some consumer defensives (Bajaj Corp) and Pharma (Sun Pharma) to make way for TVS Motor.