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TVS Motors: Topline troubles persist

Jul 29, 2004

Introduction to results
TVS Motors, one of India's leading two-wheeler manufacturers has reported disappointing 1QFY05 results. Finally, it seems that competitive pressure is catching up. For the quarter, while the topline has witnessed an 8% YoY decline, the fall in bottomline is even higher at 15%. The comforting factor though is a marginal improvement in operating margins.

What is the company's business?
TVS Motors is India's third largest manufacturer of motorcycles with an estimated 16% market share in FY04. It is also a leading manufacturer of ungeared scooters and mopeds. Compared to its predominantly southern market oriented growth in the past, it is expanding presence in other regions as well. However, in the past one year it has experienced pressure in its flagship business of motorcycles on account of shift towards four stroke motorcycles. While the company is hoping to stem the drop in motorcycles sales with new launches, it is also hoping to grow volumes by focusing on international markets, especially South East Asia.

(Rs m) 1QFY04 1QFY05 Change
Net sales 6,625 6,111 -7.8%
Other income 86 70 -18.0%
Expenditure 6,029 5,548 -8.0%
Operating profit (EBDITA) 596 563 -5.6%
Operating profit margin (%) 9.0% 9.2%  
Interest (net) 13 1 -91.4%
Depreciation 168 212 25.9%
Profit before tax 500 420 -16.0%
Extraordinary items - - -
Tax 180 148 -17.4%
Profit after tax/(loss) 321 272 -15.3%
Net profit margin (%) 4.8% 4.4%  
No. of shares (m) 231.0 237.5  
Diluted earnings per share (Rs)* 5.4 4.6  
P/E (x)   13.5  
(* annualised)      

What has led to the topline pressure in 1QFY05?
Motorcycle sales fail to match expectations: Overall sales in the domestic market were lower by 7% as compared to the same period last year. Worst hit were the motorcycle sales as the volumes fell by 23% during the quarter. The decline in sales could largely be attributed to the shift in market demand for four stroke bikes in the entry-level segment. However, the company is hopeful of arresting the tide as it plans to launch the four stroke Max' by October this year. As far as other segments are concerned, the company has continued to maintain its leadership position in the scooterette segment and has registered an impressive 42% growth in volumes during the quarter. Moped sales were also higher by a decent 9%. Although still small in terms of contribution to overall volume sales, exports have risen by an impressive 164%. The company for the current fiscal is expecting exports to cross 50,000 vehicles (12,188 during 1QFY05 and 28,043 units during FY04).

Operating margin:Despite topline pressure, the company can take solace from the fact that operating margins have improved marginally by 20 basis points. This is largely a result of reduced raw material expenses. Other expenses, on the other hand, have been on the higher side. Due to intensifying competition, the company seemed to have spent more on promotional and other related activities and hence the rise in other expenses.

Cost break-up
(Rs m) 1QFY04 1QFY05 Change
Raw materials 4,545 4,027 -11.4%
% sales 68.6% 65.9%  
Staff cost 303 363 19.9%
% sales 4.6% 5.9%  
Other expenses 1,182 1,158 -2.0%
% sales 17.8% 18.9%  

The capex trouble: Besides topline pressure, higher depreciation charges have also contributed to the 15% fall in bottomline. The company has lined up a slew of launches in the coming months and hence the capex incurred towards the same seems to be the reason behind the rise in depreciation charges. In fact, this is one of the key concerns we have had with this company. Unlike Bajaj Auto and Hero Honda, the balance sheet of TVS is not as strong. Though the company has a proven R&D track record, we would remain cautious as far as the capex is concerned.

What to expect?
The stock is currently trading at Rs 62, implying a P/E of 14x 1QFY05 earnings. Considering the company's lower operating margins than its peers and intense competition in the industry, especially in the motorcycles segment, valuations appear to be at the higher end of the spectrum. In fact, the stock has enjoyed a premium valuation on expectations of better performance compared to its peers. Considering the performance in FY04 and 1QFY05, this premium may come down.

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Dec 7, 2021 03:33 PM


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