TVS Motor Company, the country's third largest player in the two-wheeler segment, has posted a 8% rise in sales and a 20% growth in net profit for 2QFY04. The rise in net profit was on account of marginal improvement in operating margin and a sharp spurt in other income.
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Total volumes sold for 1HFY03 has increased by 3% with the ungeared scooter segment largely driving volume sales in contrast to the trend in FY03 when motorcycle segment was the growth driver. As we had mentioned in our FY03 analysis, it will be difficult for the company to grow volumes having reached an average monthly sales of 64,000 units. Despite new launches in recent past in the motorcycle segment (primarily upgrades of 'Fiero' and 'Victor), volume growth is on the lower side. In fact, as evident from the table below, total volumes have actually declined in the September quarter. Given this backdrop, we expect TVS to have lost market share in the motorcycle segment by around 100 basis points. At the same time, export volumes have doubled to more than 9,000 units.
With the launch of the upgraded version of its ungeared scooter model, 'Scooty', TVS has managed to grow volumes significantly, and the same is reflected in the table below. We expect this segment to grow by around 15% for FY04. Led by this new launch, we expect TVS' market share to touch 20% in the scooter segment compared to 18% in FY03. Bajaj has been uncompetitive in this segment in the last one year in light of an aged product portfolio, which has worked in favour of TVS and Honda Scooters. But Bajaj is slated to launch a new ungeared scooter in the second half of this fiscal. As expected, moped segment continues to lose out to motorcycle and ungeared scooters with domestic industry volumes falling by 17% in 1HFY03.
Second quarter performance…
Operating margins have increased by 20 basis points in 2QFY03, to 9% levels, which is lower compared to Hero Honda (16% in 2QFY04). Unlike Hero Honda, TVS has a diversified product mix with presence in ungeared scooters and mopeds. This, combined with lack of adequate reach to grow volumes, limits margin expansion potential for TVS. We expect TVS' margins to consolidate at 10% levels in the medium term of 1 to 2 years.
Depreciation charges have risen by 25%, as TVS is expected to incur capital expenditure of Rs 5 bn per annum for the next three years. Despite strong operating cash flows, the rise in interest costs has come as a surprise in 2QFY04. Excluding the other income component in both the quarters, net profit growth stands at 3% as against 20% at first sight.
The stock currently trades at Rs 898, implying a P/E multiple of 14x FY04E earnings. Valuations are on the higher end on a peer valuation basis. The risk profile of the stock is also on the higher side in light of significant capital expenditure plans of the company (this includes a proposed entry into the three-wheeler market). Given the strong balance sheet of competitors like Hero Honda and Bajaj and the competitive motorcycle segment, further expansion in margins and robustness in revenues could be limited.
The company has proposed a stock split (face value from Rs 10 to Rs 1) and a interim dividend of Rs 6 per share (1% dividend yield).
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