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TVS: Impressive numbers but…

Oct 21, 2002

TVS Motor Company (formerly TVS Suzuki) continues to reap the benefit of the upturn in motorcycle sales and success of its new models. The company's profits have almost doubled in the second quarter ended 2QFY03. But the performance has also got to be viewed in the context of dismal results in the corresponding quarter in FY02 (net profit fell 49% in 2QFY02).

(Rs m)2QFY022QFY03Change (%)
Sales 4,283 7,051 64.6%
Other Income 43 37 -13.3%
Expenditure 3,997 6,434 61.0%
Operating Profit (EBDIT) 286 616 115.4%
Operating Profit Margin (%)6.7%8.7% 
Interest 29 8 -73.8%
Depreciation 137 152 11.2%
Profit before Tax 163 494 202.8%
Tax 60 185 208.3%
Profit after Tax/(Loss) 103 309 199.5%
Net profit margin (%)2.4%4.4% 
No. of Shares (eoy) (m) 23.1 23.1  
Earnings per share (Rs)* 17.8 53.4  
P/E (x)  7.9  
(*annualised)   

Turnover has increased by 65% in 2QFY03 to Rs 7 bn. This is primarily led by the success of the newly launched motorcycle, 'Victor'. Besides, TVS also reduced prices on its low-end model 'Max 100-R', which also could have aided this significant jump in turnover. Motorcycle sales for 2QFY03 is higher by 112% touching 182,000 units. Sale of ungeared scooters where the company had around 35% market share has also increased by 15% in 2QFY03. Though TVS is the dominant player in the moped segment with almost 75% market share, the segment has been losing out to scooterettes and motorcycle due to attractive price points from the latter ones.

We expect value growth also to have complemented volume growth in 2QFY03. Our estimates suggest that 'Victor' accounted for around 16% of motorcycle volumes in FY02, which we expect will double in FY03. Due to this favorable product mix, realisations also have increased in 2QFY03 thus enabling TVS to boost turnover.

Second quarter performance...
(Nos)2QFY022QFY03Change (%)
Motorcycles 85,849 182,000 112.0%
Scooterettes 40,000 46,000 15.0%
Mopeds 76,100 64,500 -15.2%
Total 201,949 292,500 44.8%

Benefits from higher capacity utilisation, favorable product mix and lower raw material costs have resulted in significant improvement in operating margins in 2QFY03. We expect the company to post 100 basis points rise in operating margins in FY03. Higher cash flow from operations has enabled TVS to retire debts at a faster rate that is reflected the form of lower interest outgo in 2QFY03. Despite a sharp spurt in tax outgo, net profits have increased significantly in the same period.

The board of directors have declared an interim dividend of Rs 5 per share to those shareholders whose names appear in the register of members as on October 26, 2002. The stock currently trades at Rs 420 implying a P/E multiple of 8x annualised 1HFY03 earnings. While we expect TVS to post a 76% rise in net profits for FY03, in light of price war in the two-wheeler sector, there could be pressure on margins in the future. Since Hero Honda and Bajaj Auto have strong balance sheet, they are better placed to play the pricing game. The same may not hold true for TVS. TVS intends to spend almost Rs 5 bn as capital expenditure towards new product development and research facilities. If new models fail to succeed, profitability could be adversely affected. Keeping this mind, we expect the stock to remain weak in the near-term.

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