TVS Motor, India’s third largest two-wheeler manufacturer has continued to experience topline pressure and has reported a small 3% YoY drop in topline during 2QFY05. The fall in bottomline however is slightly higher at 8%. The corresponding figures for 1HFY05 stood at 5% and 11% respectively.
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What is the company’s business?
TVS is a leading player in the manufacture and sale of motorcycles, scooters and mopeds. Compared to its predominantly southern market oriented growth in the past, it is expanding presence in other regions as well. TVS was formerly promoted by the TVS group of South India and Suzuki of Japan. Suzuki exited the joint venture in 2002. Despite Suzuki's exit, the company has managed to gain market share by developing an indigenous motorcycle, 'Victor'. Apart from motorcycles, TVS also has presence in moped and ungeared scooter segments. The company hopes to grow volumes by focusing on international markets, especially South East Asia.
What has driven performance in 2QFY05?
Motorcycles sales continue to suffer: The company has once again failed to impress, as overall two-wheeler volumes have declined (down 3% during the second quarter). Motorcycles segment have been the worst hit (13% decline in volumes during 2QFY05). The slide in market share could be attributed to the company’s larger dependence on a single market and absence of a truly successful model, besides ‘Victor’. Moreover, its product portfolio was tilted towards two-stroke bikes, which have virtually fallen out of favor. With the launch of its entry-level four-stroke bike and other models, the company is hopeful that it will once again regain its lost market share. But with competition intensifying, the road ahead seems bumpy. Its other two-wheelers, namely scooters and mopeds, have managed to record positive growth rates with the former growing by 17% during the quarter.
Operating profits: On the operating front, the company has witnessed a marginal 20 basis points improvement in operating margins during the quarter. What is commendable however, is the fact that despite its peers feeling the heat of higher raw material expenses, the company has managed to bring down its material expenses during the quarter. But higher wage costs have offset this savings on the raw material side. Despite the good show, the company’s margins are much lower as compared to bigger players like Bajaj Auto and Hero Honda and still much needs to be done to bring them at par with the best in the industry.
Net profits: While tax provisioning is lower as compared to last quarter, higher depreciation charges has led to the fall in topline getting amplified and resulting in a 8% drop in bottomline. With the company incurring significant capex towards development and manufacturing of new models, higher depreciation charges are likely to persist in the near to medium term.
What to expect?
At Rs 73, the company trades at a P/E of 14 times its annualised 1HFY05 earnings. While the company’s efforts at launching models are laudable, it is the relatively smaller size of the company’s balance sheet and low level of operating margins that raises concern. Overall, the risks outweigh the positives.
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