With the exit of Suzuki from the joint venture, TVS Motor Company (formerly TVS Suzuki) has a daunting task ahead. On one hand, the Indian two-wheeler segment has become increasingly competitive and on the other, structural changes in the industry has forced TVS to realign its product portfolio.
TVS registered an 8.3% fall in overall volumes for the first half of the current year. Cumulative volumes comprising moped, scooter and motorcycles fell from 421,349 units in 1HFY01 to 386,285 in 1HFY02. If one were to look at the quarterly trend, total vehicle sales in 1QFY02 fell by 16% due to a 39% fall in moped volumes. Motorcycle sales, on the other hand, grew by 2% in 1QFY02. The trend continued in the second quarter also. While moped and scooter sales witnessed a decline in volumes, motorcycle sales for the first half has increased marginally by 1.3% (moped sales fell by 22% in 1HFY02).
As a result, sales growth and margins witnessed a sharp fall in the current year. While turnover fell by 8.8% to Rs 4,283 m in 2QFY02, net profit fell sharply by 49% to Rs 109 m. Margins also came down from 8.5% in 2QFY01 to 6.7% in 2QFY02. We expect the company to report atleast a 46% drop in net profits for FY02 on the back of a 150 basis points fall in operating margins. While mopeds sales are expected to fall by 11%, the only saving grace is the motorcycle segment. We expect TVS to report a 6%-7% growth in volumes. The recently launched ‘TVS Victor’, reportedly, has received a good response from consumers.
The predominantly southern focus of the company does not augur well for TVS. A substantial portion of its moped volumes are generated in the southern market and mopeds contributed to almost 43% of total volumes for the company in FY01. Given the fact that the mopeds segment is maturing, sales growth might continue to remain under pressure in the coming years. Also, with competitors launching 4-stroke motorcycles at a marginal premium to the mopeds and scooters, there has been a notable shift in consumer preferences towards motorcycles.
While the company is expected to save around Rs 170 m (0.9% of sales) as royalty in FY02, which hitherto TVS was paying to Suzuki, raw material costs are expected to rise. Due to new launches, raw material costs as a percentage of sales went up from 68.3% in FY00 to 72% in FY01. We expect this trend to continue and as a result, profit growth at the operating level will be affected.
TVS might also have to substantially increase its research and development expenses to develop in-house technology for motorcycles. But it needs to be mentioned that it does have an in-house R&D facility. This is key to sustain market share and profitability in the coming years. Due to stiff competition, shelf life of a product would keep falling and is vindicated from the strategy followed by its competitors viz. Hero Honda, Bajaj Auto and LML. While Hero Honda introduced new models like Passion and Joy last year, Bajaj Auto has already launched models like Aspire, Pulsar and Eliminator. It has lined up atleast two models in the motorcycle segment apart from scooters. Bajaj’s aggressive pricing strategy has forced competitors to reduce prices. Will TVS be able to churn out new models and increase its geographical presence remains to be seen?
TVS currently trades at Rs 166 on a P/E multiple of 9.3x annualised 2QFY02 earnings.
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