TVS Motor: Market share, margin gains key triggers

Led by higher volumes and improved realisations, TVS Motor reported a 11.3 per cent growth in revenue for the quarter ended December 2015. Traction in key categories saw volume growth come in at seven per cent, while lower sales of the less profitable mopeds helped improve realisations by about four per cent. Mopeds make up 26 per cent of the company’s two-wheeler sales. Volume growth would have been higher but for the lower exports of three wheelers to Africa, especially the Nigerian market. Africa accounts for 45-50 per cent of all two-and-three wheeler exports of TVS.

Growth going ahead is expected to come from the recent launches, including the two motorcycle launches this month — TVS Apache RTR 200 and TVS Victor which are positioned in the premium and executive segments respectively. The company plans to increase its two-wheeler market share from 14 per cent currently to about 15.5 per cent by the end of FY16 and further to 18 per cent at the end of FY17. A large part of the market share gain in the March quarter will hinge on the success of the Victor.

The results in the December quarter were impacted by one-offs as expenses increased by about Rs 12.4 crore both on account of damage related to Chennai floods as well as increase in bonus payments. Adjusted for these, operating profit margins would have been about 7.3 per cent while net profit would have been about Rs 120 crore, broadly in line with Street estimates.

TVS Motor: Market share, margin gains key triggers Reported margins came in at 6.8 per cent, up nearly 81 basis points, while the bottom line came in 19 per cent higher at about Rs 108 crore. The Street will keep an eye on the margins and the ability of the company to improve on the same as it remains the single biggest trigger for the stock. The company had clocked 7.4 per cent margin at the operating level in the September quarter which was at a 22-quarter high.

Given the 181-basis point raw material gains in the quarter as compared to the year ago quarter, TVS Motor should have done better but analysts say the severe competition as well as the downturn in two-wheeler sales led to muted volumes which therefore did not percolate down to the margins and the bottom line. Given the muted raw material costs and new launches in the premium category, expect some gains in the margins going ahead.

While there is little doubt that any improvement in margins will lead to substantial gains for the bottom line, the stock at 18-19 times its FY17 earnings estimates is trading at a premium to larger peers Hero MotoCorp and Bajaj Auto. Await a correction before taking an exposure to the stock.