Though aiming to improve its profitability and narrow the margin gap with larger peers, TVS Motor has had a 147 basis points (bps) year-on-year fall in its operating profit margin to 5.7 per cent in the March quarter (Q4).
However, this performance might not be representative. Though the two-wheeler major reported a net profit of Rs 127 crore in Q4, as against Rs 137 crore a year before, this was after a one-time provision of Rs 57 crore for discounts towards products sold which met the BS-III emission standard, banned for sale from April 1.
Analysts at HDFC Securities said, "Adjusted for the discounts, the Ebitda (earnings before interest, taxes, depreciation and amortisation) margin was higher at 7.7 per cent (up 54 bps, year-on-year) owing to the benefit of operating leverage." Adjusted profit after tax was Rs 140 crore (up four per cent year-on-year, seven per cent sequentially), they add. Total income rose to Rs 3,139 crore, from Rs 3,091 crore in the year-before period.
The slower revenue growth in Q4 was restricted by external factors. TVS reported 19 per cent growth in volumes during the first half of 2016-17 but around four per cent in the second half, while the industry reported negative growth. K N Radhakrishna, managing director, attributed this to demonetisation. The year's growth was 11 per cent.
"Though delayed by two-three quarters due to demonetisation, we will achieve the 10 per cent Ebitda margin target by 2018-19," said Radhakrishna.
S G Murali, the finance head, said that increasing of turnover, while bringing down cost, leveraging the complete portfolio and bringing down total overhead as a percentage of sales were key strategies to achieve the target. "Overall volumes will go up and the proportion of fixed cost will come down significantly. So, that will help to improve our Ebitda margin and profitability," he said.
TVS is in the process of creating mega brands and upon the success of this, the marketing cost as a percentage of sales would automatically come down, Murali added.
The company expects the industry to grow by six to eight per cent in 2017-18 and Radhakrishna says their growth would be faster. TVS is aiming to increase its market share to 15.5-16 per cent in 2017-18 from the current 14.3 per cent, and 18 per cent by the end of 2018-19, backed by a new motorcycle and scooter launch, beside upgrades of existing vehicles. The company also plans to invest around Rs 500 crore in 2017-18 on capacity and product development.
On increasing commodity prices, Murali said they'd raised their product prices during January-April by Rs 500-1,500 to offset this. "We will protect our margin by increasing prices in the coming months if needed," he said.
Improving of margins is important, with the TVS share's run-up in the past year, as also the fact that it is quoting at a huge premium to peers, at over 30 times the price to earnings ratio, based on FY18 estimates.
On export, TVS expects this to be subdued, due to currency depreciation in key markets. Around half its export goes to Africa, which has taken a hit due to currency issues after the oil crisis.
It has started exporting two-wheelers to BMW, with which it has a strategic tie-up, whereby the companies will develop products jointly and manufacture at TVS' factory at Hosur.
