TVS Motor Co. Ltd seems to be reaping the benefits of diversification, but higher input costs are threatening to puncture its profitability.
In the past four years, as its market share in the motorcycle segment fell, TVS has been aggressively selling scooters and three-wheelers. While sales in the bike segment grew 40% from a year ago, sales of scooters and three-wheelers grew faster.
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TVS’ revenue for the three months ended December grew 51% from a year ago. Its average realizations also improved 7% over the period, helped by a price hike in November and an increasing proportion of sales in scooters and three-wheelers.
However, operating profit expanded only 57%, while operating margin improved to 6.55%, an increase of 24 basis points over December 2009.
That’s because TVS was stymied by rising input costs. Raw material cost as a percentage of net sales rose to 76.8% in the December quarter against 68.5% a year ago. Consequently, TVS’ revenue for the three months ended December grew 51% from a year ago.
While net profit growth at Rs 55.75 crore was up 137% from a year ago, it was pushed up by a Rs 7 crore increase in investment income and Rs 9 crore savings on interest expenses.
These numbers were better than Street expectations only marginally. There was thus not much investor reaction as the stock closed the day 0.98% up, compared with a 0.36% gain for the Sensex.
Investor enthusiasm could have been dimmed by the headwinds facing the two-wheeler segment. Higher inflation and petrol price hikes make owning and operating a two-wheeler costlier, thus crimping demand, while sales might also cool off a bit on a higher base. Rising commodity prices are also an increasing worry—operating margins are down sequentially for both TVS and Bajaj Auto Ltd —that could hurt on costs.
TVS’ Indonesian operations, too, are not expected to contribute till 2012. However, the stock is trading at a discounted valuation to its peers. Another factor in TVS’ favour is its increasing non-bike portfolio.
Scooters are the fastest growing category among two-wheelers, at 52% this fiscal, and TVS has the second largest market share in the category. Three-wheelers, too, are growing at a healthy 23%. As of now these segments are small compared with motorcycle sales for TVS, but they are increasingly making up for a greater proportion of volumes.
BofA Merrill Lynch Global Research estimates bikes to account for only 42% of sales this fiscal compared with 51% two years ago. Scooters and three-wheelers are better margin products and could well revive investor interest in the TVS stock.
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