TVS Motor Co., India’s third-largest two-wheeler maker, expects pressure on profitability to continue until September 2007, as the higher cost of raw materials triggered by a two-year-high inflation makes it more expensive for the company to produce bikes.
Intense price cuts among motorcycle makers to win customers, and a boost in commodity prices such as steel and rubber has reduced the profit on the sale of two- wheelers and that pressure is unlikely to ease anytime soon.
“The pressure on profitability will continue for next two quarters,” said TVS Motor chairman and managing director Venu Srinivasan, adding, “nowhere have we been able to push prices up.” He said he could not unilaterally raise the price of bikes and the market leader would have to take the lead. The two-wheeler market in India is dominated by Hero Honda Motors Ltd and Bajaj Auto Ltd.
Bajaj cut about Rs3,000 from its Platina bike to sell it for Rs33,000 in a bid to gain marketshare in the category of bikes with an engine capacity of 100cc. This is India’s largest selling segment; and Hero Honda and TVS are Bajaj’s rivals in the segment.
About 79% of the 6.5 million motorcycle market in India comprises of 100cc bikes; this segment is the most price sensitive with most buyers being first-time bike owners.
In a report released after the company declared its results for the third quarter ended 31 December, Ask Raymond James and Associates Pvt. Ltd said TVS Motor’s gross margins in the quarter fell 3.8% to 3.2%. The firm saw its sales increase by 7.3% in the quarter, but its net profit fell 63%.
Srinivasan said prices of the entry-level bikes (below Rs35,000) had fallen by Rs3,000 in the last one year. He, however, said TVS Motor’s efforts to increase productivity would enable it to increase their gross margins between 5% and 6% by April 2008.
Srinivasan said he expected the two-wheeler market to slow down this year, because of the government’s efforts to tighten money supply and the consequent rise in interest rates. He also said the firm wanted exports to account for a-third of its revenue in four years from the current 5%. Much of the company’s export revenue will come from its Indonesian operations, which started trial assembly last month. TVS plans to increase the capacity to three lakh units in two years.