TVS Motor Q4 results: Profitability challenges remain
TVS Motor’s performance in the past year and the near-term outlook suggests the expected improvement in margins can’t be taken for granted
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Low profitability has been a bugbear for TVS Motor Co. Ltd, and the company is keen to address this. It generates single-digit margins, compared to double-digit margins at Bajaj Auto Ltd and Hero MotoCorp Ltd.
TVS Motor’s management aims to improve the margins to double-digit levels by the end of the current fiscal year, through market share gains and volume economics. Interestingly, the stock trades at a premium vis-à-vis its peers, indicating that investors are betting on outsized earnings growth on the back of improving margins.
But the company’s performance in the past year and the near-term outlook suggests the expected improvement in margins can’t be taken for granted.
On the back of the 2% growth in volumes, revenues in the March quarter grew just 1.6%. Margins fell by 50 basis points to 6.7% last quarter. Net profit dropped 6.8% year-on-year as the company had to make a one-time provision of Rs57 crore towards discounts on BS III products, sales of which have been banned by the Supreme Court. Excluding the impact of BS III compliant product discounts, margins rose to 7.7%.
TVS Motor expects to grow faster than the industry and gain market share in the current fiscal year. The company plans to introduce two new products and take more price hikes to cover the recent increase in costs. As volumes grow, it’ll result in better economies of scale. Besides, it plans to contain costs on advertising and marketing expenses as a percentage of revenues, for further improvements in profitability.
But difficult market conditions may come in the way of its plans. Till November last year, things were going according to plan, with volumes growing in double digits. But post-demonetization, the currency crunch impacted sales momentum.
The market is yet to recover fully, the management told analysts. It expects demand to revive after the monsoon. If the rains are good, which are crucial for rural demand, then demand is expected to grow in double digits. Otherwise the domestic two-wheeler industry growth this fiscal year is pegged at 6-8%.
TVS Motor is yet to fully cover the recent rise in input costs through price hikes. If demand does not revive, its plan of double-digit margins by the end of the current fiscal year through cost optimization will be a tough task to achieve. It may have to step up ad and marketing spends to protect and gain market shares.
“Even if we take the adjusted margin of 7.7% or so, TVS will have to achieve a good 200 basis points improvement (to reach 10% by fiscal end) from hereon, which is far-fetched given the current circumstances,” says an analyst with domestic broking firm.