BackTVS Motor skids on slow margin growth
The stock plunged after the company said sales and operating profit grew in the range of 30-33% in June quarter
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TVS Motor Co. Ltd is the latest victim of high expectations. The stock plunged 6% after the company said sales and operating profit grew in the range of 30-33% in June quarter. On the face of it, the numbers look healthy. But encouraged by the success of its scooters, strong volumes in April-June (up 22%) and robust March quarter performance, analysts were forecasting sales and operating profits to grow at an even steeper pace.
Two brokerage firms forecast sales to rise in the range of 36-38%. Ebitda, or earnings before interest, taxes, depreciation, and amortization, was estimated to rise by 61-70%. The euphoria generated by these inflated expectations has driven up the stock by 81% in the past three months. With the company growing at its own pace, it is not surprising that the stock has pared some gains.
Another reason for disappointment came from the slow reaction of the company to cost pressures. Currency fluctuations have led to a spike in raw material costs. To make up for rising costs, the company implemented price hikes in April. But they were not sufficient. Accordingly, although volumes grew at a robust pace, Ebitda margin expanded by a meagre seven basis points to 5.7%. One basis point is one-hundredth of a percentage point. This was another source of disappointment for many analysts. Sharekhan Ltd and Anand Rathi Research, for instance, were expecting margins to expand by 80-130 basis points.
The good news is that the company’s major brands, such as Jupiter, Apache and Star City Plus, continue to see good demand. With three new products planned for the rest of the fiscal year, the company is confident about gaining market shares and growing at a more rapid clip than the domestic two wheeler industry.
That said, the bugbear continues to be the operating margin. Based on the current fiscal year’s earnings estimates, TVS Motor stock is now valued more or less equal to industry peers Bajaj Auto Ltd and Hero MotoCorp Ltd. Success of new products, improvement in volume and profit in the past several quarters has helped TVS Motor close the valuation gap with Bajaj Auto and Hero MotoCorp. One yardstick where the company lags is margins. Compared with TVS Motor’s mid single digits (5.7%), Bajaj Auto and Hero MotoCorp are estimated to deliver an Ebitda margin of 19% and 15%, respectively.
To improve profitability the company is looking to revise product prices again in August. But the price hikes can be modest as the management’s focus continues to be on increasing sales and market shares. Also, with the company planning new product launches, promotional and marketing expenses can remain high in coming months. In a conference call, the management told analysts that it aims to move towards double digit margins in the next two years. While analysts will be happy if the company improves margins as early as the next quarter, the sharp rally in the share price over the past year warrants caution from investors.
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