TVS Motor Co. Ltd was expected to post substantial growth in revenue and profit in fiscal 2010, but write-off in one of its finance subsidiaries is set to impact profitability adversely. The business is being transferred to another subsidiary, but will this help TVS Motors in the longer run?
TVS Finance and Services Ltd (TVSF&S) incurred losses due to recessionary conditions in the last few years. In a notice to the stock exchange, the company said: “With increasing losses and erosion of its net worth, the valuation of TVSF&S is negative.” The equity and preference holding in TVSF&S is being transferred to another unit, and TVS will set up a finance company to support two-wheeler sales.
The two-wheeler company is following in the footsteps of peers such as Bajaj Auto Ltd. Group finance companies typically offer below market rates to attract customers, with the difference being made up by the auto company compensating the financier through a commission on sales. According to analysts, around 20-25% of Bajaj’s sales volumes are a function of financed vehicles, mainly through Bajaj Auto Finance Ltd. Hero Honda Motors Ltd has chosen to tie up with several banks and non-banking finance companies. The strategy has worked well for its rural market push, even during recessionary times.
TVS Motor is lining up an aggressive pan-India push for its products. By having a separate finance firm, it can insulate the business from the credit risk involved in financing purchases. The interest rate differential will have to be managed with prudent product pricing, analysts reckon.
The company will set off the loss on its investment against profits from property sales, with the impact on profit at about Rs30 crore in 2009-10. TVS’ sales rose 13% to Rs3,208 crore and net profit rose 300% to Rs66 crore in the nine months of fiscal 2010. Its net profit was estimated to be about Rs85 crore for the full year, but will be lower because of this write-off. Being a one-off event, investors would be more concerned about whether its strategy would help it gain share in a market where Bajaj and Hero Honda command nearly an 85% share.
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