TVS Motor: will higher sales boost profits?

TVS Motor: will higher sales boost profits?

On Friday, shares of TVS Motor Co. Ltd rose 3% over the previous closing to Rs61.75. They reacted to the stellar sales performance registered in March—a 28% rise over the year-ago period.

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This took the annual cumulative sales up by 33% year-on-year for fiscal 2011 to meet the guidance at 2.04 million. The question is: will this bring higher net profit for the year

In fiscal 2010, the firm sprung a negative surprise, when despite high sales momentum, profit figures disappointed, as the firm wrote off losses from its investment in a finance subsidiary to the tune of Rs30 crore. That was a one-time write-off.

But analysts are concerned about its Indonesian joint venture, which eats into cash flows of the parent. In 2007, TVS invested about Rs200 crore for a local assembly capacity of 300,000 two-wheelers, and another Rs270 crore in the next three years. A report by Brics Securities Ltd indicated 42% growth in the subsidiary’s nine-month sales to about 14,800 units. Yet, low operating leverage could see losses from this venture.

But, on a stand-alone basis, improved profitability could come from its changing product mix and geographic spread in domestic markets. Three-wheeler sales during fiscal 2011 grew by about one-and-a-half times over the previous year to nearly 40,000. Scooter sales jumped 50% to 470,000 units.

These product categories, besides adding to operating leverage with higher volumes, also deliver better profit margins compared with mopeds and motorcycles; though these two segments, too, posted robust sales growth of 23% and 31%, respectively.

If there are no negative surprises on the cost front (such as marketing or employee costs that are typically higher in the fourth quarter), TVS operating profit margin could inch up in line with analysts’ estimates at 7% for the full year, significantly higher than 2.3% in fiscal 2010.

This could sustain current valuations; the stock trades at about 10 times estimated one-year forward earnings, which leaves room for upsides if there aren’t any accounting surprises.

Graphic by Paras Jain/Mint

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