TVS Motor Co. Ltd’s investors were riding on the hope that the strong sales growth clocked in the March quarter would lift margins and result in handsome profits. These hopes were dashed when the company announced its Q4 result on Wednesday.

Ebitda (earnings before interest, tax, depreciation and amortization) margin at 7% was a huge 160 basis points below Bloomberg’s average estimate of 20 analysts. The Street brushed aside the 135 basis points year-on-year growth, because of unusually low numbers in the year-ago period, on account of demonetisation and emission norms-related issues. In spite of this being a better quarter for its motorcycles segment, margins fell below the preceding December quarter too.

The company’s management explained that the margin drop was due to high cost pressures on all fronts. However, the biggest hit came on raw materials and one-time costs incurred at the auto expo to promote new launches. Dealer incentives rose too. All these costs added up to catapult other expenses by about 45% in absolute terms.

Cost pressures took the charm off the sharp 32% sales growth and 7% increase in average realizations. The operating profit growth of 73% looks impressive, but this is largely because of a low base. It was almost 18% lower than the average forecast of 23 Bloomberg analysts.

This is not all. Interest cost spiralled too. Net profit for the quarter at Rs165.6 crore fell way short of expectations, although it was 30% higher than the year-ago period.

What has peeved investors is the uncertainty on profitability, especially since it has been trending down in spite of soaring growth. In fact, the drop in margins in the last two quarters comes at a time when TVS Motor’s plans of entering the premium and higher-end two-wheeler market was expected to improve margins. In fact, investor confidence in the company’s ability to consistently grow margins had just started building up.

In this backdrop, investors were naturally disappointed. They have already punished the TVS Motor stock, which has come off by about 30% since January. Even then, its valuation of about 29-times one-year forward estimated earnings may not sustain, if margins continue their downward path.