TVS Motor: superior product mix improves profitability

TVS Motor: superior product mix improves profitability

TVS Motor Co. Ltd’s July sales grew 14.3% from a year ago, although they were flat when compared with the previous month. This was despite a price hike taken across most product categories in early July.

Motorcycle sales grew in line with rivals at about 15%. Higher scooter and three-wheeler sales augur well for the firm, as these two segments clock better margins. July scooter sales were up 22% over the year-ago period, with a similar growth registered for the four months until July. The segment’s share of total sales grew by two percentage points to 23% from a year ago. Three-wheeler sales in July rose 9%, although this segment comprises only a small portion of total sales.

Its favourable product mix and market acceptance were reflected in the firm’s June quarter results, when realizations per vehicle improved 8% from the year-ago period, thanks to price increases. Net sales for the quarter were above estimates, registering growth of 25% from a year ago and 7% from the preceding quarter. Operating profit margins were lower than a year ago at 7.2%, though analysts expected worse performance as seen in the case of peers Bajaj Auto Ltd and Hero Honda Motors Ltd. Despite a rise of 190 basis points in raw material costs, TVS was able to sustain its margins on the back of a superior product mix, and lower distribution and marketing expenditure.

Operating profit for the quarter grew 21% from the year-ago period. This, along with lower depreciation, translated into 46% growth in net profit.

Impressive June quarter results, however, did not translate into better investor confidence on the Street. TVS shares have been range-bound and have underperformed the BSE Auto Index in the last six months. “Perhaps the slowdown in the auto sector has kept the stock down on concerns that any drop in volumes would hit TVS’ profitability more than that of its larger peers," says Umesh Karne, analyst at Brics Securities Ltd. After all, the July sales growth rate is down to half that registered a year ago.

In fact, at the current market price of 52.20, the stock trades at attractive valuations of around seven times fiscal 2013 earnings, about half the price-to-earnings multiple enjoyed by Bajaj Auto and Hero Honda. Besides, any good tidings from its Indonesian subsidiary, which is expected to turn profitable a year hence, could improve valuations.

We welcome your comments at