TVS Motor: high valuations call for keeping margin pressures at bay
TVS Motor Co. Ltd’s net profit of Rs154 crore in the December quarter missed the average estimate of a Bloomberg poll of 21 analysts. But this is not to say that the two-wheeler maker fared badly. The 8% deviation from forecasts was due to a steep fall in “other income” and a higher tax rate during the quarter.
This apart, the company looks to be on solid ground. Sales have been steadily rising and so has the operating performance. The quarter’s revenue of Rs3,685 crore was 23.5% higher than a year ago, reflecting a 15% rise in sales volumes and a stellar 7% expansion in average realization. Analysts say that the two-wheeler maker’s realization and market share improved following a good response to its recently launched vehicles and a price hike introduced a few months ago.
However, aggressive sales growth has also translated into an increase in advertising and promotional expenses, which rose substantially during the quarter. So did employee and raw material costs. Although higher sales partially offset the rising costs, with the benefits of operating leverage kicking in, the operating margin at 7.8% was only a tad higher than in the year-ago period and in fact lower than in the September quarter. This is in spite of price hikes.
Fortunately, the robust sales growth trickled down to a commendable 33% rise in operating profit that was in line with Street expectations. Strong product launches and the firm’s appetite for higher market share should translate into revenue expansion.
The moot question is whether this will come at the cost of margins. So far, TVS Motor’s improving profitability has pushed up valuations. At Rs712.90, the stock trades at a rich 33 times the estimated earnings for fiscal year 2019, which looks expensive. This is based on the Street’s expectations of a 30-40% growth in earnings in the next 12 months.
TVS Motor’s management is hopeful of cruising into the double-digit margin zone soon. However, there are challenges from rising commodity prices and competition in the two-wheeler market. Against this, there are several positives for the company, such as rising rural demand that should push domestic sales of motorcycles and mopeds. Exports too are likely to improve given the rising crude oil prices, which augurs well for oil producers that are key export markets for TVS two-wheelers.
The hope for investors is that the company will be able to combat margin pressure to churn out higher profit growth on the back of strong sales.