2 min read.Updated: 28 May 2020, 11:12 PM ISTR. Sree Ram
Operating profit margin stood at 7.6%, down 1.2 percentage points from the December quarter
Given the sharp fall in volumes and negative operating leverage, analysts had feared a sharper drop in operating profit margins
Shares of TVS Motor Co. Ltd gained 2.7% after it reported better-than-expected results for the March quarter. Sales volumes dropped 30% from the year-ago period, reflecting the impact of the lockdown and transition to BS-VI emission norms.
But thanks to a better product mix and higher realizations, the fall in revenue was confined to 20%. It donated ₹32 crore for covid-19, and provided for ₹22 crore worth of one-time discounts to dealers to clear BS-IV inventory. Adjusting for this, operating earnings dropped 13.2% from the year-ago quarter, which was again better than the Street’s estimates.
Operating profit margin stood at 7.6%, down 1.2 percentage points from the December quarter. Given the sharp fall in volumes and negative operating leverage, analysts had feared a sharper drop in operating profit margins.
While all this is good, financial performance can be expected to deteriorate in Q1FY21. TVS Motor clocked zero sales in the domestic market last month and exports were below par. However, things are gradually improving; its manufacturing plants resumed production after the relaxation of lockdown measures. Many dealers across India and overseas have started operations.
With the weather office predicting a normal monsoon and the agriculture sector expecting a stable rabi crop season, the management expects a recovery in the rural sector. “While economic challenges are there, things should slowly and steadily pick up," TVS management said on a call with analysts. “We feel we will see consolidation in the September quarter and are optimistic about the second half of the fiscal year."
Concurrently, the management expects exports to improve from next month, helped by easing of restrictions in key markets and recovery in crude oil prices from record lows. The management expects to perform better than the industry in FY21.
Following the recent dealer and retailer checks, Dolat Capital Market Pvt. Ltd analysts agreed that there will be a slow improvement in demand. Sales began picking up from the second week of May, driven by the absence of public transportation. Separately, analysts said the need for private transportation in the light of covid-19 will drive demand for two-wheelers, given their better affordability levels. “Covid-19 should also trigger a shift towards personal mobility, where a section of public transportation users should switch to two-wheelers, especially in urban areas," Jefferies India Pvt. Ltd said in a note. The commentary and the gradual improvement in demand should reassure investors. But the recovery will take time. Retail two-wheeler sales are only 25-30% of normal levels, according to channel checks by Dolat Capital Market. The pace of recovery will determine the stock returns. At 20 times FY22 earnings estimates, the stock is costlier than its peers—Bajaj Auto Ltd and Hero Motocorp Ltd.