TVS Motor Co. Ltd, the first among two-wheeler firms to declare December quarter results, surprised the Street with a stellar performance.

The strong 26.6% growth in revenue was driven by a healthy 5.7% expansion in realizations and 20% volume growth from the year-ago period. The growth in sales was disclosed about a fortnight ago, and had set a favourable mood on the Street, especially since competitors posted meagre single-digit improvement. The company’s revenue also got a leg-up through price hikes and higher sales of motorcycles, premium scooters and three-wheelers. Besides, a 26% jump in exports revenues, aided by favourable currency movements, also helped.

Importantly, operating leverage and revenue expansion helped TVS Motor battle higher costs. Key raw material costs rose by a substantial 340 basis points as a percentage to sales year-on-year. Besides, there was pressure from higher marketing costs to combat intense competition in the sector. But the company eked out savings on other costs.

Fortunately, new launches paid off well, and some analysts expect the trend to continue. Mitul Shah, analyst at Reliance Securities Ltd, said: “Premiumisation in domestic market with the success of Apache and strong response on NTorq would help in domestic market. And exports may grow ahead of domestic markets, in spite of tapering growth as African markets may slow down amid lower crude prices."

TVS Motor is confident of offsetting the sluggishness in Africa through its foray into new overseas regions.

Graphic: Naveen Kumar Saini/Mint
Graphic: Naveen Kumar Saini/Mint

What stands out in its Q3 performance is the ability to sustain profitability in a challenging quarter and in the backdrop of intense competition. Ebitda (earnings before interest, tax, depreciation and amortization) margin was flat at 8.1%, compared to the year-ago period. As such, revenue expansion trickled down, resulting in 25% Ebitda growth for the quarter.

Investors understandably lauded the results, and the TVS Motor stock closed 2.9% higher at 554 on BSE. But this seems to price in most of the positives as it discounts estimated FY20 earnings per share by a rich 25 times. For these valuations to be justified, the company’s new launches need to be successful.

A demand slowdown may, however, dampen investor sentiment. This cannot be ruled out given higher cost of ownership due to insurance costs and possible price hikes to absorb the new emission compliance costs.

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