While gross profit margin contracted, the measure was better than expectations. This, along with favourable product mix and better cost management helped TVS Motor’s profitability
Shares of TVS Motor Co. Ltd rose as much as 10% on Friday on NSE, touching a new 52-week high. What gives? The reason is simple. The company’s December quarter results, announced after market hours on Thursday are better than expected and as you can see, investors are visibly thrilled.
TVS Motor’s standalone earnings before interest, tax, depreciation and amortization (Ebitda) margin for the December quarter came in at 9.5%. This is better than analysts’ expectations. For instance, analysts at Macquarie Capital Securities (India) Pvt. Ltd had estimated the measure at 8.8%.
As such, while gross profit margin contracted, the measure was better than expectations. This, along with favourable product mix and better cost management helped TVS Motor’s profitability. Ebitda margin expanded by 68 basis points year-on-year in the December quarter. One basis point is one-hundredth of a percentage point. Other expenses as a percentage of revenues dropped by 390 basis points, which supported margin gain. Ebitda per vehicle was at an all-time high of about Rs5200, said analysts from ICICI Securities Ltd.
Overall, TVS Motor’s net profit increased by a robust 35% year-on-year to Rs265 crore. In general, the company’s recovery is encouraging. “Management indicated continued strength in rural markets and a recovery to pre-covid levels even in most urban markets. Dealer inventory is close to 4 weeks," said analysts from Macquarie.
Meanwhile, higher raw material costs were expected to weigh on margins and that played out in the December quarter. Gross margins fell by 390 basis points year-on-year. To be sure, rising commodity prices are a worry for margins, going ahead. “In the March quarter, gross margin will remain under pressure due to higher input commodity prices. Raw material cost/sales could increase by 0.7-0.8% in Q4FY21, despite price increases," point out analysts from Emkay Global Financial Services Ltd in a report on 28 January.
Analysts from Kotak Institutional Equities said in a report, “The company has taken further price hikes of 2% during January and expects to completely offset RM cost pressures. However, price hikes could impact demand going forward in our view."
For now, investors seem to be capturing the optimism on better margins in TVS Motor’s shares adequately. Including Friday’s gains, the stock has increased by about 20% in the past one month. Indeed, some analysts do believe the stock’s valuations are stretched. Therefore, meaningful appreciation could well be limited from a near-term perspective.