TVS Motor Company Ltd’s stock price on Monday closed 4% lower in anticipation of a weak June quarter (Q1FY20) numbers and perhaps pessimistic commentary. In fact, its shares have dropped 33.5% since January 2019, compared to a fall of 21.8% in the Nifty Auto index, and against a rise in the Nifty 50 of 4.5%.

Against this backdrop, the company’s results met the street’s forecasts in a challenging milieu where the entire auto industry is struggling with falling sales.

TVS Motor’s 7.2% year-on-year (yoy) growth in Q1FY20 net sales to 4,468.6 crore is impressive. It reflects improved realisation on flattish volumes. Within this, it’s noteworthy that TVS sales volume growth beat industry, which declined by 9.7%.

A sharp drop in moped volumes dragged sales, mirroring the weak rural sentiment. Motorcycle and scooter sales actually grew on a y-o-y basis, though aided by exports.

From an investor standpoint, the firm’s 8% Ebitda (earnings before interest, tax, depreciation and amortization) margin beat Bloomberg’s average estimate of 7.3% by 15 brokerages. It grew by 30 basis-points (bps) y-o-y on the back of cost savings. In the analysts’ concall, the management reiterated that margin improvement is an ongoing process. It mirrors the benefits of material cost reduction and localizing of inputs.

As a result, revenue growth trickled down to profits. Ebitda grew by 10.8% to Rs355.8 crore, a tad higher than what the analysts had pencilled.

TVS Motors’ resilience would perhaps go down well with investors, who battered the stock along with the rest of the auto universe. However, this is not to say that risks are behind. Latest reports by Federation of Automotive Dealers Associations indicated that new registrations fell sharply for two-wheelers, with the segment reporting the highest inventory level of 55-60 days in June.

Below normal monsoons may prolong the pain of falling sales and consumer sentiment. Also, in addition to increase in cost of ownership due to insurance charges, BS VI is likely to bring a cost impact of nearly 10-15%, according to experts. The auto slowdown would imply two things. Either the company would have to absorb some cost increases, which will eat into profits or, hike vehicle prices, which may weaken demand during these trying times.

While the management is confident of some revival in the festive season, it is also said that the second half FY20 would be less impressive than the year-ago period. It may, however, be better than the first half of FY20 as the new BS VI emission norms would trigger some pent-up demand (deferred).

For now uncertainty looms over the stock just as it does for the auto sector. Weak monsoons and continued weakness in demand along with rising inventory levels have forced analysts to cut earnings estimates across the board for FY20 and FY21. In spite of the sharp fall in TVS shares, the stock still trades at 20 times FY21 earnings. Unless sales rev up considerably, the upsides seem capped.

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