TVS shares slump as headwinds challenge growth after a weak Q4

  • The silver lining in the gloomy milieu for two-wheelers is TVS Motor’s ability to maintain a profit margin of 7-8%
  • Farm distress continues to haunt sales along with weak consumer sentiment due to the high cost of ownership

Shares of TVS Motor Co. closed 3% lower on Tuesday even before its March quarter results were declared. Notwithstanding the profit miss on poor sales growth, news reports that two-wheeler sales are still on the downtrend precipitated already weak investor sentiment.

A note by Emkay Global Financial Services forecasting April sales said two-wheelers would put up a mixed show though an overall decline would be seen. Farm distress continues to haunt sales along with weak consumer sentiment due to the high cost of ownership. TVS has fallen 14% since January compared to the Nifty’s 8% rise.

The company’s March quarter revenue growth of 9.4% year-on-year (y-o-y) to 4,384 crore was the first single-digit growth after eight quarters of strong double-digit growth. This was due to a 2.1% increase in sales volume although a 7.2% increase in sales realization was a welcome relief.

Shares of TVS Motor Co. closed 3% lower on Tuesday even before its March quarter results were declared. Notwithstanding the profit miss on poor sales growth, news reports that two-wheeler sales are still on the downtrend precipitated already weak investor sentiment.

A note by Emkay Global Financial Services forecasting April sales said two-wheelers would put up a mixed show though an overall decline would be seen. Farm distress continues to haunt sales along with weak consumer sentiment due to the high cost of ownership. TVS has fallen 14% since January compared to the Nifty’s 8% rise.

The company’s March quarter revenue growth of 9.4% year-on-year (y-o-y) to 4,384 crore was the first single-digit growth after eight quarters of strong double-digit growth. This was due to a 2.1% increase in sales volume although a 7.2% increase in sales realization was a welcome relief.

Weak sales volume, however, hurt profitability. As percent of sales, a 310-basis-point (bp) jump in raw material cost stemmed from a combination of low operating leverage and higher inventories. Fortunately, this was offset by lower employee costs and other expenses. As a result, Ebitda (earnings before interest, tax, depreciation and amortization) margin fell 30 bps to 7.1%.

This may, however, not go down well with investors, given the Street’s toned down forecast of a 7.6% Ebitda margin for the quarter. Likewise, the 308.1 crore Ebitda was about 8% lower than Bloomberg’s average estimate of 23 brokerages.

The silver lining in the gloomy milieu for two-wheelers is TVS Motor’s ability to maintain a profit margin of 7-8%. Also, with incumbents such as Bajaj Auto Ltd striving to gain market share through a vigorous pricing strategy, it is commendable that TVS has maintained its share of the two-wheeler market at about 14.6% in FY19.

That said, weak motorcycle and moped sales mirror the stress in rural areas. And the weakness trickled all the way down to net profit, too, which fell 19.2% y-o-y to 133.8 crore. On top of this, it is unlikely that TVS’s profit growth will see any smart turnaround.

Industry headwinds such as stiff competition, cost pressures and the inability to pass on cost increase to consumers amid weak demand are likely to eat into margins ahead, too.

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