Margin expansion key trigger for TVS Motor

New launches and improving product mix will rub off positively on volumes, margins

After shedding over six per cent on Friday, the TVS Motor stock recouped about half the losses on Monday to close at ~553. The reaction on Friday was to the weak quarterly numbers reported by the company, especially on the margin front.

Higher raw material costs, inferior product mix and (GST)-related compensation to dealers impacted the margins, which at 6.2 per cent fell 80 basis points (bps) on a yearon-year (y-o-y) basis. This is lower than analysts’ estimates which had projected it around the 7-7.5 per cent mark.

While the company’s share of higher-margin mopeds fell in the quarter, operating profit was impacted to the tune of ~32 crore by three oneoffs. While ~16.5 crore was paid as dealer compensation for the losses sustained on transition to goods and services tax, a ~6-crore hit was taken on costs associated with transition to BS-IV, while end of the fiscal year incentives led to an impact of ~9.7 crore. Adjusted for these oneoffs, analysts say the results were in line with projected margins.

Revenue growth, however, has been robust at 18 per cent to ~3,339 crore due to a combination of a 12 per cent growth in volumes while the rest has come from higher realisations on account of price hikes.

Volume growth in FY18 is expected to be strong on the back of a normal monsoon season, successful goods and services tax roll-out and the upcoming festive season.

Sharekhan analysts expect TVS Motor to post 14 per cent volume growth over the next two years, outpacing the industry’s 10 per cent.

The management is looking to increase its market share in the domestic two-wheeler market by about 150-200 bps from its FY17 share of 14.2 per cent.

In addition to product launches, its flagship brands of Jupiter (scooter) and Apache (premium motorcycle) will play a key role in the company’s plan to increase its share of the market. TVS is expected to launch a 125cc scooter and a similar powered motorcycle in FY18.

The Street will also await the launch of the first product from the BMW stable in the current year.

The key trigger for the stock, however, will be the improvement in operating profit margins, which are less than half of its listed peers Bajaj Auto and Hero MotoCorp and less than a fourth of Royal Enfield.

The company is expected to post double-digit margins in FY19, which should help grow its net profit number by over 30 per cent over the next two years. At the current level, the stock is trading at 33 times its FY18 estimates; investors can buy the stock on dips from a two-year perspective.