TVS looking to ride on lower costs for better and sustained growth

At a time when volumes are under pressure, TVS Motor is looking at increasing its margin to double-digit levels from 8.8 per cent it reported in the third quarter of financial year 2019-20 (Q3FY20).

The company’s gross margins hit a 13-quarter high of 27.8 per cent in Q3FY20. This came on the back of lower commodity prices, reduction in material costs (60-70 basis points quarter-on-quarter), cost-cutting, and higher localisation. However, this was partially offset by higher other expenses at 13.3 per cent.

To achieve its target, the firm has put in place a series of initiatives like reducing import content, increasing exports, and improving product mix, among others. Cost saving contributed around 230 basis points year-on-year (YoY) in Q3FY20. Imports declined to 10 per cent of raw material cost from 14 per cent in FY19. The FY21 target is around 8 per cent.

Motilal Oswal Securities says the firm’s improving market position and scale are expected to drive a 110-basis point expansion in margin between FY19 and FY21. It expected Ebitda (earnings before interest, tax, depreciation and amortization) margin expansion of 170 basis points between FY20 and FY22 to 10.1 per cent. “This would result in standalone EPS (earnings per share) CAGR (compound annual growth rate) of around 30 per cent over FY20-22," it said.

K N Radhakrishnan, president and chief executive officer of TVS Motor Company, said the company’s margins in the past four quarters have been consistent, thanks to cost reduction initiatives. “I think with our material cost reduction strategy plus ability to price better, we have a very good opportunity to, on one side, manage our demand ahead of the industry. On the other side, there is material cost reduction initiative… Overall, we will be able to do much better than… Almost 30 per cent of our business comes from international and it is also growing much faster,” he said. TVS expects exports to continue to outperform the market backed by its portfolio, both in two-wheelers and three-wheelers.

Responding to a question on the impact of ban on two-wheeler and three-wheeler taxis on certain roads in Lagos, Nigeria, he said it was too early to assess the impact. Nigeria contributes around 55 per cent of three-wheeler exports and around 12-15 per cent of two-wheeler exports for TVS, which ships products to around 70 countries. 

TVS Motor’s overall two-wheeler sales, including exports, dropped by around 19 per cent to 773,000 units in Q3FY20 compared to 950,000 in Q3FY19. Three-wheeler sales grew by 22.1 per cent to 48,391 units in the quarter from 39,629 units in corresponding period a year ago. 

TVS management expect first half of FY21 to remain weak, because of the current slowdown and transition to Bharat Stage VI emission norms, with recovery expected from the second half of the year for domestic industry, while exports are expected to grow consistently.