TVS Motor: Double-digit margin still a dream

Operating profit margins at 7% way below estimates

Barring a strong top-line performance, TVS Motor's March quarter show was dismal. Major let down was the operating profit margin, with the metric coming in at 7 per cent - up 136 basis points over the year-ago period on a low base, but down 76 basis points over the December quarter. 
 
This was way below the 8.4-8.9 per cent that analysts had estimated and no where close to the double-digit margin the company had indicated it would achieve in Q4.  According to the management, higher raw material costs, wage costs, marketing expenses, and dealer incentives were some of the reasons.

 
While raw material cost as a percentage of sales was up 110 basis points q-o-q, other expenses, too, surged by 45 per cent year-on-year after the company incurred marketing costs owing to three new launches and the auto expo. Higher import duties, which account for about 15 per cent of the raw material costs, added to the cost increase. Employee costs also increased, given the rise in minimum wages in Tamil Nadu and Karnataka.  While the company did take a price hike in January, the benefits of the same went to the dealers, whose margins have been enhanced.
 

The company has taken a price hike in April to neutralise the high raw material costs that continue to be on an uptrend. In addition, to offset the cost pressures, the firm is looking at operating leverage, richer product mix, localisation, and cost rationalisation measures. What is expected to impede the company growth is the increasing competition in the sector, especially at the entry level motorcycles and other segments.

 Any further price reduction and other offers could force TVS Motor to respond, keeping margin improvements in check. This will mean a further delay for the company in achieving its double-digit margin target.

While the company is expected to post strong volume growth as was the case in the March quarter and in April, on the back of new launches, the Street will keep an eye out for sign of margin movement, the biggest trigger for the stock.