TVS Motor's margins disappoint again

Unsuccessful in meeting forecasts of 10% operating profit margin

While the TVS Motor stock was up in the early part of the trade on Tuesday, it closed with a loss of 10 per cent after the company announced its March quarter (Q4FY16) results, where it failed to meet operating margin expectations. Analysts polled on Bloomberg expected TVS Motor to post 7.14 per cent operating margin, while it only managed 6.34 per cent in Q4FY16. As this was at least the third successive quarter of disappointing margins, the Street gave a thumbs-down, despite revenues at Rs 2,776 crore (up 16 per cent) exceeding expectations of Rs 2,756 crore.

Higher revenues came on the back of 10 per cent year-on-year sales volume growth in Q4FY16. Likewise, net profit at Rs 117.8 crore grew 30 per cent year-on-year, again topping the Street's expectations (Rs 110.5 crore). Prayesh Jain of IIFL says higher 'other income' and lower tax rates helped TVS Motor post better-than-expected profit growth.

Read more from our special coverage on "TVS MOTOR"

• TVS Motor Q4 profit up by 30 % to Rs 118 crore
• TVS Motor domestic two-wheeler sales up by 21.6 %
• TVS Motor sales up 10% in March
• TVS Motor at one-year high
• TVS Motor hits 52 week high of Rs 320 a share

A fine reading of numbers indicates that even as gross margin (revenue less raw material cost) at 28.8 per cent increased by about 60 basis points year-on-year, operating margin came under pressure due to higher other expenses. Other expenses (including marketing expenses) at Rs 495 crore in Q4FY16 increased 14 per cent year-on-year. TVS Motor attributed the elevated marketing costs of Rs 60 crore to Auto Expo in January, dealer conferences, and launch of improvised Victor (its marquee brand). Some of these costs may be regarded as one-time marketing expenses.

Export performance disappointed and the management said the trend would continue for another three-four months as African markets are facing dollar shortage due to lower realisation from oil revenues.

TVS plans to increase its market share in the two-wheelers space (now at 14 per cent) by two-2.5 percentage points in FY17 and in particular the share of Apache — its premium offering which commands 17 per cent market share in the premium motorbikes category. With these plans and the launch of Akula (its first 300cc motorbike developed in partnership with BMW) slated in mid-FY17 and little guidance on how it plans to expand its operating margins to 10 per cent, analysts feel margins may disappoint in FY17 as well. "Meeting the margin forecast will be the most critical factor for TVS Motor's stock to see any meaningful upgrade," says Jain.

Margins are crucial given that the stock, in the past, was re-rated on the back of expectations of these going up to double digits as well as strong volumes. Any further disappointment will hurt the stock, which is now trading at premium valuations of about 20 times FY17 estimated earnings versus 14-16 times for peers Hero and Bajaj.