TVS Motors: Back on track

Successful launches and handsome bonus announcements are positive triggers, but sustaining volumes will be critical.

Investors in TVS are elated over the 1:1 bonus issue and a second interim dividend of 50 per cent. The company’s net earnings grew more than two times in the June 2010 quarter over the same period a year ago, while net sales rose 40 per cent. Volume growth, at around 32.7 per cent, was above the industry average of 20-25 per cent. This proved that the company’s strategies and launches were well received by the market.

TVS Motors got good traction in volumes due to new launches — Jive 110 cc clutch-less motorcycle, with monthly off-take at 8,000 units, and Wego, the 110cc ungeared scooter that records monthly sales of 9,000 units. Also, a five-six per cent growth in realisations helped. Analysts reckon the company will start operating on a higher base and, therefore, maintaining volumes will be critical.

With the Himachal Pradesh plant working at around 70 per cent capacity, TVS Motors can step up volumes if demand rises. Increased off-take from the plant will also stabilise operating profit margins, which are much lower (around 6.5 per cent) as compared to peers like Hero Honda and Bajaj Auto. The company is expected to launch variants of Apache 180cc and MAX 100cc with four stroke engines in the second half of FY11.

Recent spikes in raw material costs could be a concern, but the company has the headroom for better realisations. The share price shot up on bonus issue and dividend announcements, but the price of 19 times FY11 earnings is seen as fair. Visibility in volume off-take and positive news on Indonesian operations can be the next triggers for the stock.