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TVS Motor: Firm metal prices may hurt

22 Jul 10 01:37 PM
ET
The stock of TVS Motor saw renewed investor interest during Wednesday’s trade. The country’s smallest listed two-wheeler player announced one bonus share for each existing share.

This coupled with the market beating performance in the June quarter took its stock to a new 52-week high during the day’s trade.

A sharp pick-up in demand for its scooter models helped TVS post double-digit jump in sales and profits. Two-wheeler companies in India have been witnessing higher demand due to the greater availability of consumer credit. While the demand is likely to remain strong in the near term, the company may have to grapple with higher raw material costs.

Net sales grew 40.9% to `1,393 crore during the first quarter, while net profit more than doubled to `40.4 crore. Operating profit, however, rose at a slower pace of 34% to `103.7 crore, indicating margin pressure.
Higher cost of raw materials such as steel and aluminium are putting pressure on profitability of auto companies. In the June quarter, TVS Motor’s operating profit margin contracted by 40 basis points to 7.4% from the year earlier.

The company’s sales volumes grew at a brisk 32.3% year-on-year to 4.61 lakh in the June quarter. This compares with 10.3% growth reported by its bigger peer Hero Honda and 71% jump in volumes of Bajaj Auto.
TVS was benefited from improved demand for models in the 75-125 cc motorcycle segment, for models including Max, Centra and Victor.

Going forward, the underlying challenge for players in this segment is the ability to manage input costs. Metal prices have risen in the recent past compared to their levels a year ago.

These are expected to remain firm at the current levels, given the demand from emerging economies. Hence, two-wheeler makers may face pressure on margins.

TVS’ decision to allot bonus shares is not likely to affect its fundamentals since bonus shares are more about capitalisation of reserves. TVS Motor at `128.55 per share, trades at nearly 28 times its trailing four-quarter earnings (without taking into account the current bonus announcement).

This is at a premium to Bajaj Auto, which trades at a P/E of 20.5 on a standalone-basis, and Hero Honda with a P/E of 17.4 times. This limits a further upside in the TVS stock.