TVS Motor disappoints on margins in Q4

TVS Motor Co. Ltd shares had raced ahead of the S&P BSE Auto index in the past 12 months, building on hopes of a sharp volume revival and margin expansion. The company’s management has targeted 10% Ebitda (earnings before interest, taxes, depreciation and amortization) margin and an 18% market share by fiscal year 2018.

In the March quarter (Q4), TVS Motor’s Ebitda margin shrank by 30 basis points from a year ago to 6.3%. It was also lower than the December quarter number by 80 basis points. Investors punished the stock by hammering it almost 10% after earnings were announced despite the profits rising a better-than-expected 30% to Rs.118 crore. A basis point is 0.01 percentage point.

Clearly, the gains from the commodity prices fall seem to be over for now. Material costs made up 70.4% of sales in the March quarter, about the same level as they were a year ago. Other expenses, which make up nearly one-fifth of the firm’s expenses, rose 14%, perhaps owing to launch expenses of the TVS Victor. Employee expenses rose 18%.

For the full fiscal year, TVS Motor’s material costs-to-sales ratio improved by around 1.4 percentage points. In any case, the margin gains were supposed to come from volume improvements and not commodities. In areas such as employee expenses and advertising and marketing costs, the cost to sales ratio is about 1.5-3 percentage points higher than its larger rivals. When these costs are spread over larger unit sales, margins should improve, theoretically. But that has not come about, despite volumes rising by 10% in the March quarter.

With a good monsoon predicted, and its strength in the fast-growing scooter segment, TVS Motor will likely do well in domestic sales in the current fiscal year. However, the picture is not so bright when it comes to overseas sales. Exports are likely to be muted this year because of severe currency depreciation in markets such as Nigeria and Egypt. Exports comprise about 20% of TVS Motor’s volume and typically boast higher margins.

Come fiscal year 2018, the company would also lose tax incentives at its Uttarakhand factory, which would increase its difficulty in hitting the margin target.

To be sure, if its recently-launched Victor model is a roaring success and exports pick up sharply, TVS Motor could get back on track to meet its margin target. However, investors seem unwilling to take risks with a stock that is trading at 20.5 times its estimated earnings for fiscal year 2017.