Stock Review: TVS Motor

 

TVS Motor's March 2011 quarter results once again highlight the difficult operating environment that the smallest of the top three players in the auto sector is operating in.

TVS Motor's operating profit margin declined 130 basis points yearon-year (y-o-y) to 6.7% in the fourth quarter(Q4), despite a 34.3% rise in net sales to . 1,633.5 crore. The adverse impact on operating margins was again due to raw material costs like steel, non-ferrous and rubberbased components that have not shown any signs of easing. While net realisations rose nearly 6.6% yo-y in the fourth quarter, helped by price hikes effected earlier and improved sales of motorcycle brands like Max and Centra, coupled with the numbers for the Scooty range, they failed to fully offset input cost pressures. However, the company's Q4 net profit doubled to . 41.7 crore, helped partly by a low base effect in the corresponding period of previous year.

The Q4 results were declared on Friday and the TVS Motor stock has lost 5.4% over the past two trading days, to close at . 56.5 on Monday. The stock has managed to outperform the Sensex over the past three months.

The company had also grappled with a fall in its operating margins in the December 2010 quarter on a y-o-y basis. TVS Motor's operating profit margin over the past several quarters has been substantially lower than its larger rivals, Bajaj Auto and Hero Honda.

Going forward, prices of key raw material costs may not offer any relief, and analysts are concerned on their potential impact on TVS Motor, and on its larger rivals in this sector in the short term.

Apart from that, the uptick in auto-finance rates is a dampener on the growth potential for the broader auto sector. TVS Motor's unit sales improved by 26% y-o-y in the fourth quarter, though the figure was lower than the 35% y-o-y rise reported in the first nine months of FY11.

TVS Motor trades at a P/E of nearly 13.9 times on a trailing four-quarter basis and it broadly factors in the growth opportunities for the company in the short term.