TVS Motors’ failure to grow margins to put pressure on stock

ET Intelligence Group: The stock of TVS Motors fell by over 3 per cent on Thursday following the company’s weak outlook on the margin performance. Though the company was positive on demand scenario, it cited multiple cost pressures and refrained from providing a timeline for achieving targeted doubledigit operating margin before depreciation (EBITDA margin). This is likely to put pressure on the stock’s premium valuation in the medium term.

TVS Motors had earlier expected to report double-digit margins by the end of FY18. This had resulted in raising the stock’s valuation over the past two years. At Thursday’s closing price of Rs 589, the stock was trading at 28.7 times its projected FY19 earnings, a premium of 27 per cent to its five-year average. It is one the most expensive auto stocks in India.

In the March quarter, the company’s EBITDA margin fell by 80 basis points sequentially to 7 per cent due to higher raw material prices, increase in the minimum wages in Tamil Nadu and Karnataka, higher marketing expenses on account of the auto expo and elevated dealer margins. Despite the company’s attempts to improve profitability, the margin has remained more or less flat between FY15 and FY18 after adjusting for accounting changes.

Sales volume increased to 34.5 lakh units at the end of FY18 from 25.4 lakh units in FY15. The increasing export to higher margin bikes to BMW has not helped on the margin front either. The company exported 26,471 units to BMW in the FY18 compared with 4,700 units in FY2017.

Analysts expect 9.0 per cent and 9.7 per cent margin for FY19 and FY20. Given the FY18 margin at 7.5 per cent, the company will have to boost it by at least 150 basis points in a year to meet the expectations. It plans to reduce costs with the help of value engineering, localisation, platform consolidation and lower marketing spend.

Despite these efforts, it may not be easy to meet the Street’s expectations. This is because the pressure on margin is likely to remain given higher raw material prices and increased competitive intensity in the scooter space.

Scooter volumes grew by 33 per cent in FY18 with 160 basis point expansion in the market share to 16.4 per cent. However, this was offset by no major increase in the economy segment of motorcycles and decline in moped volumes. The domestic market share in the two-wheelers of TVS Motors was unchanged at 14.2 per cent in FY18.

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Source: Economic Times