Moneycontrol Pro Panorama | TVS Motor's profit margins rev up amid headwinds

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Automobile companies are beset with production constraints and input cost inflation. Few managed to control these pressures successfully in the December 2021 quarter. TVS Motor Co is one of them. Volumes dropped. Yet the company managed to maintain profit margins at 10 percent and grow its earnings. The stock is up 2 percent in Tuesday’s trade.

The profit margins are aided by a favourable product mix and price hikes. Realisations, or the average selling price, increased 6 percent sequentially. Realisations in export sales improved at a faster pace, thanks to a richer product mix.

Importantly, the management expects to keep up the good work on profit margins through cost control measures and superior product mix.

High oil prices and business normalisation are expected to drive exports even as volumes in India are estimated to see a gradual recovery. Consequently, analysts are pencilling in further improvement in profit margins to 11-12 percent in the next 1-2 years.

That will be a structural improvement in profitability at TVS. Profit margins languished at 6-8 percent in much of the last decade. This has been a long-held complaint about TVS and its stock. Profit margins at its peer Bajaj Auto, which also has a sizeable exports business, hovered at 17-22 percent during the time.

But the latest results show TVS’s strategy of market share gains and volume-led operating leverage is paying off. According to Jefferies India, TVS has gained sizeable market share in all key business segments of exports, scooters and motorcycles including premium bikes from FY17.

Still, all is not hunky dory. The profit margin gap between TVS and Bajaj Auto is large. Also, two-wheeler companies face disruption from native electric vehicle start-ups. Companies such as TVS and Bajaj Auto are aggressively expanding their electric vehicle portfolio and capacities. However, their products are yet to reach the masses on a pan-India scale and face the prospect of elevated investments in the near term. This can put pressure on cash flows. That is the risk investors need to watch out for.

In other earnings, we analysed the results of Tata Steel. The company’s results exceeded Street expectations. It continues to bet on domestic demand and emerged as a winning bidder for the 1 million tonne per annum Neelachal Ispat Nigam Ltd. However, our research team has cautious advice for long term investors. Do also read our other piece on Tata Steel’s expansion dilemma.

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Is Paytm worth a bet after Q3 earnings and a steep price correction?

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CMS Info Systems: Growth at a reasonable price
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In PM Narendra Modi’s economic policies, both Karl Marx and Adam Smith are out of dateTechnical Picks: Bank of Baroda, Hindalco, Union Bank and SAIL (These are published every trading day before markets open and can be read on the app)

R Sree Ram

Moneycontrol Pro