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TVS Motor Company: Hold/Buy on declines

B. Krishnakumar

TWO-WHEELER major, TVS Motor Company, has reported a sharp increase in turnover and post-tax earnings for the first half ended September 2002. The turnover rose 59 per cent to Rs 1341 crore and the post-tax earnings saw a near three-fold rise to Rs 57.63 crore from Rs 19.16 crore.

`Victor' powers sales

While the total two wheeler sales increased by 44 per cent, much of the improvement in performance is explained by the robust demand for TVS Motor's four-stroke motorcycle — Victor. The company's motorcycle sales volume almost doubled to 3.45 lakh units from 1.73 lakh units in the first half of previous fiscal.

Victor's success has also resulted in a change in product mix in favour of higher value product. After a flat trend last year, the scooterette sales (represented by TVS Scooty) saw a growth of 15 per cent in the first half of the current year. Moped sales volume continues to be affected on account of the subdued trend in agricultural output and crop realisations.

Homegrown profitability

While Victor's success raked in volume growth, the company's profit margins too improved owing to a combination of factors. Efforts towards indigenisation of production facilities coupled with savings on royalty payment have played a crucial role in pushing up the operating profit margin to 8.8 per cent from 6.6 per cent.

A combination of higher turnover and improvement in profitability has bolstered the post-tax earnings of TVS Motor.

From Rs 19.16 crore in 2001-02 first half, the post-tax earnings jumped 201 per cent to Rs 57.63 crore for the six month period ended September 2002.

Competitors flex their muscles

While the performance in the first half has been quite robust, it remains to be seen if TVS Motor could sustain this kind of a growth rate in the future as Victor has been the primary growth driverThough there is no indication of a slowdown in demand for Victor, the dependence on one model is always a risky business proposition. Besides, competitors such as Hero Honda, Bajaj Auto, LML and Kinetic Engineering have come up with new models in the recent months. The success of the products launched by these companies could have a major impact on the growth prospects of TVS Motor.

While TVS Motor has also lined up a slew of model introductions, the market place is getting overcrowded with a motorcycle models. Besides, TVS Motor passed through a lean phase during the first half of previous fiscal. While the company has outperformed the industry growth rates, the lower base factor has also played a role in bolstering sales growth in the current year.

A higher base would slow down growth rate. The degree of success enjoyed in new model launches and the market acceptance of new product introductions by competitors would hold the key factors influencing the success of TVS Motor. In the future, volume growth would be critical as scope for significant improvement on profitability front would get reduced owing to competitive compulsions.

From an investment perspective, shareholders could book profits. Fresh buying may be considered at lower levels. Evidence of success in model launches by the company could be used to pick up equity exposure in TVS Motor.

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