TVS Motor misses earnings estimates, disappoints investors

Stock markets thrive on expectations and outperformance. That’s why TVS Motor Co. Ltd’s shares fell by 5.7% on the Bombay Stock Exchange on Friday, despite net profit for the March quarter doubling to Rs. 41.7 crore compared with a year ago.

But this figure was a good 30% lower than the Street’s estimate for the quarter. Also, the underperformance was attributable to its operating profit margin coming in lower over the year-ago period and the preceding quarter.

The positive side to the third largest two-wheeler maker’s results is that it has maintained its growth trajectory over the past four to six quarters. It is benefiting from the unabated boom in the two-wheeler segment, just as its peers Hero HondaMotors Ltd and Bajaj Auto Ltd.

The company’s March quarter sales volumes jumped by 27.3% and, along with a 6% improvement in realization, resulted in a robust 34.3% year-on-year (y-o-y) jump in net revenue to Rs. 1,633 crore.

Higher revenue, mainly driven by the operating leverage from rising volumes, trickled down to 11.4% y-o-y growth in operating profit. This was in spite of cost pressures, which affected operating profit margin. At 5.6% in the March quarter, it was 114 basis points (bps) lower from a year ago and about 80 bps below from the preceding quarter. One basis point is one-hundredth of a percentage point.

The main dampener was the rise in raw material cost due to a surge in commodity prices in their underlying inputs such as metals. As a percentage of sales, it rose 340 bps from a year ago, though flat compared with the December quarter. It was partially offset by the drop in other expenditure relating to marketing and advertising costs.

What did the trick to drive up profits is the all-round growth across products—mopeds, motorcycles, scooters and three-wheelers. TVS Motor is steadily gaining mileage as a pan-India player, which is a change from being predominantly a southern firm for several years.

“Its changing product mix—higher contribution of more profitable product categories like scooters and three-wheelers—augured well for TVS,” says Umesh Karne, analyst at Brics Securities Ltd.

Scooter sales grew by 54% y-o-y and now account for about one-fourth of vehicles sold by the firm. Further, three-wheeler sales grew by a significant 92%, although on a low base of about 6,200 vehicles sold in the previous year. TVS Motor is a new entrant in this segment unlike veterans such as Bajaj Auto and Piaggio.

Of course, its oldest product—mopeds—also grew by a significant 20%. So did motorcycles, which comprise two-fifths of the firm’s sales volumes. TVS Motor met its volume guidance for the year at two million vehicles.

What took the charm off the stock is the negative surprise in lower-than-estimated net profit. The firm stated that it provided about Rs. 9 crore towards the natural calamity cess for its new facility in Himachal Pradesh, where it enjoys tax exemptions.

Companies operating in the state are contesting this demand, which will affect profits, unless it is reversed. Besides, some analysts also view its other income as being lower-than-expected, while the tax outgo was higher.

TVS Motor’s stock trades at Rs. 56.30, which discounts the estimated earnings (stand-alone) for fiscal 2012 (FY12) about 10 times. Given that the firm’s revenue is estimated to grow faster than the industry growth rate of 12-15% per annum for at least two years, the stock offers value.

But some risks could trip investors. One is the performance of its Indonesian subsidiary. Although sales are growing, whether its operations are yet profitable is not known.

Losses could, therefore, pull down consolidated earnings for FY11, as it did in the previous year. If domestic operations don’t see better profitability, that too could affect its performance.