Indonesian venture poses a challenge for TVS Motor

TVS Motor Co. Ltd seems to have got its act together in the domestic market. As the third largest two-wheeler maker in the country, monthly sales have revved up across its portfolio of products—be it motorcycles, mopeds, scooters or three-wheelers.

But its subsidiaries’ performance continues to cast a shadow on its overall performance.

While its stand-alone net profit for fiscal 2011 (FY11) was Rs194.6 crore, losses in the subsidiaries trimmed the consolidated net profit to around Rs127.9 crore.

Of the lot, its Indonesian unit, PT TVS Motor Co. Indonesia, continues to bleed. Six years after setting up operations, the firm registered an operating loss of Rs39.8 crore, lower than the Rs64.2 crore incurred a year ago.

Although the management stated in Wednesday’s annual general meeting that the Indonesian operations would break-even by FY13, analysts remain sceptical. Against the required run rate of around 5,000 vehicles per month, the firm sells around 7,000 vehicles a quarter (June numbers).

In fact, on a capacity of around 300,000 units a year, the firm has so far managed cumulative sales of barely half a million units in all these years. Of course, the management’s optimism has led to consistent infusion of money into this venture, which totals around Rs330 crore from inception till date.

One reason could be that despite its pioneering feat in mopeds, TVS’ growth trajectory has been one of caution rather than aggression in motorcycles and scooters when compared with some of its peers. Besides, the Indonesian market is not an easy terrain despite being the third largest two-wheeler market in the world after India and China.

“In Indonesia, four Japanese manufacturers account for 99.7% of the market, among which Yamaha, being the largest, accounted for 46.9% of the market as at the end of 1QCY11,” Abhishek Banerjee of Asian Market Securities Pvt. Ltd said in a report. This explains why TVS is making this operation an export hub.

Fortunately, TVS is gaining ground in the domestic market. Overall sales volumes in August rose 15% from a year ago. So has its stock price, which caught up with the BSE Auto index in the last few trading sessions.

The kicker was the June quarter net sales of stand-alone operations—up about 24% from the year ago period. Of course, here again the management has signalled caution due to the rising cost of ownership of vehicles.

Another concern is that the firm’s advertising spend, at around 7% of sales, is by far the highest in the industry, with peers such as Bajaj Auto Ltd and Hero Motorcorp Ltd spending around 1.5-2%. This eats into operating margin, which is less than half that clocked by rivals.

For now, TVS shares trade at around Rs59.55, discounting estimated FY13 earnings by around 11 times.

Although the outlook for the medium term does not promise a big upside, good tidings from the Indonesian operations could well be a shot in the arm.