TVS results impress despite write-offs

The fourth quarter results of TVS Motor Co. Ltd saw several write-offs and additional expenses that affected its net profit. Yet, at Rs20.3 crore, it was 39% higher than the year-ago period. This was due to strong sales volumes, which translated into a 34% rise in net sales to Rs1,192 crore. Sequentially, sales rose by around 11% from Rs1,073 crore in the quarter ended 31 December. During the March quarter, TVS wrote off Rs38.2 crore as exceptional items, comprising mainly of a loss on sale of investments in its finance subsidiary, set off against a profit accrued on sale of land. Besides, there have been some one-time expenses at the operating level. Employee costs were 6.5% of sales, higher than around 4.7% a year ago. This was partly due to expenses on a voluntary retirement scheme; around Rs7.3 crore was charged during fiscal 2010 as employee costs. If this one-time expense is adjusted, the employee cost at around 5.8% would be higher year-on-year but in line with the preceding quarter. Nevertheless, operating profit at Rs78.9 crore was 63.4% higher than the year-ago period. According to Umesh Karne, analyst, Brics Securities Ltd, “Better product mix and higher operational efficiency has resulted in improvement in operating profits.” The company had seen static motorcycle sales during fiscal 2010, as it did not cash in on the boom in the segment through new models and variants as competitors such as Hero Honda Motors Ltd and Bajaj Auto Ltd did. Only in the fourth quarter has the company’s new and reportedly successful launch—Jive—started driving volumes in the motorcycle segment. But growth in scooters and mopeds took volumes up from 1.34 million in fiscal 2009 to 1.53 million. Three-wheeler sales grew from 4,613 to 14,730 units in the same period. The TVS management expects that sales in fiscal 2011 should touch 2 million units, including 50,000 three-wheelers. Analysts’ consensus is that following the write-offs in fiscal 2010, increased volumes during fiscal 2011 should give TVS the operating leverage needed for higher profit margins. So far, the relatively stagnant operating profit margin of around 6.5% in the last few quarters was a point of concern. TVS shares rose by 2% to Rs88 each on the National Stock Exchange. The past earnings of Rs3.80 a share is discounted around 23 times at the current market price. The key to appreciation in stock price from these levels is an improvement in profit margins.