TVS Motor's gross margins hit 13-quarter high, grow by 360 basis points

Better product mix, cost cutting initiatives, higher localisation help, despite a fall in volumes

Despite a fall in volumes, TVS Motor's gross margins hit a 13-quarter high growing by 360 basis points to 27.8 per cent in Q3 of 2019-20. Gross margins have grown gradually from 24.1 per cent, during the first quarter of fiscal year 2019 to 24.9 per cent by the end of the fiscal.

Margins were driven by cost initiatives, lower commodity cost and a better product mix among others.

The company’s overall two-wheeler sales, including exports, stood at 773,000 units during quarter ended December, 2019, as against 950,000 units in the quarter ended December, 2018. Three-wheeler sales grew by 22.1% to 48,391 units in the quarter from 39,629 units in the quarter ended December 2018.

EBITDA margins grew 70 basis points YoY to 8.8 per cent as the gross margin growth was offset by higher other expenses at 13.3 per cent, say analysts.

TVS rivals Bajaj and Hero have also seen margin expansion and sustained a double digit EBITDA. Bajaj reported a 290 basis point growth in gross margins, at 30 per cent while its EBITDA margins were at 17.9 per cent on lower other expenses, according to Prabhudas Lilladher report. Hero's gross margin expansion was due to raw material cost softening and cost control making EBITDA margin to grow at over 80 basis point to 14.8 per cent.

TVS is targeting double digit margins against the backdrop of its cost reduction efforts, import reduction, export growth and better product mix including mopeds.

Motilal Oswal Securities says improving market position and scale are expected to drive a 110 bp margin expansion over 2019-21 and there are several levers to improve margins, including improving competitive positioning, better mix, cost-cutting initiatives and operating leverage (particularly on marketing and employee cost).

"Hence, we estimate EBITDA margin expansion of 170bp margin expansion (FY20-22) to 10.1 per cent. This would result in standalone EPS CAGR of around 30 per cent over FY20-22," it said.

"I think with our material cost reduction strategy plus ability to price better, we have a very good opportunity to, on one side, manage our demand ahead of the industry. On the other side, there is material cost reduction initiative, we can also a little bit of pricing. Overall, we will be able to do much better than what we are doing today. Almost 30 per cent of our business comes from international and it is also growing much faster," said K N Radhakrishnan, president and CEO of TVS Motor Company.