TVS Motor: Bumpy ride

Operating profit margin slumped to 1% in the March quarter in comparison with 3% in the previous quarter.

Since peers Bajaj Auto and Hero Honda have not exactly been setting the market on fire with their performances, the market was not expecting much from TVS Motor.

The Chennai-based two-wheeler maker had posted an operating profit margin of just over 3 per cent in the December 2006 quarter and the market believed it might do somewhat better in March. But no one would have imagined that the company's margins would be smashed to one per cent.

Volumes were abysmally low, growing at just 5.5 per cent y-o-y, thanks to the decline in volumes for motorcycles. However, due to better realisations from mopeds, the top line grew by about 10 per cent y-o-y to Rs 920 crore.

TVS is obviously struggling to push sales and, moreover, it is selling larger numbers of entry-level products. So it is simply not able to absorb the higher cost of raw materials, and as a result, the net profit has crashed 68 per cent to Rs 9 crore.

FY07 has been a terrible year for TVS with its earnings having been badly dented by about 43 per cent. What's worse is that there are no signs that earnings will grow in FY08 since the top line is unlikely to grow by more than 7-8 per cent from the Rs 3,855 crore posted in FY07.

The company's entry into the three-wheeler segment, slated for the second half of the current fiscal should help revive margins. However, the business will obviously take time to stabilise. The competition in the two-wheeler space is only becoming more keen and TVS is going to find it hard to survive. At the current price of Rs 61, the stock trades at 24 times FY08 estimated earnings, which is way too expensive.

Hotel Leelaventure: Under pressure

Though Hotel Leelaventure leveraged higher average room rents (ARR) in the March 2007 quarter, a rising cost structure put pressure on its margins. As a result, the company's operating profit grew merely 3.3 per cent y-o-y to Rs 47.2 crore in Q4 FY07, while sales grew 18.2 per cent to Rs 116.7 crore.

Its operating profit margin declined 530 basis points y-o-y to 40.4 per cent in the last quarter.

This pressure on Hotel Leelaventure's margins in the last quarter was due to other expenditure as a percentage of sales going up by 410 basis points y-o-y to 32.7 per cent.

Analysts attribute this increase in expenditure to higher marketing spends and year end commissions paid to managers. In contrast, Indian Hotels' standalone operating profit margin grew 590 basis points y-o-y to 42 per cent in the last quarter.

Meanwhile, Hotel Leelaventure's ARR was Rs 11,939 in Q4 FY07 as compared with Rs 9,291 a year earlier, helped by its Bangalore property which contributes nearly half its total income, where ARRs had reached close to Rs 19,000 levels.

Hotel Leelaventure's consolidated operating profit margin also declined 80 basis points y-o-y to 46.5 per cent in FY07. During the year, it also earned Rs 41 crore as profit on sale of Leela Business Park in Mumbai.

In FY07, Indian Hotels' ARRs in key markets like North Mumbai had increased by 43 per cent y-o-y to Rs 9,600, while in New Delhi they improved 36.7 per cent to Rs 10,800.

Going forward, Leelaventure is expected to grapple with a saturating Bangalore market, and the fact that a large part of its new properties will not be ready till FY10.

In addition, analysts also point out that Leelaventure's recent land acquisition in South Delhi has been done at a high valuation, which would result in this property taking considerably longer time to break even, once it is operational.

As a result, at Rs 52, the stock trades at about 15-16 times estimated earnings for FY08 and leaves little room for further upside.

With contributions from Shobhana Subramanian and Amriteshwar Mathur