The company needs to manage raw material costs judiciously to increase margins and achieve profitability.
The shares of TVS Motors have been on a ride; they touched a yearly high and closed at Rs 119 on Wednesday. This comes on the back of May numbers, as volumes grew 31 per cent year-on-year to 156,980 during the month. Motorcycle sales, which saw a sequential dip in April, grew 2.9 per cent in May. A similar, if not better, performance is expected in the coming months.
The launch of the auto-clutch model, Jive, buoyed volumes. With Jive and Wego expected to perform well, analysts reckon the company will grow more than the industry rate of 18 per cent in the coming months. TVS is likely to maintain monthly sales of more than 135,000 vehicles in the current financial year. The volume growth will enable the company to tide over the pressure on costs while the operating leverage will improve margins.
However, the share price might have just reacted before the quarterly numbers. While there is optimism over volume growth, there are concerns if this will translate into earnings growth. Operating profit margins remained low at five-six per cent in May, with Bajaj Auto and Hero Honda (15 to 20 per cent) doing much better.
The company needs to manage raw material costs, which account for more than 70 per cent of expenses. With inflationary pressures on the rise, the costs may rise. The recent hike in petrol prices and a good monsoon will act as hedges —motorcycles offer best petrol consumption rates and a good monsoon may boost rural sales. The management has also mentioned restructuring of the electrical vehicle business, which could help curtail expenses. Exports may also get a boost as the company forays into the Philippines and Egypt. However, the base is low and analysts expect the company have a monthly run rate of around 20,000 vehicles, an overall 21 per cent growth.
Going ahead, the success of new launches and the ability to manage costs will be the real deciders.
