TVS-Suzuki: Hold

B. Krishnakumar

Recommendation: Hold

TVS-SUZUKI, the two-wheeler major, reported a rather depressed performance for the quarter-ended June 2000. Despite an overall volume growth of 13 per cent in April-June 2000, the pressure on profitability led to a marginal decline in net profit.

For the quarter, the company reported a 24 per cent growth in turnover to Rs. 365.04 crores. This is explained by an all-round increase in the offtake of the company's products.

TVS-Suzuki's motorcycle sales rose 18 per cent, moped sales 8 per cent and scooter sales 18 per cent. The flagship brands, such as Scooty (in the scooter segment), Samurai and Max (in motorcycle segment) and TVS XL Super (in mopeds), appear to have propelled volume growth.

Despite the growth in turnover, the sharp rise in raw material and component costs pulled down the profit margin. Raw material and component costs accounted for 73.03 per cent of turnover against 67.87 per cent in the corresponding previous period.

The steady rise in base metal price, coupled with the additional expenses incurred towards fitting catalytic converters, appears to have pushed up input costs. The company has been forced to fit its vehicles with catalytic converters to comply with the new emission norms.

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On account of the sharp rise in raw material and component costs, the company's operating profit margin fell to 10.1 per cent from 12.07 per cent. Moreover, the growing competition and recent product launches, including Spectra, have led to a rising outgo on advertisement and promotionals. As a result, ``other expenses'', increased to Rs. 77.75 crores from Rs. 60.17 crores. This was another factor that led to the decline in profit margin.

Interest costs fell to Rs. 5.83 crores from Rs. 6.92 crores, while the depreciation charge rose to Rs. 12.24 crores from Rs. 9.05 crores. Commissioning of new facilities at Mysore, and the other related capital expenditure pushed up the depreciation charge for TVS-Suzuki. The taxation provision remained stagnant at Rs. 7.60 crores (Rs. 7.07 crores).

For the quarter-ended June 2000, the post-tax earning, at Rs. 20.60, was marginally lower than the Rs. 21.21 crores in the corresponding previous period.

On the future prospects, TVS-Suzuki's volume growth would continue to be propelled by top-notch brands such as Samurai, Max and Scooty. However, the profit margin would continue to be under pressure because of the rising input cost and promotional outgo. It has to hike the product price to negate the impact of rising input costs. However, the stiff competition in the industry would prevent the company from passing on the entire impact of the rise in input costs.

This apart, much of the future success of TVS-Suzuki hinges on the commercial success of the recently-launched Fiero -- the four-stroke motorcycle. The company has to compete with players such as Bajaj Auto and Hero Honda in the four-stroke segment. Both these companies have well-established brands. Bajaj's product portfolio includes popular brands such as Kawasaki Bajaj 4S Champion and Caliber, while Hero Honda dominates the segment with top brands such as Splendor and CBZ.

Though TVS-Suzuki has a track record of successful product launches, the competitive dynamics is different in the four-stroke segment. Here, the company has to compete with stronger brands and the four-stroke segment per se is well-segmented by the existing players. Between Bajaj and Hero Honda, the broad spectrum of the four-stroke motorcycle segment has been almost entirely taken care of.

At the lower end of the segment, Bajaj has its Boxer range of motorcycles while the mid-price segment is highly competitive with strong brands such as 4S Champion, Caliber and Splendor. The top end of the four-stroke motorcycle segment has been tapped effectively by Hero Honda through the CBZ range.

TVS-Suzuki has to first create a niche for itself in the four-stroke segment. Being a new product, it would take some time before Fiero attracts consumer fancy. This apart, it would have to compete with Hero Honda's CBZ, which is growing at a fast clip. Though it would be premature to conclude anything about Fiero's future, it would take quite some time and effort for TVS-Suzuki to break into the four-stroke segment.

In the meantime, the company has planned a relaunch of Spectra, the success of which would again be critical from the long-term viewpoint. The company has also planned a slew of new product launches, the success of which would play a crucial role in shaping the company's prospects.

From an investment perspective, there is no compelling reason to sell the existing holdings in TVS-Suzuki. Fresh purchases can be contemplated after reviewing the consumer response to Fiero.