TVS Suzuki: Hold/Sell on uptrend

Recommendation: Hold/Sell on uptrend

B. Krishnakumar

THE stock market continues to be stuck in a relatively narrow range.

The two-wheeler segment, that managed to withstand the overall slowdown in automobile sector till now, is also witnessing signs of a slowdown. With base metal prices ruling firm, the margins of two wheeler producers would be under pressure. TVS Suzuki, with its financial performance already under strain, is unlikely to see any major improvement in earnings this year.

The company's share price has already been badly battered at the bourses. Given that Fiero (four stroke motorcycle) has seen a reasonable level of success, the company could see some improvement in performance, if Fiero turns out to be a big hit. Existing holders could therefore remain invested. Fresh investment may be contemplated after reviewing the performance of Fiero over the next quarter. Intermittent price rally could be used to cut exposures in the company.

After a phenomenal run, in terms of sustained growth in performance and increase in market capitalisation, TVS Suzuki has had a bad patch in the recent months. The muted success of Spectra -- the four stroke scooter -- and the incremental cost incurred to comply with new emission norms, have affected the company's performance.

For the year ended March 2000, the company's turnover increased by about 23 per cent to Rs 1,621 crore. The increase in input costs on account of fitment of catalytic converters (to comply with new emission standards) and the firm trend in aluminium prices affected the company's profitability. The post-tax earnings, as a result, remained almost stagnant at Rs 87 crore as against Rs 82 crore posted the previous year.

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In the meantime, with the recent launch of Spectra, the company has shifted its focus towards the fast growing four stroke motorcycle segment. Fiero appears to be steadily gaining market acceptance which is reflected in the improvement in offtake over the recent months.

The company's offtake of scooters (represented mainly by Scooty) and mopeds has seen a slowdown in the last couple of months. The company also appears to be slowing down in the offtake of motorcycles. While Fiero is picking up, its flagship brands such as Samurai and Max appear to have hit a plateau. As a result, the company's financial performance would continue to remain depressed, as reflected in the first half performance.

Though the growth in sales of Fiero would result in better profit margins, the lack of growth in overall volume would impede any significant improvement in the bottomline. With indications that aluminium prices would see a firm trend ahead on account of production cut backs by global majors, the production cost is bound to increase for TVS Suzuki and its peers.

The growing competition in the two wheeler sector would inhibit the company from raising product prices to counter the impact of an increase in input costs. As a result, the profitability would be strained, at least in the near term.

Given this backdrop, existing holders could remain invested while fresh investments may be deferred for the time being. Considering that the financial performance would be under pressure, any price uptrend could be used to book profit in the company.