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B. Krishnakumar

Pick up in two-wheeler demand will drive growth.

LONG-TERM investors may consider exposures in TVS Srichakra at the prevailing market price of Rs 58. The recent developments indicate that the company might report better performance in the remaining three quarters of this fiscal. Taking into account the healthy dividend yield and growth prospects, investors may buy this stock in small lots at present levels and add more on declines.

The company is a major player in the two-wheeler tyre industry. It supplies tyres to almost all the two-wheeler majors, including Bajaj Auto, Hero Honda and TVS Motor. The company derives close to 55 per cent of the earnings from the original equipment market, 30 per cent from replacement segment and export earnings account for the balance.

With a major exposure to the original equipment market, the trend in two-wheeler production, motorcycle production in particular, tends to have a major influence on the company's performance.

TVS Srichakra's performance, as has been the case with other tyre companies, has been lacklustre in the recent quarters. A sharp rise in raw material prices, mounting competitive pressure and the not-so-robust demand affected the performance of tyre majors.

For the year ended March 2004, the company reported a two per cent drop in net turnover to Rs 203.04 crore. Post-tax earnings fell 12 per cent to Rs 6.9 crore. Apart from the rise in the prices of key raw materials such as natural rubber, carbon black and tyre cord, the slowdown in volume growth at TVS Motor's end affected its performance.

A similar trend in performance was evident in the first quarter earnings as well. After a sharp pick-up in volume motorcycle sales, TVS Motor had to contend with a slowdown in volume growth in the pervious fiscal. Besides, the motorcycle industry as such recorded a nominal growth last year. This also affected the performance of the company.

The performance of TVS Srichakra is likely to improve. The softening trend in the price of natural rubber, the recent hike in tyre prices and the pick-up in sales volume at TVS Motors are a few of the latest developments that would have a positive impact on the company's performance.

After a sharp rise, the price of natural price has softened over the past few weeks. The recent relaxation of norms pertaining to rubber imports is also likely to keep rubber price rise under check. Besides, TVS Srichakra has also the revised prices of tyres sold in the replacement market. This would have a positive impact on the profitability.

The pick-up in sales volume of TVS Motor's Centra range of bikes is another positive development from TVS Srichakra's perspective. Considering that the company caters to about 70 per cent of Centra's requirement, the pick-up in volume would push up company's sales volume. The dividend yield of about 5.5 per cent is another positive feature from the investor's perspective.

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