The Hindu Business Line : TVS Srichakra: Book profits

INVESTORS in TVS Srichakra, especially those who have entered at fairly lower levels, may pare exposure. The recent trend of rising sales and pressure on profitability is likely to continue in the near term. The scope for significant improvement in earnings appears limited, unless there is a significant hike in product price or a sharp drop in input costs.

TVS Srichakra is a prominent player in the two-wheeler tyre segment. It has a strong presence in the original equipment market. The company caters to almost all motorcycle manufacturers including Bajaj, TVS Motor and Hero Honda. Given the exposure to the original equipment market, the performance of the company is strong linked to the trends in two-wheeler production.

After a steady growth in earnings, the company's performance has taken a knock in recent quarters. For the quarter ended June 2005, the turnover increased by 33 per cent to Rs 61 crore. The company, however, had to contend with a net loss of Rs 1.3 crore opposed to a profit of Rs 0.95 crore for the quarter ended June 2004.

The growth in turnover appears to have been driven primarily by the improved offtake of motorcycles recorded by TVS Motor. Besides, Bajaj and Hero Honda also managed to post robust growth in motorcycle sales. This along with the growing contribution from exports has played a role in the 33 per cent growth in turnover.

The profitability has been strained by the sharp rise in the price of inputs such as natural rubber, carbon black and tyre cord. As the company caters mainly to the original equipment market, the profitability and the scope for price revision is relatively limited in comparison to the replacement market.

To address this issue, the company is negotiating with its customers for price hikes. It has also revised prices in the replacement market. These factors are likely to ease the pressure on profitability in the near term. However, the scope for any significant rise in earnings appears remote, as the price of inputs will continue to rule firm. The profitability improve noticeably only if the price of raw materials such as natural rubber and carbon black falls.

Taking into account these factors, the company is likely to post growth in revenues. The sustained growth in motorcycle sales will help the cause. But profitability could remain under pressure with the process of inputs showing no signs of softening. Given this background, the scope for any significant appreciation in the share price appears minimal. Investors may pare exposures.

Fresh investment in TVS Srichakra may be considered if there is a drop in raw material cost. The strong presence in the original equipment market and a healthy dividend yield are positive features from an investment perspective.

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