TVS Electronics (TVSE), which belongs to an industrial group that the market has consistently valued at above average earnings multiples, has managed to deliver a reasonably good performance for the first half of the current year. But as the TVSE stock already trades at a high earnings multiple, the improved results had very little impact.

The financial performance reported has essentially been a continuation of the growth in revenue seen last year. TVSE managed to grow its revenue by 22 per cent last year even though it could not grow volumes in its main business of supplying computer peripherals. The revenue growth came through an increase in capacities of uninterrupted power supply (UPS) packs, which are becoming increasingly indispensable for PC users.

In the first half of the current year the company's position was strengthened by a 63 per cent growth in volume sales of computer peripherals. Revenue was up by nine per cent over the same period last year. Margins were down marginally but more importantly, market share in printers has increased substantially. The trend is in line with TVSE's performance in the second half of last year where it managed to reduce operating costs. Consequent to that its operating profit in the second half was higher by 2.5 times. It does seem as if its focus on cost cutting and concentrating on the two segments - UPS systems and printers - is beginning to pay off.

And like most of the other companies under the control of Venu Srinivasan, this one also has consistently been able to rely on its internal cash generation for capacity expansions and funding incremental net current assets rather than relying on debt (its d/e ratio for 1996-97 is a little over 0.5:1, which is an improvement over the previous year). And at a p/e multiple of 20, the TVSE stock seems to fully reflect the markets enthusiasm for the company as well as the TVS group as a whole.

However, the earnings multiple for other group companies has come down of late; the reason being that almost all TVS group companies - Sundaram Clayton (TVSE's parent company), TVS Suzuki, Sundaram Fasteners, Lakshmi Auto Components, Sundaram Finance and Sundaram Brakes derive the bulk of their revenue from the automobile sector. The stock of Sundaram Clayton has already begun to reflect the possibility of a poor performance for the first half of the current year.

And in spite of Sundaram Brakes reporting a growth in profits for the first half, mainly due to a 20 per cent growth in exports, its stock is being pushed to new lows. Obviously, the drop in the company's domestic sales and the deteriorating operating environment has had its impact on the stock.

Local institutions increase market volatility

Stock market operators seem to be caught with short-term trends while cash flush domestic institutions seem equally caught with deploying surplus funds in stocks. This has led to two developments. One, there has been a sharp increase in volatility whenever the domestic institutions have stepped in to buy, and second, the bearish trend is being exacerbated by the presence of the institutions, as they tend to attract more sellers.

This was definitely the case on Tuesday; when the intra-day volatility on a normally placid BSE was rather exceptional. The Sensex went to a intra-day high of 3,852 points, at the point the institutions were in the market chasing Sensex stocks. Thereafter, the market looked overpriced enough to bring in a large number of sellers, sending the Sensex crashing all the way down to 3,800 points.

As long as the institutions remain bullish or rather try to take exposure to the equity market through the liquid Sensex stocks, this kind of volatility is bound to continue.

But no matter the extent of volatility or demand from institutions, any rise in stock prices, even in counters like ITC, Castrol and Hindustan Lever, are simply being viewed as blips in an otherwise bearish market.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.