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Above est.; led by lower cost inflation, better cost mgmt.

Double-digit margins achieved in 4Q; balance sheet deleveraged

* TVS Motor Company (TVSL)’s operating performance was led by lowerthan-expected cost inflation, price hikes, a favorable mix, and cost reduction initiatives. While the lockdown is likely to impact in the near term, export strength, coupled with a continued focus on cost management, would support profitability.

* We upgrade our FY22/FY23E EPS by ~14% to reflect price hikes and astute cost management. Maintain Neutral, with TP of INR635.

Credible cost control leads to best EBITDA margins in over 15 years

* 4QFY21 revenue / EBITDA / adj. PAT grew 53%/119%/191% YoY to INR53.2b/INR5.4b/INR2.9b. FY21 revenue / EBITDA / adj. PAT came in at +2%/+6%/-0.9% to INR167.5b/INR14.3b/INR6.1b.

* Net sales grew 52.9% YoY (-1% QoQ) to INR53.2b (v/s est. INR51.8b) as realizations rose 4.3% YoY (+5.3% QoQ) to INR57.4k (v/s est. INR55.8k).  Gross margins expanded ~80bp QoQ (-30bp YoY) to 24.7% (v/s est. 23%) as the 150bp commodity cost inflation was more than offset by price hikes (100bps) and the cost reduction impact (100bp).

* It reported an EBITDA margin of 10.1% (+310bp YoY / +60bp QoQ; v/s est. 8.6%) on higher gross margins.

* Higher EBITDA and lower interest cost boosted adj. PAT by 8.9% QoQ to ~INR2.89b (v/s est. INR2.2b).

* The company generated FCF of INR3.38bn in 4Q and ~INR19b in FY21. Excl. sales tax loans, it has turned net debt zero.

Highlights from management commentary

* Demand: Localized lockdowns may hamper buying sentiment, but pan-India vaccinations may lead to high growth in 2HFY22. Rural demand would remain strong on the back of a normal monsoon season and high crop yield. Exports would see growth in all key markets.

* It expects a further 1.9% QoQ increase in RM cost in 1QYF22, for which it has already taken a 1.6% price hike in Apr’21.

* EVs: TVS iQube was recently launched in Delhi (second market after Bengaluru). It plans to launch this in more than 20 new cities in FY22. It would also expand the capacity and portfolio of e-2Ws. Moreover, it plans to launch e-3Ws.

* The Indonesia business has turned PBT positive – 4Q/FY21 PBT stood at USD1.6m/USD3.1m (v/s PBT loss of USD3m/USD5.8m in 4Q/FY20).

* Capex for FY22 would be at INR5–6b. It would invest INR1.5b toward TVS CS and INR1b toward other projects.

Valuation and view

* TVSL’s volume growth is now falling in line with the domestic market as a large portion of the portfolio gaps has been filled, but the ramp-up in exports supports overall growth. However, it is seeing benefit from economies of scale and operating leverage, resulting in EBITDA margins trending toward the double digits.

* Valuations at 25.5x/18.7x FY22E/FY23E EPS already reflect a large portion of the earnings recovery. Maintain Neutral, with TP of ~INR635 (~20x Mar’23 EPS + INR32 for NBFC).

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