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In-line operating performance led by improved realizations

Near-term stress in exports | EVs to ramp up to 25k/month

* TVSL’s operating performance was in line with estimates driven by better realizationsin 1QFY23. However, higher other income due to sale of investmentsled to a beat in adj. PAT. Demand recovery in the domestic market is likely to be offset by potential stress in the export market. Further product launches in EV, however, could help in gaining market share in e-2W segment.

* We raise our FY23E/FY24E EPS by 12%/4% driven by: a) increase in volumes on supply-side improvement, b) favorable Fx and c) higher other income (for FY23E). Maintain Neutral with a TP of INR820, as valuations fairly capture the expected strength in earnings growth and risk of an EV disruption to its Scooter business.

Tight cost control measures support margins

* TVSL’s revenue/EBITDA/adjusted PAT grew 53%/119%/3.25x YoY in 1QFY23 to INR60.1b/INR6b/INR3.2b, respectively.

* Net sales grew 53% YoY to INR60.1b (est. INR59.3b). Realizations improved 11% YoY (3% QoQ) to INR66.3k (est. INR65.4k) propelled by price hikes and favorable Fx.

* Gross margin was stable QoQ (-40bp YoY) to 23.9% (est. 23.5%). RM basket was up 2% QoQ and the company took a price hike of 1.5%. EBITDA margin expanded 3pp YoY (flat QoQ) to 10% owing to operating leverage.

* Higher other income due to profit of ~INR219m on sale of investment led to a beat in adj. PAT, which surged 3.25x YoY/ 17% QoQ to INR3.2b in 1QFY23.

* Net contribution of subs/associate was a net loss of INR152m for 1QFY23 (v/s profit of INR30m in 4QFY22 and loss of INR859m in 1QFY22).

Key takeaways from the management interaction

* Domestic demand: Management expects the festival season sales to be better than the last two years aided by: a) opening up of the economy postCovid, b) normal monsoons supporting rural markets, and c) resolving chip issues due to sourcing from alternate supplier. Newly launched Ronin (modern retro offering) has been well received by the customers.

* Export demand: The company is seeing stress in some export markets due to depreciation of the currency in some economies and stress in Nigeria as well as other African countries.

* EVs: TVS iQube has 20k bookings (and has sold ~20k units so far) with presence in 85 cities. Production was ramped-up to ~4.5k units in Jun’22 and would be further ramped-up to 10k units/month in near future and further to 25k/month.

* Chip shortage is easing a bit as supplies are improving MoM due to sourcing from alternate supplier. Raider/Apache wholesales were affected adversely by chip shortages in 1QFY23, but expects improvement from 2QFY23 onwards.

* RM cost inflation in 1QFY23 was at 2%. Management expects some minor RM cost inflation in 2QFY23 with some cooling-off from 2HFY23.

Valuation and view

* TVSL’s volume growth is likely to be driven by new products (Raider and Ronin) in the domestic market as well as a ramp-up in exports. It is enjoying the benefits of economies of scale and operating leverage, resulting in sustenance of EBITDA margin at double-digit level. However, TVSL earns ~40% of its overall EBITDA from the domestic Scooter business, making it vulnerable to an EV disruption in the listed 2W space.

* Valuations at 27.8x/23.9x FY23E/FY24E EPS largely reflect TVSL’s strong earnings growth as well as increasing risk of EVs. We maintain our Neutral rating with a TP of ~INR820 (premised on ~20x Sep'24E EPS + INR40/share for the NBFC).

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