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Buy TVS Motor Company Ltd For Target Rs.719

EV investment accelerates; margin focus continues

TVS Motor Company’s (TVSM) Q1FY22 operating performance was below consensus estimates as EBITDA margin came in at 7% (down 312bps QoQ) largely attributable to negative operating leverage. ASP jump of 4.3% QoQ (~Rs59.8k/unit) driven by mix, price increase (~1.1%) coupled with cost reductions led to superior gross margin performance (down only ~37bps QoQ). TVSL has undertaken price hike of ~2.4% in Jul’21 and only ~50bps of input cost under recoveries remain due.

Management reiterated that as volumes normalise (to Q4 levels), the margins too are likely to follow suit (~10%). We like the TVS template of growth based on customer centric product innovations, brand building and R&D. It is now pivoting into EV’s in a similar structured form (capex plan: Rs10bn) with end to end design, development and manufacturing focus. Maintain BUY.

* Key highlights of the quarter: Standalone revenues in Q1FY22 declined ~26% QoQ to ~Rs39.4bn while EBITDA margin shrunk 312bps at 7%. Gross margins held up well (down only 37bps QoQ) amidst rising input costs thanks to superior mix, price increases (1.1%) and cost reduction efforts. Employee costs remained sticky (down ~3% QoQ /159bps QoQ margin headwind) due to annual bonus pay-outs, wage settlements. Standalone Adj. PAT slumped ~71% QoQ to ~Rs833mn. TVSM also incurred exceptional expense of Rs300mn in covid relief measures.

* Key takeaways from earnings call: Management indicated: a) TVSM will incur capex of Rs10bn over next few years towards building electric portfolio, capacity expansion and supporting ecosystem; Rs3bn towards EVs has already been spent; current capacity stands at 10k units/month. EVs would be housed in a separate vertical which already has ~500 engineers dedicated for R&D b) Capex for FY22 is expected at Rs8bn; investment of Rs1.5bn-2bn is to be made in TVS-Credit services.

c) TVS Indonesia reported sales of 20k 2Ws (down ~10% QoQ) and 3W sales of 4k units; d) Q1 reported highest-ever export revenues at Rs18.3bn; spares revenue was ~Rs3.7bn. e) TVS Credit Services grew to a book size of ~Rs106.6bn, and PAT loss of Rs250mn; gross NPA stood at 5.2% vis-à-vis 5% QoQ, and moratorium book stood at 4-4.5%. f) TVSM plans to expand its EV offering (iQube) to >20 new cities in FY22, plans to launch new EVs in H2FY22 g) TVSM has invested in Singapore for Norton (Rs3.5bn), digital investments: (Rs2.2bn) and TVS Indonesia (Rs1.3bn); Digital investments are made in start-ups in connected factorybased and IOT-based technologies.

* Maintain BUY: We continue to like TVSM’s capability of delivering strong growth on the back of superior product mix and engineering prowess, its aggressive capital deployment into EV’s reflects well on their confidence on scale manufacturing and R&D capability. We revise our standalone earnings lower by -6.8% for FY22E. We value TVSM’s standalone business at an unchanged multiple of 24x FY23E EPS (Rs690/share) and TVS Credit Services at 1.0x trailing BV (Rs29/share) to arrive at a target price of Rs719/share (earlier: Rs722/share). Maintain BUY.

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