IGI Logo

Margin acceleration surprises street

TVS Motor Company’s (TVSM) Q4FY21 operating performance was a beat to consensus estimates as EBITDA margin came in at 10.1% (EBITDA/vehicle was at an all-time high of ~Rs5.8k). ASP jump of 3.7% YoY (~Rs57.4k/unit) continues to reflect improving product mix, higher exports and price increase (~1%). TVSM in 2H witnessed strong operating leverage gains (volumes up 32%) which aided in negating the input cost inflation impact.

The template of success in automotive remains product, brand and then margin (10%+) which TVSM has now achieved. Superior working capital savings coupled with operating gains has led to FCF of ~Rs18.9bn in FY21, net-operating debt free status. TVSM plans to invest (capex: ~Rs5bn) and expand the EV capabilities and product portfolio while continuing to strengthen existing portfolio in domestic and exports. Maintain BUY.

* Key highlights of the quarter:

Standalone revenue in Q4FY21 grew ~52% YoY to ~Rs53bn while EBITDA margin improved 246bps at 10.1%. Gross margin contracted 85bps YoY to 24.7% due higher raw material, BS-VI costs impact. The company achieved 199bps reduction in other expenses via various cost-reduction initiatives and digitally oriented A&P spends (savings!). Adjusted PAT grew ~164% YoY to ~Rs2.9bn. Consolidated EBITDA margin contracted 223bps to 12.7%, while adjusted PAT grew 142% YoY to Rs30bn.

* Key takeaways from earnings call:

Management indicated: a) Strong FCF generation of ~Rs3.4bn in 4Q (FY21: Rs18.9bn); b) TVS Indonesia reported sales of 22.3k 2Ws (up 73% YoY) and reported a positive PBT of $3.1mn in FY21 (loss:$5.8mn in FY20) ; b) 4Q export revenue stood at Rs17.3bn; spares revenue was Rs5.3bn; c) TVSM plans to spend of ~Rs5bn capex in FY22 for EVs and new product development, ~Rs2bn in investments; d) TVSM has made Rs1bn equity investment in TVS Credit Services and investment of EUR18mn in digital initiatives and ~Rs400mn in Ultraviolet (EV); e) TVS Credit Services grew to a book size of ~Rs112bn, and PAT of 1.06bn; gross NPA level stood at 4.9% vis-à-vis 4.3% QoQ and capital adequacy stood at 18.5%; f) financing penetration for TVSM has reached ~42.5%, (against 49% last year); g) TVSM plans to expand its EV offering(iQube) to 20 new cities in FY22; and h) Cost-reduction initiatives (1% margin impact) coupled with pricing actions (2.6% hike in YTD-CY21) are l levers to protecting margins.

* Maintain BUY:

We continue to like TVSM’s capability of delivering strong growth on the back of superior product mix, engineering capabilities. It has continued on its EBITDA improvement trajectory and continues to invest in new technologies (e.g. EV). We upgrade our standalone earnings estimates by ~11% / 8.4% for FY22E / FY23E, respectively. We value TVSM’s standalone business at unchanged multiple of 24x FY23E EPS (Rs692/share) and TVS Credit Services at 1.0x trailing BV (Rs29/share) to arrive at a target price of Rs722/share (earlier: Rs668/share). We maintain our BUY rating on the stock.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer