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Mix and margins set to improve…

TVS Motor’s (TVSL) Q2FY23 EBITDA margin at 10.2% (up 23bps QoQ) was in-line with consensus estimate. EBITDA per vehicle rose 8% QoQ to cross Rs7.1k led by: i) ~6% higher ASP due to 1% blended price hike taken, and ii) better mix due to higher share of premium models and iQube. Despite operating leverage benefit, EBITDA margin was flat QoQ because of higher marketing spend (up 30bps QoQ) on the launch of Ronin. Post the success of iQube (>25k pending bookings) breaching 8k vehicles per month sales, TVSL is targeting to ramp-up its production to 10k vehicles per month in Q3FY23 (25k/month by year-end). Company also plans to launch a diversified EV portfolio by FY25 with a few launches lined up from H2FY23 onwards. Ex-standalone, Norton continued to bleed due to a combination of fixed expenses and product development expenses without a single model getting sold. Captive NBFC continued to operate efficiently delivering PAT of ~Rs1bn with GNPA of 2.8%. Maintain BUY with a DCF-based target price of Rs1,284 (earlier: Rs1,093), implying 25x FY24E core EPS.

Key takeaways from earnings call:

* Blended realisation improved by ~6% QoQ led by a combination of ~1% price hike taken in Q2, price hikes taken in the latter part of Q1, ~40bps benefit from weaker domestic currency and improved mix through rising sales of the higher-priced iQube models. With export markets going through a rough patch, adequate price hikes are an issue recently in select export markets, impacting profitability partly. With retail sales growth during the domestic festive season at 30% and TVS holding on sub-30 days of dealer inventory, outlook for the coming months remains bright, especially with improvement in the semiconductor supply situation. TVS is gearing up for rising production of Ronin, Raider, Apache as demand is currently more than supply. With present supply of iQube at 8k units per month, TVS is planning to take it up to ~10k units per month in Nov-Dec’22 and to ~25k units by Mar’23.

* Gross margin remained flat QoQ with raw material cost decline resulting in benefits that are yet to fully reflect in numbers, though gross profit per vehicle improved by 6% QoQ through better mix. Weaker domestic currency rates on one hand helped export realisations and on the other hand increased the cost of import sourcing. Rising volumes of iQube also added to the gross margin pressure, as till it achieves the desirable break-even scale a month, would put pressure on the overall profitability. Other expenses were up ~24% QoQ due the launch-related marketing promotions for Ronin and expanding reach of iQube, impacting EBITDAM by ~30bps. Thus, with rising scale of iQube beyond the breakeven level, benefits of declining raw material prices, and export market situation gradually coming back to normalcy, we expect the company’s standalone EBITDA margin to progress towards ~12.5% by FY24E from ~10% currently.

* With captive NBFC delivering ~Rs1bn of PAT in Q2FY23 and Indonesian business continuing to be profitable, Rs300mn of losses at ex-standalone level imply Rs1.3bn of losses during the quarter from Norton and EV-related investments. With launch schedule of Norton getting closer, we believe gradual scaling up of the business will help TVS reduce losses from Norton and deliver consolidated earnings higher than standalone in the coming quarters.

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