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Gradual recovery in rural sales, iQube ramping up; maintaining a Buy

For TVS Motors, 2W off-take turned tepid in the quarter. Management talked of a gradual recovery in rural markets and, finance penetration having improved, augurs well for a recovery. Semi-conductor shortages have begun normalising and we expect demand for premium motorcycles and scooters to improve. iQube volumes have substantially improved since its introduction and would further improve as the company plans to penetrate into tier-3 and 4 markets. We maintain a Buy at a revised TP of Rs1,350 (26x FY25e).

Rural recovery and greater off-take for premium 2Ws. Management said rural off-take has started showing signs of recovery and finance penetration is now ~60% (~45% last year). Premium off-take improved, which led to better realisations. Overall volumes grew 9% y/y to 879,423 units, but q/q were down 14%, while revenues were up 15% y/y to Rs65.5bn, but down 9% q/q. Management said semi-conductor shortages have begun to normalise in the last quarter, which led to greater offtake for premium 2Ws and it expects momentum to be much better in Q4 FY23. TVS Ronin received excellent feedback and the company is building it as a new brand. It is currently doing ~3,000 units a month. Customer acceptance of TVS iQube is even better. Q3 volumes were ~29,000 units and management expects to double that in Q4. Also, it plans to introduce 2-3 products in the next 4-6 quarters in the EV space targeting the 5-25kWh battery segment (premium). Accordingly, we expect 24% growth in FY24 and 17% in FY25

Better margins in the next two years. RM prices were stable in the quarter and the company raised prices ~1%. With better premium 2W off-take, healthy margins of 10.1% were maintained. As volumes pick up, we expect the proportion of premium 2Ws to improve, leading to better margins. Accordingly, we expect margins of 10.2% in FY24 and FY25.

Valuation. We expect a 20% revenue CAGR over FY23-25, and 26% earnings growth, leading to an EPS of Rs44.9. We maintain our Buy rating with a revised TP of Rs1,350 (26x FY25e), incl. Rs54 a share for TVS Credit Services.

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