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Strong quarter; EV focus strengthens with new subsidiary

* Q2 EBITDA margin expanded by 70bps yoy to 10%, above our estimate of 8.7%, aided by the restoration of export incentives, higher spare-part sales and a one-time benefit (0.4% of revenues) relating to export incentives of the last two quarters. Revenues rose 22% yoy to Rs56.2bn, above our estimate of Rs54bn, mainly due to a 39% jump in spare-part sales.

* The domestic 2W volume outlook is positive, and premium motorcycles/scooters could outperform ahead. In addition, the export outlook is encouraging, owing to healthy demand in Africa and Latin America regions. We expect 11% volume CAGR over FY22-24E.

* TVSL board approved the incorporation of a subsidiary to undertake the electric mobility business. It will invest Rs10bn on product development and capacity expansion. EV launches are targeted at segments such as premium scooters, high-performance sporty motorcycles, commuter space, delivery market and 3Ws.

* We increase FY22-24 EPS estimates by 1-3% on higher revenue assumptions. We expect robust revenue/earnings CAGRs of 13%/27% over FY22-24E. Retain Buy with a TP of Rs800 (Rs780 earlier), based on 24x Dec’23E EPS (25x Sep’23E earlier) and the value of TVS credit services at Rs26/share.

Strong quarter:

Revenue grew by 22% yoy to Rs56.2bn, above our estimate of Rs54bn, due to higher spare-part sales and the reinstatement of export incentives. Volume rose 6% yoy and realization grew by 16% yoy. Spare-part sales increased by 39% to Rs6.1bn, representing 11% of revenues. EBITDA margin expanded by 70bps yoy to 10%, above our estimate of 8.7%. Results include a one-time benefit worth 0.4% of revenues, relating to export incentives for the last two quarters. Consequently, PAT grew 41% yoy to Rs2.8bn, above our estimate of Rs2.2bn.

Increasing focus on EVs:

TVSL board approved the incorporation of a subsidiary to undertake the electric mobility business. Management highlighted a strong product pipeline and Rs10bn investment plan, which would qualify for PLI scheme benefits (Report). It has set up a dedicated 500-member R&D team and a manufacturing facility with monthly capacity of 10,000 units (to be operational from Jan’22). It currently sells iQube electric scooter in 33 cities, and is planning to make the model available across 1,000 dealerships in major towns and cities ahead.

Retain Buy with a revised TP of Rs800 (Rs780 earlier). Key downside risks include delays in economic recovery, rising competitive intensity, further increase in commodity prices and adverse movement in foreign exchange rates.

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