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Earnings above our estimates; cost pass-through and currencyrelated benefits drive margin

Commercial launch of EVs in three segments to begin from December 22

* TIINDIA’s 2QFY23 performance was driven by benefit of cost pass-through and currency-related benefits, despite lower revenue. The traction in revenue is expected to continue, led by a recovery in underlying Auto volumes, though exports may be subdued in the near term. Its EV program is on track, with e-3W and e-HCV bookings starting from Dec’22.

* We have raised our FY23/FY24 EPS estimate by 4%/1% to reflect the benefit of lower commodity prices and a favorable INR. We maintain our Buy rating with a TP of INR3,250 (Dec’24E SoTP-based).

Gross margin improvement drives PAT beat

* Standalone revenue/EBITDA/adjusted PAT grew 14%/30%/32% YoY to INR19.1b/INR2.5b/INR1.6b. The same grew 32%/30%/35% YoY in 1HFY23.

* Gross margin improved by 1.8pp YoY and 4.8pp QoQ to 36.8%, driven by settlement of commodity pass-through and a favorable INR. EBITDA rose 30% YoY to INR2.5b (above our estimate). EBITDA margin improved by 1.6pp YoY to 13.2% (est. 10.8%).

* Despite a lower-than-estimated other income and higher tax, adjusted PAT grew 32% YoY to INR1.6b (est. INR1.5b).

* It also reported an exceptional item of INR234.5m for an impairment provision in respect of investments made in its Sri Lankan subsidiary.

* Revenue from the Engineering business grew 16% YoY to INR11.9b (est.INR12.3b). PBIT margin stood at 13.8% (est. 10.5%) v/s 10% in 2QFY22.

* Revenue from the Metal Formed business grew 13% YoY to INR3.7b (est. INR3.4b). PBIT margin stood at 12.9% (est. 11.5%) v/s 11.9% in 2QFY22.

* Revenue from the Mobility business declined by 14% YoY to INR2.3b (est. INR2.8b). PBIT margin stood at 4.4% (est. 5%) v/s 7.6% in 2QFY22.

* CFO improved to INR3.5b in 1HFY23 (v/s INR900m in 1HFY22) due to a reduction in working capital and a strong operating performance. FCFF improved significantly to INR2.55b (from INR358m in 1HFY22), despite a higher capex of INR944m (v/s INR541m in 1HFY22).

* Consolidated revenue/EBITDA/adjusted PAT grew 16%/38%/44% YoY to INR38b/INR5.2b/INR2.9b (est. INR32.6b/INR3.8b/INR2b).

Highlights from the management commentary

* Volumes in the Engineering business grew 20% YoY. However, exports were impacted due to inventory destocking due to subdued demand in key markets, impacting near-term revenue.

* Volumes in the Metal Formed business grew 12% YoY. The Railway segment didn't see any recovery in 2QFY23, but the management expects this segment to recover in 2HFY23.

* The initial response of Montra e-3W has been positive. It will commence bookings from Dec’22, starting with 40 dealers in South India (Tamil Nadu, Kerala, Andhra Pradesh, and Telangana). It plans to expand into other markets from 1QFY24. It already has a tie-up with three financiers and will look to expand its financing tie-ups.

* The LEAP project for reducing costs began nine months back and has started yielding results, which was reflected in its 2QFY23 earnings. This is a three-year exercise, with the full benefit accruing in the future.

Valuation and view

* TIINDIA offers diversified revenue streams, with a strong growth in the core business (~34% standalone PAT CAGR over FY22-25), ramp-up in CGPOWER, and optionality of new businesses incubated under its TI-2 strategy.

* The stock trades at 46.6x/35.8x FY23E/FY24E consolidated EPS. We maintain our Buy rating and TP of ~INR3,250 (premised on Dec'24E SoTP, based on 35x for the standalone business and valuing listed subsidiaries at a 20% holding company discount).

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