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Superior product mix to drive profitability.

TVS Motors (TVS) is the third largest two-wheeler manufacturer in India with a domestic market share of 17.6% in FY22

• Q1FY23 revenue grew by at 9% QoQ and recorded highest ever revenue and EBITDA, due to improved product mix and price hike. 

• Despite adverse commodity price, strong cost control initiatives has aided margin to maintain at 10.0%(+302bps YoY).

• In the domestic market, It aims a gradual recovery with the pick-up in economic activity & ramp up in the EV portfolio. TVS is planning to reach 10,000 units/month EV sales by H2FY23.

• Higher export and stability in exchange rate are currently driving the international numbers. Export grew by 7%QoQ. The company has outperformed the domestic industry growth by 17%YoY.

• We value TVS on a SOTP basis, standalone business at 25x FY24E EPS (and TVS Credit Services at 1x BV to arrive at a target price of Rs. 964/share and maintain our Accumulate rating

Margin continues to show resilience..

Despite higher commodity price, company continue to report 10% EBITDA margin due to superior product mix and cost control management. Total volume increased by 37.9%YoY & –2.2% QoQ to reach at 9,06 lacs units. In which, 2W grew by 8.6% and 3W by 17.8% YoY. TVS Radeon, Jupiter and N-Troq continue to witness strong brand visibility among consumers, which has resulted in lower marketing expenses. We expect the confidence in the domestic market to recover gradually with the pick-up in the economic activities and positive triggers from the rural market. Higher export, stability in exchange rate and expanding to newer geographies are currently driving the industry numbers. We expect the volume to grow at 13% CAGR over FY22-24E.

Higher Export and Product innovation.

TVSM has improved its overall market share by +20bps YoY on account of both export (+30bps) and domestic(+150bps). In addition, underachievement of the market share owing to lack of positioning, reaffirmation of the existing brands has also largely addressed in both domestic and export market. For the quarter, export volume grew by 7% QoQ. Export revenue share stood at 43% YoY for FY22. This was largely on account of the different variant the company can offer in newer markets and premiumization. We also believe, the growth in the export is likely to expand to develop markets through the acquisition of Norton UK.

Key Highlights.

Key takeaways from earnings call:1)TVSM has laid down a capex of Rs ~750cr in FY23 and further investment in subsidiaries around 300-400cr. 2)TVSM’s Rs1000cr allocation for EV development and plans is on track to launch 10 new models 3) For the quarter the company took price increase of 1.5% to offset elevated RM cost. 4)With the opening up of economy the company see demand coming back to normalcy 5) Book Size of TVS Credit Services stood at ~Rs15,400cr, as on June end. GNPA is at 3.1%. The collection in Q1 is also improved and the PBT came at Rs.111cr. 6) 2W-EV– iQube units sales stands at 6000/m and available across 86 cities, and planning to reach 10,000 units/m to 25000/m to the end of FY23. 3W-EV, has also ramped up its production from January onwards. As outlook, the company expects the entry level bikes to do well owing to complete opening of the economy and nearing festive season.

Valuations

Amid Cautious outlook in the near term due to weak business environment, sustainability of the margin is justifiable, with respect to superior product mix, cost control initiatives, product innovation and price hike. In addition, respite in the commodity price to support margin. Given better revenue visibility, improving economic situation and healthy export outlook, We value TVSM's standalone business at 25x FY24E EPS (Rs.935/share) and TVS Credit Services at 1x BV (Rs.29/share, (15% holding dis.)) to arrive at a target price of Rs. 964/ share and maintain our Accumulate rating .

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