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Encouraging outlook - Accumulate.

TVS Motors (TVS) is the third largest two-wheeler manufacturer in India with a domestic market share of 14.3% in FY21.

• Q3FY22 revenue growth came at 6% YoY (largely in-line with our estimate) due to improved product mix, The growth was largely driven by robust export demand of 13%YoY.

• Despite adverse commodity price, Strong cost control initiatives and price hike aided margin upbeat. Gained 50bps YoY.

• We expect confidence in the domestic market to recover gradually with the pick-up in the economic activity & pandemic relaxations. However, near term impact is likely due to elevated RM cost.

• Higher export, stability in exchange rate are currently driving the international numbers. However, the long term plan for the EV and its investment of Rs1000 cr. capex is on track.

• We rollover and value TVS on a SOTP basis, standalone business at 20x FY24E EPS (Rs.707/share) and TVS Credit Services at 1.0x trailing BV (Rs.29/share) to arrive at a target price of Rs.736/share and recommend Accumulate rating at CMP.

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. TVS Apache, 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 activity and relaxation. However, near term impact is likely due to elevated RM cost. Higher export, stability in exchange rate and expanding to newer geographies are currently driving the industry numbers. Adj. PAT came at of Rs. 288cr growth of 9% YoY.

Higher Export and Product innovation.

TVSM has improved its overall market share by +110bps on account of both export and domestic. In addition, underachievement of the market share owing to lack of positioning, reaffirmation of the existing brands was also largely addressed in both domestic and export market. For the Quarter, export volume grew by 13% YoY. Export revenue stood at Rs.1,878cr. This was largely on account of the different variant the company can offer in newer markets and premiumization. We also believe, unlocking in Srilanka and Bangladesh market will drive volume in these markets.

Key Highlights.

Key takeaways from earnings call:1)TVSM has invested Rs ~750cr in subsidiaries in 9mFY22, and further 700cr likely in Q4 given the acquisition of ‘SMEG’ a European E-bike manufacturer in Jan‘22 of over Rs.500cr, to enhance its expansion plan in European region. 2)The company has taken price hike of ~1.2% in Q3. 3) TVSM’s Rs1000cr allocation for EV development and plans is on track to launch 10 new models 4) For the quarter the company took price increase of 1.1% to offset elevated RM cost. 5)With the opening up of economy the company see demand coming back to normalcy 5) Book Size of TVS Credit Services stood at ~Rs12,805cr, as of Dec end. The collection in Q3 is also improved to 23%YoY due to Nill provisioning in the last quarter. GNP stood at 3.9% (against 4.4% in Sep.) and 6) 2W-EV– iQube units sales stands at 6000/m and available across 33 cities. 3W-EV, expected to ramp up production from January onwards.

Valuations.

Amid Cautious outlook, sustainability of the margin is possible, with respect to superior product mix and product innovation. Considering the better revenue visibility, improving economic situation and healthy export outlook . We rollover and value TVSM's standalone business at 20x FY24E EPS (Rs.707/share) and TVS Credit Services at 1x trailing BV (Rs.29/share, (15% holding dis.)) to arrive at a target price of Rs.736/share and recommend Accumulate rating at CMP.

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