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Revival in growth expected in second half.

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

* Q1FY22 revenue came lower at 26% QoQ due to pandemic related disruption, leading to supply constraints, lower utilization and thus negative operating leverage.

* Despite adverse commodity price, Strong cost control initiatives and superior product mix helped the margin to reach at 7%, against 10.1% during Q4FY21.

* We believe sentiments in the rural is positive due to normal monsoon and nearing festive demands. However, near term impact is likely due to elevated RM cost and higher dealer level inventory.

* Higher export, stability in exchange rate are currently driving the international numbers. Company for the first time achieved 1 lakh units milestone in march for 2W in international market.

* We value TVS on a SOTP basis, standalone business at 22x FY23E EPS (Rs.572/share) and TVS Credit Services at 1.0x trailing BV (Rs.38/share) to arrive at a target price of Rs.610/share and upgrade our rating to buy due to significant correction in price.

Cost management & product mix offset further decline.

Despite lockdown, company reported 7% 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 believe that the sentiment in the rural is positive owing to expected normal monsoon.

However, near term impact is likely due elevated RM cost and time for normalization of economic activity. We believe the sentiments in the rural demand is positive owing to normal monsoon and expect revival in H2FY22. Higher export, stability in exchange rate, pent up demand are currently driving the industry numbers. Adj. PAT came at of Rs.83cr , which is not comparable due to lockdown.

Higher Export and Product innovation

For the full year FY21, TVS has improved its overall market share by +120bps on account of strong export (+440bps). 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 2%QoQ. Export revenue stood at Rs.1,830cr (Highest quarterly revenue). This was largely on account of the different variant the company can offer in newer markets and premiumization. We also believe, unlocking in Nepal and Bangladesh market will drive volume in these markets.

Key Highlights

Key takeaways from earnings call:1)TVSM has guided for capex of Rs800cr including Rs300cr for EV in FY22. Funding of capex would entirely from internal accruals. 2)The company has taken price hike of ~2.4% in July. 3) The company generated Free cash flow of Rs1,878cr by Q1FY22 as a result the net debt dropped further compared to Rs1,600cr in the last year.

4) For the quarter the company took took price increase of 1.5% 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 ~Rs10,653cr, as of June end. The company incurred a loss of 25cr in Q1 due to higher provision as collection were impacted. GNP stood at 5.2% (against 5% in March) and 6) 2W-EV– iQube launched in more than 20 cities and plans to launch 3W-EV.

Valuations

Amid Cautious outlook, sustainability of the margin is possible, with respect to superior product mix and product innovation. However, higher raw material price and competition from peers to put pressure on the margin for near term. We value TVSM's standalone business at 22x FY23E EPS (Rs.572/share) and TVS Credit Services at 1x trailing BV (Rs.38/share) to arrive at a target price of Rs.610/share and recommend buy rating at CMP.

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