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Strong mix drives beat; looking to unlock value in NBFC

iQube to be launched Pan-India; secured order of e-3W from CESL

TVSL’s performance was above estimate driven by improved mix leading to strong ASP growth and margin beat. The management’s focus remains on expanding the EV capacity, its portfolio and reach. It is also searching for an investor in its NBFC business, which can unlock value.

We maintain our FY22E/FY23E EPS and Neutral rating with a TP of INR625, as valuations fairly capture the expected strength in earnings growth and risk of an EV disruption to its Scooter business

Strong mix drives realizations and margins

Revenue/EBITDA/adjusted PAT grew 6%/11%/8.5% YoY in 3QFY22 to INR57.1b/INR5.7b/INR2.9b, and grew 33%/55%/93.5% YoY in 9MFY22, respectively

Net sales grew 6% YoY (2% QoQ) to INR57.1b (est. INR55b). Realizations grew 19% YoY (6% QoQ) to INR64.9k (est. INR62.6k) driven by price hikes (5%/1% YoY/QoQ) and mix improvement (higher contribution of premium products and spares).

Contraction in gross margin was restricted to ~15bp YoY (flat QoQ) to 23.7% (est. 23.5 %) as the impact from commodity cost inflation was diluted by price hikes and better mix.

EBITDA margin expanded 50bp YoY (+30bp QoQ) to 10% (est. 9.5%), aided by operating leverage.

Lower interest costs boosted Adj. PAT to INR2.9b (v/s est.INR2.6b); which grew 8.5% YoY (10.5% QoQ)

Net contribution of subs/associate was a higher net loss of INR406m (v/s net loss of INR354m in 2QFY22 v/s profit of INR180m in 3QFY21), impacted by losses of Norton Motorcycles and auto comp business.

Key takeaways from the management interaction

4QFY22 outlook: TVSL is confident of growing ahead of the industry in both India and exports. Exports will continue to grow as economic conditions are stable in all the key markets.

EVs: It received 6,500 bookings for iQube e-2W, but electronic part supply chain is a challenge. With the easing of supply-side issues, TVSL is planning to have a capacity of 10k/month by 1QFY23 and planning a pan-India launch by end-FY22. Additionally, it has got orders for 2,000 e-3Ws from CESL (subsidiary of EESL).

TVS Credit (TVSL’s 84.3% NBFC subsidiary) is actively searching for an external investor as its growth partner, which can unlock value.

Increase in investments for FY22: Though TVSL has maintained its FY22 capex at INR7.5b (including investment in EVs); its investment guidance has been raised to INR14-14.5b (v/s INR7.5 guidance earlier). The management has indicated that it would invest further INR6.5-7b in 4QFY22 in SEMG (recent acquisition of an e-bike company in Switzerland) and in its NBFC business (INR0.5-1b).

Valuation and view

Volume growth is likely to be driven by new product launches (Raider and Jupiter 125) in the domestic market as well as a ramp-up in exports. It is enjoying the benefits of economies of scale and operating leverage, resulting in the EBITDA margin sustaining at double-digit level. However, TVSL earns ~40% of its overall EBITDA from the domestic Scooter business, making it vulnerable to an EV disruption in the listed 2W space.

Valuations at 23.4x/19.5x FY23E/FY24E EPS largely reflect its strong earnings growth as well as increasing risk of EVs. We maintain our Neutral rating with a TP of ~INR625 (premised on ~18x Mar'24E EPS + INR37/share for the NBFC)

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