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Above est.; beat driven by price hike, mix & better cost mgmt.

Inching toward double-digit margins; deleveraging balance sheet

* TVS Motor Company (TVSL)’s operating performance was driven by price hikes, a favorable mix, and lower other expenses. Good volume recovery, price hikes, and a continued focus on cost management would support profitability.

* We upgrade our FY21/FY22E EPS by 14.5%/4.2% to reflect for price hikes and astute cost management. Maintain Neutral, with TP of INR585.

Credible cost control leads to best EBITDA margins in over 15 years

* 3QFY21 revenue / EBITDA / adj. PAT grew 31%/41%/47% to INR53.9b/INR5.1b/INR2.6b. 9MFY21 revenue / EBITDA / adj. PAT contracted 11.7%/18.9%/3.8% to INR114b/INR8.9b/INR3.2b.

* Net sales grew 31% YoY to INR53.9b as volumes increased 20.4% YoY, and realizations grew 8.5% YoY (+2.7% QoQ) to INR54.5k (v/s est. INR53.4k).

* Gross margins expanded 40bp QoQ (-390bp YoY) to 23.9% (v/s est. 23.7%) as raw material cost inflation was offset by price hikes and an improved mix.

* It reported an EBITDA margin of 9.5% (v/s est. 9%; expansion of +70bp YoY and +20bp QoQ), supported by higher gross margins and lower other expenses, partially offset by high employee cost.

* Higher other income and lower interest cost boosted adj. profit by 47% to ~INR2.6b (v/s est. INR2.3b).

* It has announced interim dividend of INR2.1/sh (FY21E DPS of INR3.5).

* In 9MFY21, it generated FCF of ~INR16.2b, resulting in substantial balance sheet deleveraging. Excluding sales tax loans, it is now a net cash company.

Highlights from management commentary

* Urban retails are returning to pre-COVID levels, supporting the gradual uptick in the Scooter segment. Rural demand is buoyant with the highest rabi sowing.

* Export demand: Stability in the major export regions is driving demand, supported by stable oil prices and currency availability. Core demand for Indian brands is increasing in these markets. However, container-related issues continue to affect exports.

* RM cost: It has taken a ~2% price hike in Jan’21 (1% in 3Q and 1.5% in 2Q) to partially offset the impact of RM cost, leaving 80–90bps of uncovered RM cost. It expects to offset the remaining RM cost inflation through a better product mix and continued cost reduction efforts.

* Other expense: Decline is largely sustainable as it is shifting toward digital marketing v/s BTL activity

Valuation and view

* TVSL’s volume growth is now falling in line with the market as a large portion of the portfolio gaps has been filled. However, it is reaping the benefits of operating leverage, resulting in EBITDA margins trending toward double-digit levels.

* Valuations at 25.2x/19.8x FY22E/FY23E EPS are already reflecting massive earnings recovery. Maintain Neutral, with TP of ~INR585 (~20x Mar’23 EPS + INR52 for NBFC).

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