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In-line op. performance; credible cost management

Management confident of achieving double-digit EBITDA margins

* TVS Motor Company (TVSL)’s operating performance was in-line, led by good cost management. However, higher interest/depreciation led to below-estimate PAT. As volumes return, profitability is expected to recover to over 10%.

* We increase our FY22 EPS estimate by ~7.6% to reflect higher realization and astute cost management, while maintaining our FY23E EPS estimate. Maintain Neutral, with TP of INR625.

Price hikes and favorable mix offset high commodity cost inflation

* 1QFY22 revenue / EBITDA / adj. PAT declined 26%/49%/73% QoQ to INR39.3b/INR2.74b/INR757m.

* Net sales grew 175% YoY (-26% QoQ) to INR39.3b (v/s est. INR37.9b) as realizations grew 11.5% YoY (+4% QoQ) to INR59.8k (v/s est. INR57.7k).

* Gross margin contraction was restricted to ~40bp QoQ (+20bp YoY) to 24.3% (v/s est. 23.5%) – as commodity cost inflation was diluted by price hikes (110bps), a favorable mix, and cost management.

* The EBITDA margin declined 310bp QoQ to 7% (v/s est. 7.1%), impacted by higher staff cost and operating deleverage.

* Higher interest/depreciation restricted adj. PAT to INR757m (v/s est INR955m), decline of ~73% QoQ. An extraordinary expense of INR302m was reported due to COVID-related expenses.

Highlights from management commentary

* Demand has improved in Jul’21 and is approaching 4Q retail levels. It expects demand to normalize from Sep–Oct’21.

* Exports: The momentum in exports is expected to continue (ex-Bangladesh and Nepal, as they are yet to re-open). It expects even Bangladesh and Nepal to see recovery from Aug’21.

* Commodity cost impact and margins: The commodity cost impact in 1Q was offset by a favorable product mix, cost-saving initiatives, and price increases. It took a price hike of 1.1% in Apr’21 and 2.4% in Jul’21. Post the Jul’21 price increases, under-recovery on account of cost inflation stands at just 50bp. The management is confident of EBITDA margins normalizing, and volumes should be back at double-digit levels.

* EV plans: TVSL’s EV capacity is expected to be 10k units/month by 4QFY22, with further expansion planned next year. It has set up a separate vertical for EVs and would invest INR10b (~INR3b in FY22E) in building a product portfolio, capacities, and ecosystem for both 2Ws and 3Ws in India and the global market. TVS iQube is now sold in six cities and is expected to see expansion across the country by end-FY22.

Valuation and view

* TVSL’s volume growth is now falling in line with the domestic market, as the portfolio gaps have largely been filled, but the ramp-up in exports supports overall growth. However, it is seeing benefit from economies of scale and operating leverage, resulting in EBITDA margins trending toward the doubledigit range.

* Valuations at 22.3x/17.1x FY22E/FY23E EPS largely reflect strong earnings growth as well as the increasing risk from EVs. Maintain Neutral, with TP of ~INR625 (~18x Mar’23 EPS + INR32 for NBFC).

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