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Operating performance in line; highest revenue and EBITDA

Expect a recovery during Diwali after a weak Navratras

* TVSL’s operating performance was in line, though higher depreciation and interest resulted in lower PAT. The management’s focus is on expanding EV capacity, its portfolio and reach, along with the creation of a wholly-owned subsidiary for EVs.

* We maintain our FY22E/FY23E EPS estimate and Neutral rating, with a TP of INR635 per share, as valuations fairly capture expected strength in earnings growth and risk an EV disruption to its Scooter business.

Margin expansion led by credible cost management

* Revenue/EBITDA/adjusted PAT grew 21.5%/26%/33% YoY in 2QFY22 to INR56b/INR5.4b/INR2.6b, and rose 58%/113.5%/488.5% YoY in 1HFY22.  Net sales grew 21.5% YoY (42% QoQ) to INR56b (est. INR55.9b). Realizations rose 15% YoY (2% QoQ) to INR61.1k (est. INR61k) due to price hikes and better mix. It has received an estimated INR225m in RoDTEP incentives in 1HCY21.

* Contraction in gross margin was restricted to ~50bp QoQ (+30bp YoY) to 23.8% (est. 23.9%) as the commodity cost inflation was diluted by price hikes and better mix.

* EBITDA margin grew 270bp QoQ (30bp YoY) to 9.7% (est. 9.8%), aided by operating leverage, despite higher than estimated staff cost.

* Adjusted PAT grew 33% YoY (244% QoQ) to INR2.6b (est. INR2.9b), restricted by higher depreciation and interest cost.  Standalone FCF was a negative INR1.14b in 1HFY22 (INR4.9b including investment in subsidiaries) as there was a working capital outflow of INR5.5b. Capex and investments in subsidiaries/associates stood at INR2.49b and INR5.1b in 1HFY22, respectively.

Key takeaways from the management interaction

* Demand outlook: Retail sales in Navratras declined on a high base (pent-up demand in FY21), while rural demand was affected by erratic rains. Retail sales are expected to pick up during the Diwali season, supported by normalization of the monsoons and reduction in COVID-19 cases. TVSL expects to do better than the industry on the back of new launches (TVS Raider 125/Jupiter 125).

* Electric Vehicles: TVS iQube has a healthy order book. It is already available in 33 cities, and the management plans to expand pan-India by FY22-end. It plans to expand monthly capacity to 10k units by Jan’22. It is incorporating a wholly-owned subsidiary for the EV business to increase focus, flexibility, and freedom.

* Semiconductor shortage: It is currently impacting iQube production. It has impacted Apache volume by 25k units in 2QFY22. However, supplies are now improving for Apache.

* Capex stands at INR7.5b in FY22 (1H at INR2.49b), including investment in EVs (~INR3b). It would invest INR7.5-8b toward TVS CS (INR2b), Norton (INR1.2b), TVS Supplychain (INR1.3b), E-GO (INR1.4b), among others.

Valuation and view

* Volume growth is expected to be driven by new product launches (Raider) 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 EBITDA margin nearing the double-digit range. TVSL earns ~40% of overall EBITDA from the domestic Scooter business, making it vulnerable to an EV disruption in the listed 2W space.

* Valuations at 25.2x/18.9x FY22E/FY23E EPS largely reflects the strong earnings growth as well as increasing risk of EVs. We maintain our Neutral rating with a TP of ~INR635/share (~18x Sep'23E EPS + INR33/share for the NBFC).

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