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Superior product mix to support valuation.

TVS Motors (TVS) is the third largest two-wheeler manufacturer in India, with a domestic market share of 17.6% in FY23.

• Despite flat volume growth, Q3FY24 revenue grew by 26% YoY on the back of superior product mix, forex realization, and price hikes.

• The margin came in line with our estimate, supported by softening raw material prices and cost control initiatives.

• TVS continued to outperform its peers in Q3 and gained 160bps market share. To strengthen its 2W electric sales, TVS has lined up several models for FY24 and plans to sell 25,000 units per month.

• We anticipate a gradual recovery in domestic demand, driven by an improved sentiment in the rural market and the expansion of exports, particularly for premium vehicles and electric vehicles.

• We value TVS on a SOTP basis, and standalone business at 31x FY26E EPS and TVS Credit Services at 1x BV to arrive at a target price of Rs. 2,272/share and recommend Buy rating at CMP.

Margin resilience due to superior product mix

. Q3FY24 revenue grew by 26% YoY on the back of a superior product mix and price hike. Despite industry volume growth of 18.7%, TVS outperformed industry growth by 9%. TVS continued to outperform its competitors in the first quarter, increasing its market share in motorcycles by 50 basis points to a record 13.7% while maintaining its market share in scooters at 25%. This was largely driven by the growth in urban commuters and the strong product mix in the 125cc category. New products like Raider and iQube (EV) were well accepted by the customers. News Brands like Ronin & Radeon and existing brands like Apache Jupiter & NTroq continue to witness strong brand visibility among consumers. However, entry-level demand is still struggling, and the income level has not increased commensurate with the cost escalation, which is ~40% on vehicles. EBITDA margin came in line with our estimate, supported by softening raw material prices and cost control initiatives. As a result, PAT grew by 68% YoY.

Ramp up in the electric vehicle portfolio.

Despite the cut in FAME subsidy, management is confident of hitting a run rate of 25,000 units per month for the EV-2W. The company sold 48,000 units of electric vehicles in Q3. It also highlighted the need to expand the dealer network from 400 to 800 by year-end. Currently, 10% of the volume comes from EVs. To strengthen electric mobility, the company is planning to launch a few more new products covering 5KW to 25KW on the EV platform by FY24. Furthermore, it entered the European market with a strategic partnership with Emil Frey, thereby investing in products, technology, and marketing to build brands.

Key concall highlights

. Key takeaways from the earnings call: 1) TVS is in the advanced stage of the PLI approval process and confidence in future achievements. 2) Export and spare part revenue stands at Rs1,882cr and Rs792cr. 3) The average selling price of the vehicle is 0.5%YoY. 4) With the opening up of the economy, the company sees demand coming back to normalcy, supported by the ease in chip shortage. 5) The book size of TVS Credit Services stood at ~Rs25,300cr, till dec, and the PBT was Rs.230cr vs Rs.131cr last year quarter. 6)2W-EV-iQube unit sales stand at 20,000/ m and are available across 400 touch points, with 30,000 units booked in hand. 3W -EV has also ramped up its production and is likely to benefit from the strategic tieup with Amazon.

Valuations

. Despite potential competition and disruption from electric vehicles affecting 40% of its scooter portfolio, the company is poised to maintain a competitive edge in innovation and product engineering by introducing customer-centric products early and outperforming its peers. This trend is mirrored in the expansion into European and Latin American markets with the Norton brand. We rollover and value TVSM's standalone business at 31x FY26E EPS (Rs2,191/share) and TVS Credit Services at 1x BV (Rs.81/share, (15% holding dis.)) to arrive at a target price of Rs.2,272/share and recommend Buy rating at CMP.

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