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Operationally in line; higher other income leads to PAT beat

Both domestic and export demand improving gradually

* TVS Motor Company (TVSL) posted an in-line operating performance in 2QFY24, wherein it recorded the highest-ever EBITDA margin of 11% (+40bp QoQ; in line). It still has a further scope of margin improvement in the coming quarters, led by operating leverage and lower marketing expenses that was incurred in 2Q for new launches.

* However, we believe the strong earnings growth driven by a recovery in underlying segments and margin improvement is fairly captured in the current valuations of 35.7x/30.4x FY24E/FY25E EPS. We maintain our FY24E/FY25E EPS. Reiterate Neutral with a TP of ~INR1,500 (premised on ~22x Dec’25E EPS + INR168/sh for NBFC).

Better gross margin offset by higher other expenses

* TVSL’s revenue/EBITDA/adj. PAT grew 13%/22%/32% YoY in 2QFY24 to INR81.45b (in line)/INR9.0b/INR5.4b (v/s est.INR5.2b). 1HFY24 revenue/EBITDA/adj. PAT increased 16%/24.5%/38% YoY.

* Revenue growth was driven by ~5% YoY growth in volumes and ~8% YoY growth in ASP to INR75.8k per unit (est. INR76k).

* Gross margin expanded 220bp YoY/60bp QoQ to 26% (est. 24.5%), driven by stable RM costs and moderate price hikes.

* Better gross margin was partially offset by high other expenses (due to marketing spends on new products launched in 2Q and R&D). EBITDA margin expanded 80bp YoY (+40bp QoQ) to 11% (in line).

* EBITDA grew ~22% YoY to INR9b (in line) in 2QFY24. Higher other income due to a fair valuation of investments in TVS Supply Chain Solutions (INR375m) boosted adj. PAT to INR5.4b (+32% YoY) vs. our estimate of INR5.2b.

* FCFF in 1HFY24 declined to INR10.6b (v/s INR11.2b in 1HFY23) despite better operating cash flows of INR16b (v/s INR14.4b in 1HFY23), due to a higher capex of INR5.4b (v/s INR3.2b in 1HFY23).

* TVSL invested INR2.4b in TVS Motor Singapore and divested INR1b in TVS Credit Services (for 1HFY24 it invested INR1b in credit services). The net contribution of subs/associates was a net loss of INR1.5b in 2QFY24 (v/s loss of INR212m in 2QFY23 and loss of INR333.4m in 1QFY24) due to losses in Norton Motorcycle/other recent investments.

Key takeaways from the management interaction

* Domestic: Ongoing festivals have started on a positive note, and TVSL believes that growth should sustain for the coming period as well. Rural should possibly do well while growth in urban has continued. Inventory levels stood at 25-30 days.

* Exports: International markets, including Africa, are settling down and retail is picking up. TVSL does not have much stock in the market. After Africa, the company is now focusing on the LATAM market with the right set of products leveraging Apache, Raider and Ntorq.

* IQube: Ramped up production to ~25k units per month; TVSL is planning to take this to the next level. It has strong bookings and now the company plans to launch a series of products in the range of 5kW to 25kW over the next one year. It has started supplying iQube in the international markets and the product will be available in more markets (including Europe) over the next 2-3 quarters.

* The company has guided for a capex of INR10b in FY24 largely towards EVs. TVSL has incurred investments of INR6.2b in 1HFY24 and will be looking at INR8-9b for FY24. It has made investments of INR1b towards TVS Credit, INR1.8b towards Norton, INR1.9b for SMEG and some investments towards TVS Digital.

Valuation and view

* Volume growth is likely to be driven by a recovery in the domestic 2W market, new products, and a recovery in exports. TVSL is enjoying the benefits of economies of scale and operating leverage, which help it sustain its EBITDA margin at the double-digit level. However, TVSL earns ~40% of its overall EBITDA from the domestic scooter business, making it vulnerable to EV disruption.

* TVSL’s valuations at 35.7x/30.4x FY24E/FY25E EPS largely reflect its strong earnings growth as well as increasing risk of EVs. Reiterate Neutral with a TP of ~INR1,500 (premised on ~22x Dec’25E EPS + INR168/share for NBFC).

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