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Both domestic and export demand seeing gradual improvement

-      TVS Motor (TVSL) posted an operationally in-line performance in 3QFY24. The company posted its highest-ever EBITDA margin at 11.2% (+1,10bp QoQ). We believe TVSL is well placed to outperform the 2W industry, led by its multiple successful products in key categories, expansion in global geographies, and success in EVs.

-      However, we believe strong earnings growth driven by recovery in underlying segments and margin improvement is fairly captured in the current valuations at ~45x/37x FY24E/FY25E EPS. We retain our FY24E/FY25E EPS. Reiterate Neutral with a TP of ~INR1,880 based on ~27x Dec’25E EPS (vs. ~25x earlier) and INR176/sh for NBFC.

Better gross margins offset by higher other expenses

-      TVSL’s revenue/EBITDA/adj. PAT grew 26%/40%/68% YoY in 3QFY24 to INR82.45b (in line)/INR9.2b/INR5.9b (est. INR5.5b). 9MFY24 revenues/EBITDA/adj.PAT grew 19%/30%/48% YoY.

-      Revenue growth was driven by ~25% YoY growth in volumes. ASP remained flat at INR74.9k per unit (in line).

-      Gross margin expanded 220bp YoY to 26.3% (est. 25.9%), driven by stable RM costs. Operating leverage aided EBITDA margin expansion by 110bp YoY to 11.2% (est. 11.5%). EBITDA grew ~40% YoY to INR9.2b (in line).

-      Other expenses were high due to marketing spending during the festive season. Other income was high at INR734m (est. INR60m) as it included profit from the reduction of capital amounting to INR827m (balance was notional loss due to fair value of investment). The tax rate was low at 23.4% (est. 25%).

-      As a result, adjusted PAT grew 68% YoY to INR5.9b (est. INR5.5b).

Key takeaways from the management interaction

-      Domestic- The management expects positive demand momentum to continue in 4Q, driven by healthy growth in rural areas despite some challenges in sowing. Retail financing has also been favorable. TVSL believes growth will be significant in urban and semi-urban regions.

-      Exports- A recovery in international markets should continue as inflation is settling down; however, currency availability is still an issue in African markets. Customer retails are happening. Sri Lanka has started opening up.

-      TVS credit- PBT grew 75% to INR2.29b in 3QFY24. Gross book size stands at INR250b, with GNPA at 3.1% and capital adequacy ratio of 8.6%. Disbursements stood at INR70b vs. ~INR60b in 3QFY23. 

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 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.

-      We now value TVSL at 27x Dec’25E EPS (25x earlier), led by a visible recovery in domestic 2W volumes, sequential growth in exports, and success in EV scooters. Valuations at ~45x/37x FY24E/FY25E EPS largely reflect its strong earnings growth as well as the increasing risk of EVs. Reiterate Neutral with a TP of ~INR1,880 (premised on ~27x Dec’25E EPS + INR173/share for NBFC).

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