Even as we expect TVS to continue outperforming the industry on both volume & Ebitda growth, we maintain Hold given our concerns that consensus expectations are too high given the ongoing challenges in the industry.
TVS’ Q1 EBITDA/EBITDA margin surprised positively, driven by a better gross margin, for a change. The management attributed this to lower RM costs (to continue in Q2) and cost reduction initiatives; better forex realisation in exports also helped. Commentary on the 2-wheeler industry was cautious though as it expects a continued y-o-y decline for rest of FY20E due to demand weakness & BS VI. Its own channel inventory is 5 weeks & it expects to continue to outperform industry growth.
TVS’ Q1 Ebitda/Ebitda margin were ahead of our estimate helped by a sharp improvement in gross margin (+150 bps q-o-q and 90bps ahead of expectation). The management attributed this to a combination of lower raw material costs and cost reduction initiatives; better than expected INR-USD realisation of 70.4 is also likely to have helped. TVS indicated that benefits of lower RM costs will continue to play out in Q2 as well. Net profit was largely in line though due to higher depreciation, finance & tax expenses. The company indicated a marginal +5bps (Rs 220 lakh) impact on Ebitda margin of new lease accounting norms while at the PBT level, it was negative Rs 180 lakh.
Management expects the industry growth to remain negative for rest of FY20E due to muted economic activity and transition to BS VI though the rate of decline could improve relative to Q1 (-12% y-o-y).
TVS itself expects to grow ahead of industry; its channel inventory is currently 5 weeks. 1> It attributed weakness in mopeds (-21% y-o-y in Q1) to rural weakness and sharp increase in costs 2> it plans to start BS VI transition in Q3 with full production in Q4 3> EVs in 2w/3w are planned to be launched in FY20E 4> TVS has taken a 0.1% price escalation inQ1 and another 0.2% in July. Even as we expect TVS to continue outperforming the industry on both volume & Ebitda growth, we maintain Hold given our concerns that consensus expectations are too high given the ongoing challenges in the industry.
Our price target of Rs 460 is based on DCF and implies 29/26x FY20/21E P/E, which we consider appropriate given strong growth prospects.