Better product mix, cost cutting drive profitability. Volumes declined ~19% Y-o-Y (-4% Q-o-Q) to 885.8k units in 2QFY20. Realisations increased ~7% YoY (+1.4% Q-o-Q) to Rs 49.1k (our estimate: Rs 48.6k), driven by an improved mix and price increases. Revenues were down ~13% Y-o-Y to Rs 43.5 billion. Gross margin improved ~240bp Y-o-Y (+170bp Q-o-Q) to 26.6% (our estimate: 25%), driven by cost-cutting initiatives (120bp Q-o-Q) and mix (40bp Q-o-Q).
EBITDA margin improved 20bp YoY (+80bp Q-o-Q) to 8.8% (our estimate: 7.8%). Low tax boosted adj. PAT to ~ Rs 1.8 billion (our estimate: ~ Rs 1.5 billion), a decline of ~15% Y-o-Y. For 1HFY20, revenue/EBITDA/PAT were down ~4%/2%/6% YoY.
Heavy rain during Navratras in the central/east region and Maharashtra resulted in much lower retails. However, retails have started picking up since the last few days due to receding rains. Diwali retails are expected to be good for TVSL. Rural economy will likely improve either in 4QFY20 or 1QFY21 as sentiment is turning positive. The strong focus on cost reduction is leading to a continuous improvement in margins.
TVSL expects further commodity cost benefit in 2HFY20. Inventory is stable at five weeks. 1HFY20 capex stood at ~ Rs 3.3 billion and investments in subs at ~ Rs 2.4 billion. FY20 capex pegged at ~ Rs 6 billion.
We upgrade our EPS estimates by ~21%/7% for FY20/21, led by better margins and lower tax (deferred tax revaluation).
Valuations at 30.7x/23.9x FY20/21E EPS already reflect a large part of the earnings drivers, leaving no margin of safety for execution risk and change in competitive intensity. Maintain ‘neutral’ with a target price of Rs 434 (18x Sep’21E EPS + Rs 44/share for value in NBFC).