TVS Motor Company rating: Buy | Delivering on margins yet again

Steady performance in the quarter; margins are likely to expand further; ‘Buy’ rating maintained with a target price of Rs 1,023.

tvs motor
TVSL is planning to address the market for 3kw-25kw range of EV battery packs in the next couple of years and have a well-diversified portfolio.

TVS Motor’s (TVSL’s) Q1FY23 performance was in line with our estimates – delivering an Ebitda margin of 10% (flat q-o-q). Ebitda per unit rose 2% q-o-q to Rs 6.6k led by ~3% higher ASP due to 1.5% blended price hikes taken and higher scooter mix at the cost of entry-level motorcycles. Strong brand recall, diversified domestic portfolio, rising export mix and success in the premium 2W segment have led to the company delivering 10% Ebitda margin for four consecutive quarters despite RM cost pressures and chip supply issues.

With the success of i-Qube (>20k bookings), TVSL is targeting to ramp up its production to 10k units/month by the forthcoming festive season (25k/month by year-end). Company also plans to launch a diversified EV portfolio by FY25 with a few launches lined up for the coming quarters. We believe the much-awaited stake sale in the EV subsidiary would create opportunities for potential value unlocking, while the tie-up with BMW and ramp-up of Norton production in the UK would help TVSL realise its global ambitions in coming years. Maintain Buy with a DCF-based target price of Rs 1,023, implying 22x FY24E core EPS.

Key takeaways from earnings call

Led by shortage of semiconductors, Apache and Raider production got severely impacted in May-Jun’22, resulting in the inventory getting fully absorbed and in turn impacting retails in Jun’22 partially. TVSL has secured an additional supplier for chips and, from Q2, production of these models is returning to normalcy, along with scope for restocking inventory, resulting in a stronger mix for the premium brand in Q2.

Current monthly production of I-Qube is ~5k units. Brand I-Qube has three variants across ranges and is available in 85 cities with the orderbook at ~20k units. Production is getting hampered due to chip shortages as it needs to have a fine balance between EVs and premium bike production. TVSL is planning to address the market for 3kw-25kw range of EV battery packs in the next couple of years and have a well-diversified portfolio.

Some export markets are witnessing limited availability of currency, currency rate volatility and hyper-inflation, as against a few others doing fairly well. TVSL is looking forward to a steady export demand momentum, albeit with demand for a couple of quarters getting slightly impacted due to the adverse macros. Diversification of the portfolio, gaining share on lower base in target markets, and partly passing on currency benefits would help sustain volume growth in the current adverse times in the export markets, in our view.

Raw material cost inflation was ~200bps q-o-q, but TVSL was able to absorb it fully through ~1.5% price hike and mix improvements. Scooter volumes increased by 18% q-o-q resulting in scooter mix improving ~350bps q-o-q to 34%. This compensated for loss in Apache production. In Q2, raw material costs are set to remain largely steady, with price hikes, scale and mix improvement likely to drive margin over the current 10%. Bulk of the margin benefit of raw material cost deflation would come from Q3, in our view.

TVS Credit Services’ PBT came in at Rs 1.1 bn in Q1 with GNPA at 3.1% and book size at Rs 154 bn. Capex for FY23 is planned at Rs 7.5 bn and investments anywhere between Rs 12 bn and Rs 14 bn.

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