TVS Motor Ranking – Buy: The automaker has done well given the tough times

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2W demand is expected to increase even as the company’s market share increases in several segments; ‘Buy’ retained with TP of Rs 800

Q3 TVS volumes fell 11% YoY, but Ebitda and PAT were up 9-11% YoY (3-5% above JEFe). Ebitda margin remained stable QoQ while Ebitda/vehicle increased 5% QoQ to reach a new high. We expect Indian 2W demand to recover from an abnormal low. Additionally, TVS gained market share in scooters, high-end bicycles and exports. It’s also getting aggressive on electric vehicles, expanding its portfolio and capacity. TVS, however, shared few details about its strategy for acquiring Swiss e-bikes. Keep Buy.

Good results in Q3: TVS’ ASP increased 6% YoY (+19% YoY) thanks to better mix and price increases, driving 6% YoY revenue growth. TVS recorded its highest gross profit and Ebitda per vehicle in the third quarter, reflecting the improvement in its franchise. Gross and EBITDA margins remained stable during the quarter. Third quarter EBITDA and PAT increased 9-11% year-on-year. The consolidated PAT at Rs 2.5 billion was however 14% lower than the standalone. TVS invested Rs 2.4 billion in Q3, including Rs 0.5 billion in the financing arm, Rs 1.2 billion in TVS Singapore and Rs 0.8 billion in Ultraviolette (electric bike start-up).

2W Indians with abnormal trough: Rising vehicle prices and Covid weighed heavily on Indian demand for 2W. However, we see signs of bottoming out and expect a gradual recovery from an abnormal cyclical bottom. We believe that the urban is better placed to bounce back. TVS exports are holding steady at around 100,000 units/month and the company expects momentum to continue. The recent ban on 3W imports in Egypt could, however, present some risk, in our view.

Franchise improvement: TVS has enhanced its franchise across multiple segments with an attractive product proposition. Its market share from FY17 to 9MFY22 is up: (i) from 15% to 21% in scooters, (ii) from 11% to 19% in 125cc+ motorcycles, (iii) from 16% to 24% in 2W exports and (iv) 21% to 32% in 3W exports.

Manage cost pressure well: TVS was able to manage the sharp rise in raw material costs well through price increases and internal cost control, and its Ebitda margin improved from 7-8% during FY17-19 at 10% in H2CY21. We expect further improvement to 12% in FY23-24 as 2W demand recovers, operating leverage builds and raw material costs come down.

Getting aggressive on electric vehicles: TVS plans to launch new electric 2W/3W in the next 2 years. It has expanded its EV capacity to 10,000 units/month and expects to ramp up production by the first quarter of FY23 as chip constraints ease. Its iQube E2W is now available in 33 cities and will be launched across India by the end of FY22. TVS is investing ~Rs 5 billion to acquire a 75% stake in Swiss e-bike maker SEMG; it had also acquired a stake in another European e-bike company, EGO Movement, in September 2021. TVS, however, shared few details on its strategy for these acquisitions.

Maintain Buy: We are refining the FY22-24 estimate and our FY23-24 EPS is 27-35% higher than Street. The shares are trading at a reasonable PE of 18x FY23e, in part due to concerns over the disruption of electric vehicles despite TVS adopting electrification. We retain Buy with Rs 800 PT at 21x Sep-23rd PE.

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