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TVS Motor Company - Fixed-cost rationalisation to aid margins rebound - ICICI Securities

Posted On: 2020-07-29 22:14:14

TVS Motor Company's (TVSM) Q1FY21 operating performance was slightly below consensus estimates (EBITDA margin at -3.4%) while PAT was in-line. ASP rise by 7.4% YoY to ~Rs52k/unit continues to reflect strong product mix. TVSM has undertaken price hikes cumulating (1.1%), coupled with better FX realisation is likely to boost ASP's further in H2FY21. Key call takeaway remains of no visible downtrading, premiumisation trend continuing. This trend if confirmed over next few quarters could benefit TVSM as its strength lies more on premium motorcycles vis--vis entry-level motorcycles. We expect EBITDA/vehicle to hit Rs5.7k in FY22E, believe scooter and moped revival could drive market share gains. Stock remains relatively attractive at ~19x FY22E standalone EPS. We maintain our BUY rating on the stock.

- Key highlights of the quarter: Standalone revenues for Q1FY21 declined 68% YoY to ~Rs14bn while adjusted EBITDA margin was down 1,137bps at -3.4%. Gross margins contracted 74bps YoY to 24.1% due to BS-VI cost impact, weaker mix, lower export hedge rates (USDINR at 72 vis--vis spot of 76). It reported PAT loss of ~Rs1.4bn. Strong performance of TVS Credit Services with moratorium at ~14% (down from ~37% in Q4FY20), bodes well for growth in H2FY21. TVSM has paid back the Rs5bn NCD debt which it had raised in early Q1FY21.

- Key takeaways from earnings call: Management indicated: a) Only 75% of dealerships were open currently due to new lockdowns in Bihar and West Bengal; retails in open dealerships are close to pre-Covid levels; current inventory is much lower than 30-35 days; b) Q1FY21 revenues from export and spare parts stood at Rs4.6bn and Rs1.8bn respectively; capex for FY21 is planned at Rs3bn (FY20 capex at Rs7.9bn); d) TVS Credit Services grew to a book size of ~Rs91.3bn and net worth of ~Rs13.5bn; e) financing penetration for TVSM has reached ~52% (46% in FY20) of which TVS Credit Services' share stood at ~54% in 2W segment; and f) TVSM will focus on continued fixed-cost reduction with marketing spends turning largely digital, and further efficiency enhancements of spends.

- Maintain BUY: We continue to like TVSM's capability of delivering strong growth on the back of new products and high customer focus. We tweak our FY21E/FY22E standalone EPS estimates by ~4.2%/2.8% respectively. We value TVSM's standalone business at 22x (earlier: 21x) FY22E EPS (Rs433/share) and TVS Credit Services at 1.0x trailing BV (Rs28/share) leading to our target price of Rs462/share (earlier: Rs422/share).

Shares of TVS MOTOR COMPANY LTD. was last trading in BSE at Rs.402.15 as compared to the previous close of Rs. 406.1. The total number of shares traded during the day was 72243 in over 1795 trades.

The stock hit an intraday high of Rs. 414.35 and intraday low of 397.85. The net turnover during the day was Rs. 29371304.

Source: Equity Bulls

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