TVS Motor (TVSL) has delivered a strong operating performance, with a double-digit EBITDA margin for the first time in its history during 2QFY22, on the back of a healthy realization and better mix. Revenue grew by 22% YoY and 43% QoQ to Rs56.2bn, on the back of a volume growth of 6%YoY/39%QoQ and a 16% YoY improvement in average realization. Its EBITDA margin expanded by 60bps YoY (up 306bps QoQ) to 10% vs. our estimate of 8.3%, mainly due to the lower employee expenses, control on other expenses and cost-cutting measures on the RM front. TVSL PAT came in at Rs2.8bn (up 42% YoY and up 268% QoQ), exceeding our estimate by 29%. ASP growth was supported by product-mix, price hike, higher exports, and a favourable exchange rate. We believe that the better product-mix and rising export contribution, coupled with a favourable exchange rate would support TVSL's margin expansion, going forward. In view of the strong products basket, improving brand equity, healthy export potential, increasing margin territory and improving return ratio, we reiterate our BUY recommendation on the stock, with a revised Target Price of Rs801 (vs. Rs575 earlier Previous note dated 16th Dec'20).
Focus on EV and Double-digit EBITDA Margin Territory augur Well
Though we expect the domestic 2W industry to face a near-term demand weakness, we believe TVSL's outperformance will continue on the volume front, while its rising exports at a better exchange rate would help on the margin front. Better product-mix, pricing power and increasing exports would support its double-digit margins. We expect its EBITDA margin to expand further and record 10.3% in FY24E. Looking ahead, TVSL expects to sustain the higher volume and margin owing to the success of new products and improving brand equity. Moreover, its recent increasing focus on EV segment through new launches as well as strategic tie-ups globally would take it to a new scale on the EV platform. This opens a huge potential for the next decade for the company.
Outlook & Valuation
We expect TVSL's domestic volume to witness a de-growth of 18% in FY22E. We estimate a healthy 11% CAGR for export over FY22E-FY24E, on the back of strong sales in African markets, which would drive TVSL's revenue. We increase our revenue/EBITDA/PAT estimates by 5%/7%/4% and 5%/10%/8% for FY22E and FY23E respectively. We introduce FY24 estimates and expect the company to report an EPS of Rs32.7 in FY24E. In view of the higher exports and healthy margin profile, we reiterate our BUY recommendation on TVSL. We have shifted to a 1-year Target Price from the earlier 2-year. As we enter 2HFY22, we roll forward our P/E valuation to FY24E and increase the Target Price to Rs801, valuing the core business at 23x (unchanged) to Rs751 and adding Rs50 for the subsidiary and valuing at 2x P/B.
Link to the report
Shares of TVS Motor Company Limited was last trading in BSE at Rs. 620.00 as compared to the previous close of Rs. 576.55. The total number of shares traded during the day was 610189 in over 16267 trades.
The stock hit an intraday high of Rs. 632.85 and intraday low of 599.20. The net turnover during the day was Rs. 377039047.00.