TVS Motor Company - Premiumisation, higher exports boost margins - ICICI Securities

TVS Motor Company's (TVSM) Q3FY21 operating performance was a beat to consensus estimates as EBITDA margins came in at 9.5% (EBITDA/vehicle was at an all-time high of ~Rs5.2k). ASP rise by 8.5% YoY to ~Rs54.5k/unit continues to reflect a richer product mix, higher exports and RM basket related price increases. TVSM has witnessed continued demand momentum coupled with strong pricing power, this coupled with working capital improvements has led to FCF generation of ~Rs16.2bn in 9MFY21. Cost-reduction initiatives coupled with pricing actions (2% hike in Q3) are likely levers towards protecting margins amidst further commodity inflation (till Jan'21). With the premiumisation trend visible in the market, TVSM's product portfolio led by brands like Apache and nTorq is well positioned to capture growth, scooterisation demand revival in FY22E coupled with exports are key demand triggers for TVSM. Maintain BUY.

- Key highlights of the quarter: Standalone revenues for Q3FY21 grew ~31% YoY to ~Rs54bn while EBITDA margin improved 68bps at 9.5%. Gross margins contracted 390bps YoY to 23.9% due higher raw material costs, domestic mix effect (higher moped share/up ~180bps). Company achieved 392bps reduction in other expenses via various cost-reduction initiatives and lower A&P spends. Adjusted PAT grew ~58% YoY to ~Rs2.6bn. Consolidated EBITDA margins contracted 51bps to 12.4% while Adjusted PAT grew 20% YoY to Rs28bn.

- Key takeaways from earnings call: Management indicated: a) TVS Indonesia reported sales of 15.3k 2Ws and 1.8k 3Ws; b) Q3FY21 export revenues stood at Rs13bn; spares revenue was Rs29bn (Rs23bn YoY); c) TVSM plans: 1) capex spend of ~Rs5bn for FY22 for new product development and expansion in export markets, 2) investment of Rs1.08bn in Norton Motorcycles and investments into technology; d) TVS Credit Services grew to a book size of ~Rs107bn, net worth of ~Rs14bn and PBT of 0.96bn; gross NPA level stood at 4.3% (against 3.9% YoY); 13-14% of its moratorium customers have opted for restructuring; e) financing penetration for TVSM has reached ~46%, (against 49% last year); TVSM has made Rs1bn equity investment in TVS Credit Services and f) TVSM plans to launch multiple new products in H1FY22 while also focussing on EV launches.

- Maintain BUY: We continue to like TVSM's capability of delivering strong growth on the back of superior product mix, engineering capabilities. It has continued on its EBITDA improvement trajectory, even as it has continued to invest in new technologies (e.g. EV). We upgrade our standalone earnings estimates by ~11% / 6% / 6% for FY21E / FY22E / FY23E respectively. We value TVSM's standalone business at 24x FY23E EPS (Rs639/share) and TVS Credit Services at 1.0x trailing BV (Rs29/share) to arrive at a target price of Rs668/share (earlier: Rs593/share).

Shares of TVS MOTOR COMPANY LTD. was last trading in BSE at Rs.528.65 as compared to the previous close of Rs. 531.55. The total number of shares traded during the day was 111318 in over 2921 trades.

The stock hit an intraday high of Rs. 534.5 and intraday low of 520. The net turnover during the day was Rs. 58862006.

Source : Equity Bulls

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