PL Stock Report - TVS Motor Company (TVSL IN) - Q1FY24 Result Update - Operating leverage help margins - ACCUMULATE

TVS Motor Company (TVSL IN) - Himanshu K Singh - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: ACCUMULATE | CMP: Rs1,364 | TP: Rs1,400

Q1FY24 Result Update - Operating leverage help margins

Quick Pointers:

♦ Operating leverage help margins expand QoQ by 30bp, as volume grew c10%.

♦ Exports likely bottomed out; should grow QoQ for remaining quarters.

TVS Motor Company’s (TVSL) 1QFY24 realization was flat QoQ, as lower EV volumes at c39k units (-10% QoQ) along with poor mix had an impact. The company plans to reach 25k unit monthly EV volumes by August month (18k units in May). EBITDA margins, on the other hand, benefited from operating leverage QoQ, price hikes, lower EV mix and inventorisation and expanded c30bp QoQ to 10.6%. We expect margins to further benefit from low raw material prices in the subsequent quarter, while exports volume should see sequential improvements.

TVS is well placed to outperform the industry given (1) new product launches in ICE & EV segments (2) higher focus on exports & premiumisation and (3) margin improvement helped by cost control, (4) operating leverage, (5) benign input prices and (6) price hikes which could more than offset negative impact from higher EV mix. We change our EPS estimates by c2% for FY24/FY25 each considering largely in-line revenue in 1Q and also incorporate the commentary on margins. Maintain ‘ACCUMULATE’ with TP of Rs1,400 (earlier TP at Rs. 1,380) at 27x Mar-25E EPS incl. Rs34 for TVS credit.

♦ 1QFY24 – Revenue and margins largely in line: TVSL’s revenue of Rs. 66bn grew by 9.3% YoY (helped by volume growth of 5.3%) and came largely in line with our estimate and slightly below Bloomberg consensus. EBITDA margin at 10.6% was above our estimate of 10.2% and in line with Bloomberg estimates. Employee expenses were also in line while other operating expenses were higher than expected. Higher other income and lower taxes aided PAT beat.

♦ Key takeaways: (1) TVSL noted seeing good demand in the urban market, while rural market remained moderate, and TVSL aims to grow faster than the industry in domestic and exports market. (2) On exports side, TVSL noted volumes have largely bottomed out and with inventory at desired levels, we could see volume improvement QoQ for remaining quarters too. Retail sales continued to remain higher than dispatches in 1QFY24. (3) Electric Vehicles: iQube’s volumes de-grew c10% QoQ in 1QFY24 to 39k units due to cut in FAME subsidy (from Rs. 52k to Rs. 22k per unit). TVSL has only partially passed on the subsidy cut, however, EV business is still positive on the contribution side. TVSL aims at increasing EV volumes to 25k units per month from August onwards and has an order-book of 35k units. It plans to expand to more cities in India and will be introducing new EV product in 2QFY24 which should help volumes. It will also launch an EV 3W in upcoming quarters. TVSL started exporting iQube to Nepal and plans to expand to other markets in FY24. TVSL has developed the platform and designed BMW’s CE 02 EV scooter. (4) TVSL took price hike of 0.5% in 2Q. It sees commodity prices to be lower in 2Q and benefit margins. (5) On margins, TVSL saw increase in employee and other expenses due to higher focus on EV hiring and increase in marketing and R&D spends. (6) Capex for FY24 is expected to be at Rs. 10bn and investments at Rs. 85-90bn. Effective borrowing rate is higher by c30bp QoQ.

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