Q1FY24 Review: TVS Motor: EVs hurt margins; Investments in subs hurt FCF

25 Jul 2023 , 11:46 AM

TVS’ Q1FY24 results were slightly weaker than expected (3% Ebitda miss). TVS has done well in domestic 2W (mkt-share gains) but overall volume growth has been dragged down by weak exports. Mgmt. is hopeful of better volume performance in H2FY24. Cut in FAME subsidy (effective Jun 2023) is hurting margins; this may continue as TVS has not been able to pass on full impact of lower subsidy, for fear of losing volumes. This may offset some of the expected benefit from lower input costs (precious metals). Meanwhile, investments in subsidiaries continued (Rs6.15bn in Q1FY24) and hurt FCF. Analysts of IIFL Capital Services largely maintain their FY24/FY25 EPS estimates. High valuations (28x FY25 PE) do not factor weak cash flows and uncertainty on “path to profitability” in EVs. Retain ADD.

Q1 Ebitda 3% below estimates: 

Q1 revenue grew 20% YoY on a 5% volume growth. ASP grew 14% YoY due to stronger mix and price hikes. Ebitda margin improved 60bp YoY and 30bp QoQ to 10.6% (20bp miss). Although gross margin came in better than analysts of IIFL Capital Services estimate, it was more than offset by higher operating costs. Mgmt. mentioned that elevated operating costs are likely to sustain. Loss of FAME subsidy (1-month impact, as effective Jun 1, 2023) hurt margin by 20-30bps. This is likely to continue as TVS did not pass on the full impact, for fear of losing volumes.

Volume growth is currently low; mgmt. hopeful of strong recovery in H2: 

In Q1FY24, TVS clocked 5% YoY vol. growth. Analysts of IIFL Capital Services expect Q2FY24 to be similar (single-digit). Achievement of FY24 estimate (+11%) requires 15-20% YoY volume growth in H2FY24. Mgmt. mentioned that domestic 2W demand is subdued in rural markets, but urban is doing better. Export markets have been weak. In export markets, inventory correction phase is behind us. Mgmt. expects volume normalisation in H2FY24.

Premium valuations do not factor negatives: 

TVS has generated positive FCF only once in five years (FY21). In recent years, improvement in profitability has been offset by high capex and investments. In Q1FY24, TVS invested Rs6.15bn in subsidiaries; this is equivalent to 1.3x standalone PAT in the quarter. Consol. PAT continues to be lower than Standalone PAT due to subsidiary losses. There is no clarity on sustainability of EV growth and “path to profitability” now that FAME subsidy has been cut (effective Jun 2023).