Q2FY24 Review: TVS Motor: Growth is good, but capital allocation is not

31 Oct 2023 , 02:01 PM

TVS’ Q2 Ebitda missed analysts of IIFL Capital Services estimate by 3% on lower than expected margins. TVS is clocking better volume growth vs peers due to market-share gains in domestic 2W and exports. TVS’ vol. growth in H1FY24 stood at 5%; analysts of IIFL Capital Services forecast 18% growth in H2 (base effect, festive calendar shift, export recovery) to end FY24 with 11% growth. Margin expansion is having a magnified impact on TVS’ earnings growth due to its starting point of below-par margins. These positives deserve credit and are amply rewarded in the form of premium valuations vs peers. However, TVS continues to invest cash in non-core subsidiaries (many of which are loss-making); this is hurting FCF. Consolidated earnings continue to lag standalone earnings, due to subsidiary losses. 

Q2 Ebitda 3% below estimate on margin miss: 

Q2 rev grew 13% YoY, led by 5% volume growth and 8% rise in realisation (price hikes, mix). Ebitda margin improved 50bps QoQ to 11.0% (30bps miss), as higher gross margin was partly offset by higher operating expenses. Absolute Ebitda came in 3% below analysts of IIFL Capital Services estimates. PAT (excl. one-off gains) missed by 7%. 

Market-share, margins on uptrend: 

TVS has improved its domestic 2W market-share from ~16.5% in FY23 to ~17.5% in H1FY24. In EV 2W, TVS has improved market-share from 11% in FY23 to 20% in H1FY24, as smaller EV players have lost out. Even in exports, TVS is clocking better volumes compared to the mkt-leader, Bajaj. TVS’ Ebitda margin (11% in Q2FY24) has been on an uptrend from FY19/FY20 levels of ~8%. Analysts of IIFL Capital Services largely maintain their earnings estimates post the Q2FY24 miss, and forecast 23% EPS Cagr over FY23-26. 

Premium valuations do not factor in inferior capital allocation, subsidiary losses: 

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 H1FY24, TVS invested Rs6.2bn (67% of PAT) in subsidiaries. Some investments went into TVS Credit (profitable), but significant amounts have flowed into subsidiaries such as Norton, Swiss e-mobility, etc. to fund operating losses and investments on product/brand/network. TVS’ consolidated earnings continue to lag standalone earnings due to losses in subsidiaries.