Q3FY24 Review: TVS Motor: Strong results, but slightly below estimates

25 Jan 2024 , 02:27 PM

TVS’ Q3 results were strong (25% volume growth, 40% Ebitda growth) but slightly lower than expected (2% miss) on lower margins. TVS has clocked continuous market-share gains across 2W segments. Analysts of IIFL Capital Services believe that its 2W market-share may have peaked based on competitors’ actions (aggressive model launches from Hero, price cuts by EV OEMs and Honda’s impending entry into 2W EV). Analysts of IIFL Capital Services expect premium valuations to come off, as TVS’ volume outperformance pauses. Meanwhile, TVS continues to invest 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. Analysts of IIFL Capital Services largely maintain their EPS estimates. Retain REDUCE with TP of Rs1700. 

Q3 Ebitda 2% below estimate on margin miss: 

Revenue grew 26% YoY, led by 25% volume growth and 1% rise in blended ASP. Gross margin (GM) improved 30bps QoQ to 26.3%. Analysts of IIFL Capital Services estimate EV rev share to have come off by 3% QoQ, which would have supported GM. In addition, RM was favourable due to fall in precious metals. Ebitda margin improved only 20bps QoQ to 11.2% (30bps miss), as higher gross margin was partly offset by increased opex. Absolute Ebitda and Adj. PAT came in 2% below analysts of IIFL Capital Services estimates. 

TVS has delivered well on market-share, but competitors’ launches may cap further gains: 

TVS has delivered well on marketshare, consistently gaining share in both motorcycles and scooters. It has done well in EVs, with its 2W EV mkt-share now at about 20%, higher than ICE share of ~17%. However, analysts of IIFL Capital Services believe TVS’ 2W market-share may have peaked. Hero, which has consistently lost share, is now getting aggressive with new launches. EV OEMs are getting aggressive on pricing to garner market-share. Honda (leader in ICE scooters) is expected to launch EV in late 2024. 

Premium valuations do not factor weak FCF, capital allocation: 

TVS has generated positive FCF only once in five years (FY21). In 9MFY24, TVS invested Rs9bn (55-60% of PAT) in subsidiaries. Some investments went into TVS Credit (profitable), but significant amounts flowed into other subsidiaries to fund operating losses and investments on product/brand/network. TVS’ consolidated earnings continue to lag standalone earnings due to losses in subsidiaries.