Shares of TVS Motor Company gained over 5 percent on May 5 after the company reported better-than-expected earnings and strong outlook.
At 9.30am, the stock was trading at Rs 1,228 on the BSE, up 5 percent from its previous close while India’s benchmark Sensex fell 0.5 percent to 61419 points.
The Chennai-based company reported a 50 percent jump in its standalone net profit to Rs 410.30 crore for the quarter ended March 2023, as against Rs 274.50 crore a year ago. The boost in profits can be attributed to the success of premium products, a more readily available chip supply, and a decrease in commodity prices.
Revenue from operations went up 19.4 percent to Rs 6,604.80 crore, while the EBITDA jumped 22 percent to Rs 680 crore from Rs 557 crore a year ago. The EBITDA margin was up 20bps on-quarter to 10.3 percent, despite lower exports and higher EV volumes. Overall sales of the two and three wheelers, including exports, stood at 8.68 lakh units for the quarter as against 8.56 lakh units a year ago.
“(The margins) are likely to remain stable in the coming quarter, despite a moderate increase in raw material prices during the first quarter of fiscal year 2024, as it should be offset by a roughly 2 percent price hike (including a 1 percent increase to cover OBD-2 related costs),” said Motilal Oswal in its report. The brokerage firm has reiterated ‘neutral’ rating and kept its target price at Rs 1,060 from its previous close.
According to Kotak, the company’s profitability improved marginally on account of RM tailwinds. However, it believes rapid adoption in the EV segment as well as aggressive pricing strategy by competitors can severely impact ICE scooter demand as well as profitability.
In addition, the launch of Hunter 350 and limited success of Ronin in the domestic market (due to pricing issues) can impact the demand for the company’s premium motorcycle segment. The brokerage house retains ‘sell’ rating on the stock and keeps the target price at Rs 875 a share from Rs 830 earlier.
TVS has reported a positive trend in urban markets, while rural markets remain weak and heavily dependent on the upcoming monsoon season. However, TVS management remains optimistic and anticipates that TVS will surpass both the domestic and export markets.
TVS experienced a significant decline in its export volumes, down by 41 percent year-over-year during the fourth quarter, due to multiple factors including a weak macro environment, local currency depreciation, and foreign exchange availability constraints. However, despite the drop in export volumes, TVS reported that retail sales are already surpassing wholesale sales, and the company anticipates a sequential improvement in dispatches moving forward.
“We believe TVS will be a key beneficiary of 2W demand revival in domestic and export markets. Its improving franchise also provides headroom for further margin expansion. We see a 39 percent EPS CAGR over FY23-25; our FY24-25 EPS is 10-15 percent above street,” said Jefferies India in a note to investors. The brokerage house retained a ‘buy’ rating and increased its target price to Rs 1,550 a share, up 32 percent from its previous close.
Kotak Institutional Equities forecasts a 7 percent CAGR for the domestic two-wheeler segment from FY2023 to FY2025, primarily due to the increasing popularity of electric two-wheelers and a 9 percent CAGR in the premium motorcycle segment fueled by consumers’ preference for high-performance vehicles.
However, this growth will be partially offset by demand pressures in the ICE scooter segment. The overall recovery of the sector is hampered by persistent price hikes implemented by multiple OEMs. Additionally, Kotak predicts that the export two-wheeler segment volumes will recover gradually due to the non-availability of US dollars, which is impacting demand in the African region.
According to Motilal Oswal, TVS is anticipated to experience growth in sales volume due to various factors such as the resurgence of the domestic 2-wheeler market, the launch of new products like the Raider, 125cc scooters, and iQube, as well as the potential recovery of exports. TVS’s strong performance is supported by its economies of scale and operating leverage, which have contributed to its ability to maintain a double-digit EBITDA margin.
It is worth noting that the domestic scooter business currently accounts for roughly 40 percent of TVSL’s total EBITDA, leaving the company exposed to the risk of disruption by the advent of electric vehicles (EVs), the report said.