TVS Motor to ride strong on profitability gains in FY23: Brokerages

Volume recovery, market-share gains, and EV plans are other triggers

Expectations of margin expansion, straddling volume recovery, lower raw material prices, improvement in market share, and increased focus on electric vehicle (EV) product portfolio, are key triggers for India’s third-largest listed two-wheeler maker — TVS Motor Company.

These triggers have led to brokerage upgrades in the recent past and are reflecting in its stock price, up 15 per cent over the past fortnight. One of the key positives for the company is the scope for margin expansion.

IIFL Research highlights that metal prices have corrected 25-35 per cent, are now lower than the fourth quarter of 2020-21 levels, and will act as a tailwind. Companies are expected to retain most of the price hikes taken in the recent past and will benefit from sliding input costs.

Analysts of the brokerage, led by Joseph George, highlight that low-margin automotive (auto) makers have a higher earnings sensitivity to changes in the operating profit margin. Should input costs fall, low-margin companies like TVS Motor may see higher earnings per share (EPS) upgrades.

At sub-10 per cent, TVS Motor has the lowest margins in the listed two-wheeler peer set. IIFL has revised its EPS estimates for TVS Motor by 20-21 per cent for 2022-23 (FY23) and 2023-24 (FY24) — the highest across its coverage of automakers.

A richer product mix and premiumisation are other factors that could help drive margins. Despite higher input costs which went up 24 per cent in 2021-22 (FY22) for the company, TVS was able to expand its margins by 90 basis points (bps). In addition to prudent cost management and price hikes, a higher share of exports had helped the company.

The share of higher margin exports in the volume mix increased 10 percentage points year-on-year in FY22 to 38 per cent. Brokerages expect this share to improve on the back of distribution expansion and new product launches in the export segment. Given the higher share of exports, a 7 per cent fall in the rupee, compared to the dollar, should also help on the revenue and margin fronts.

Karan Kokane of Ambit Capital expects the company’s operating profit margin to exceed 11 per cent by FY24 (FY22 margins at 9.4 per cent) due to rising scale, premiumisation, higher export mix, and continued focus on cost control.

In addition to margins, the Street will track volume growth and market-share trends of the company. With overall volume growth of 8.4 per cent in FY22, largely led by a 42 per cent jump in exports, the company outperformed the domestic two-wheeler industry which declined 11 per cent. The sector decline was due to chip shortage, rural and demand weakness on the back of sharp increase in the cost of ownership.

The company’s domestic volumes fell 6 per cent, outperforming peers due to new launches like the TVS Raider (executive motorcycle segment) and the Jupiter 125cc (scooter segment). The company gained market share in all segments in the domestic two-wheeler space, with overall gains at 120 bps.

Gains in the executive motorcycle and scooter segments stood at 110-170 bps, while premium motorcycle gains at 220 bps were due to better supply-chain management. The gains are expected to continue in FY23. The company recently launched the 225cc Ronin motorcycle in the premium segment.

CLSA has increased its volumes and earnings estimates after this launch, saying this marks the entry into the cruiser motorcycle segment for the company. The strong launches are helping the company gain market share, observes the brokerage.

Most brokerages expect the company to deliver a volume growth of about 14 per cent in FY23, led by new launches and recovery in domestic volumes amid opening of offices/schools and revival in rural demand.

What should keep the Street interested is the company’s plans to expand its EV presence and ride the demand wave with the launch of electric two- and three-wheelers in the current financial year (FY23). 

The scaling up of production from 800 per month last year to 10,000 units, higher investments, and setting up of a separate subsidiary (which will enable funding) are positives and highlight the company’s focus on the nascent segment.

At the current price, the stock is trading 22.4x its FY24 earnings estimates. Given the near 40 per cent jump in stock price since its lows in May, investors should await correction before taking exposure to the stock.