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TVS Motor investors, miles ahead of others


‘Stop me if you can,’ seems to be the stock of TVS Motor Co. Ltd. saying. The two-wheeler maker’s shares have risen by nearly 50% so far in 2023, after gaining 73% in 2022. This means its market capitalization has risen to around 75,600 crore on October 31 from 29,788 crore on December 31, 2021. Investors have given a boost to the steady margin performance and rising market share in the electric vehicle segment.

The company maintained a double-digit Ebitda margin in the range of 10-10.6% from the December 2021 quarter to the June quarter (Q3FY22 to Q1FY24). In the September quarter (Q2FY24), margin improved to a record 11%, taking TVS shares to a new 52-week high of 1,634 on Tuesday. Ebitda is earnings before interest, tax, depreciation and amortisation. Factors such as cost control initiatives, favorable product mix and price increases contributed to the margin performance. This is even after the share of electric vehicles has been rising with narrowing margins. TVS is unscathed so far. TVS iQube electric vehicle volume grew by nearly 49% sequentially in Q2.

Of course, the tricky question now is whether the upward trajectory of the Ebitda margin would sustain. While there are factors to support TVS’s margin expansion, there are speed bumps on the road ahead.

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For one, it appears that much of the benefit of lower commodity prices has already accrued. In the Q2 earnings call, TVS said it believes costs will not rise in the next two quarters. Second, the upcoming launches mean more spending on advertising and thus weight on the margin. The company is planning a series of electric vehicle launches. In Q2, TVS launched two products – TVS X, a premium electric crossover and TVS Apache RTR 310.

In addition, the increasing competitive intensity in electric vehicles may put pressure on profitability and may affect the demand for ICE (internal combustion engine) vehicles. October, according to Vahan registration. In comparison, Bajaj Auto’s electric vehicle market share stood at 12%. Hence, there would be economies of scale for TVS. In addition, the company is making a profit at the level of contribution to electric vehicles. During Q2, TVS increased production to 25,000 units per month.

Overall, consistent volume growth would help operational leverage benefits kick in. Here, demand in international markets is slowly reviving. In Q2, TVS’ exports increased sequentially but fell year-on-year. The company sees the export market picking up in the second half of FY24. Back home, the festive season would bring joy. Motilal Oswal Financial Services’ interaction with key channel partners shows 15-20% year-on-year retail growth for two-wheelers during the Navratri period. TVS has noted its industry-leading growth during the Dussehra season, and expects the momentum to continue during Diwali as well. But the demand in the countryside is relentless.

Meanwhile, in Q2, the company’s automotive and parts subsidiaries saw an increase in earnings before interest and tax level, which is a concern. “Rising investments in the subsidiaries to cover their losses is a concern, leading to free cash flow challenges,” analysts at Incred Research Services said in an Oct. 31 report. In the first half of FY24, TVS invested 623 crores. He hopes to invest 800-900 crore in FY24.After the crisis in the shares, valuations are on the higher side. The stock trades at nearly 30 times its estimated FY25 earnings, Bloomberg data shows. But if the company delivers on margins, valuations may find support.

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