Volume recovery, extraneous export thrust to support margins at TVS Motor

Any value unlocking in the EV subsidiary could drive further gains

A strong margin outperformance despite multiple headwinds was the key takeaway in the December quarter (Q2FY22) results of two wheeler major, TVS Motor. The company reported an operating profit margin of 10 per cent which was 48 basis points YoY. The rise in profitability was achieved even though volumes were down 11.2 per cent and raw material costs were up 6 per cent YoY. 

What aided margins and revenue growth (up six per cent) were higher realisations that were up 19 per cent. The growth in average selling prices was the combination of price hikes (five per cent) and superior product mix. In addition to higher spare part sales, the share of three wheelers up 120 basis points YoY. New launches in the domestic portfolio (Raider and Jupiter) also led to the increase in realisations. Analysts at Motilal Oswal Research expect these products to aid in volume growth and ramp up of exports. They believe that operating profit margin will sustain at the double digit level on the back of economies of scale and operating leverage. 

 

While volumes in the domestic market continued to remain weak (down 20 per cent YoY) it was offset a bit by the 13 per cent rise in export volumes. Sales of scooter, moped and entry level motorcycles in the domestic market were weak leading to a fall between 19-38 per cent for these categories as compared to the year ago period. 

The management expects exports to grow aided by favourable macroeconomic conditions in Africa and Central America as they will benefit from rising crude oil prices. While Sri Lanka is bringing down import restrictions, improvement in container availability situations should help support exports. While the company is confident of growth both on the exports and local markets, given the muted demand trends, Reliance Securities has decreased the domestic volume estimates for TVS in FY22 by 4 per cent and in FY23 by 2 per cent.

What could support sentiment is the pace of product development and launch of electric vehicles (EV). ICICI Securities believe that the EV subsidiary would create opportunities for potential value unlocking and scaling up EV business along with Norton (acquired in April 2020), BMW tie-up and e-bike brands which will help it realise global ambitions. 

The stock gained 3 per cent post December quarter results and at the current price, it is trading at 24 times FY23 earnings estimates. The near-term upsides are factored into the price and corrections could be an opportunity to consider it.