Valuations factor in strong earnings growth, better margins for TVS Motor

TVS Motor met expectations in terms of revenue and posted a strong margin performance in Q1FY25.  The key drivers were material cost savings and a better mix. The domestic demand outlook looks good with a rural rebound but geopolitical uncertainties in key export markets may dent overall growth. Bangladesh, for example, is in turmoil.  

The strong earnings growth and margin improvement are reflected in the current valuation of 44 times price to price-to-earnings ratio on FY25 earnings. But analysts are upgrading earnings expectations to factor in better margins and higher other income.

TVS’s revenue grew 16 per cent Y-o-Y while the operating profit was up 26 per cent and adjusted net profit grew 23 per cent in Q1FY25 to Rs 8,380 crore, Rs 960 crore and Rs 580 crore, respectively which was in line with consensus. Revenue growth was led by 14 per cent Y-o-Y growth in volumes and 2 per cent Y-o-Y growth in average selling prices to Rs 77,000 /unit which was marginally below expected. The international revenues and spares grew 18 per cent Y-o-Y each to Rs 1,963 crore and Rs 846 crore.

 

The gross margin expanded 320 basis points Y-o-Y (140 basis points Q-o-Q) to 28.6 per cent, driven by raw material cost savings and better product mix. TVS has also taken a small price hike in Q1 and another small hike in Q2FY25 (till date). While aluminium prices rose, other materials and metals softened. Guidance is a mixed outlook for commodities, with slight increases likely in Q2FY25. The better gross margin was partially offset by higher operating expenses, leading to an operating profit margin of 11.5 per cent, up 90 basis points Y-o-Y and up 20 basis points Q-o-Q. The reported operating profit was in line with consensus. The other income was above estimate at Rs 36.3 crore, including Rs 28 crore towards the revaluation of investments in the TVS supply chain.

The domestic retail growth in the two-wheeler market came in at 13 per cent Y-o-Y in Q1FY25 with rural demand growing 17 per cent Y-o-Y. Given normal monsoon, TVS expects rural recovery to drive sustained rebound and result in sector growth of 10 per cent for FY25.

In the international market, there were challenges in the Red Sea blockade affecting transit times and availability of vessel containers. African markets face currency devaluation, but LATAM and West Asia offer significant opportunities. Management expects stabilisation soon in Bangladesh.

Norton (British motorcycle maker acquired by TVS in 2020) is going to launch six new products over the next three years, with the first launch by FY26 end. The new range of motorcycles will be more affordable. TVS has invested Rs 1,200 crore in Norton. The guidance is for capex of Rs 1,000-1,100 crore for FY25. In Q1, major investments were Rs 300 crore in TVS Credit Services, Rs 100 crore in Norton, and Rs 30 crore in the e-bikes business, with smaller amounts in TVS Digital.

The rural recovery is crucial for domestic 2W demand. TVS’s domestic growth will be supported by new product launches, but geopolitical uncertainties may affect exports (about 24 per cent of total volumes) limiting growth.

The transition towards the 125cc+ segment favours TVS, which gets over 70 per cent of domestic volumes from that segment. TVS is also the second largest player in EVs, with products like Jupiter and Ntorq and iQube. Improving profitability is reflected in the growing margins which have risen 350 basis points in the last three financial years. However, there are concerns with low-return investments in subsidiaries and associates including Norton. The high valuations reflect optimism and discount strong earnings growth potential and proactive EV stance.