TVS Motor investors, miles ahead of others
‘Stop me if you can,’ TVS Motor Co. Ltd stock seems to be saying. The two-wheeler maker’s shares have risen close to 50% so far in 2023, after gaining 73% in 2022. This means its market capitalization has risen to about ₹75,600 crore on 31 October from ₹29,788 crore on 31 December 2021. Investors have given a thumbs up to the steady margin performance and rising market share in the electric vehicle segment.
The company has maintained double-digit Ebitda margin in the range of 10-10.6% since the December 2021 quarter till the June quarter (Q3FY22 to Q1FY24). In the September quarter (Q2FY24), margin improved a notch to 11%, a record high, taking TVS’ shares to a new 52-week high of ₹1,634 on Tuesday. Ebitda is earnings before interest, tax, depreciation, and amortization. Factors such as cost control initiatives, favourable product mix and price hikes have helped the margin performance. This is even after the share of margin dilutive electric vehicles is rising. TVS has so far remained unscathed. TVS’ electric vehicle iQube’s volume grew by nearly 49% sequentially in Q2.
Of course, the moot question now is if the upward trajectory of Ebitda margin would sustain. While there are factors to support TVS’ margin expansion, there are speed bumps on the road ahead.
For one, a large part of the benefits of lower commodity prices seems to have already accrued. In the Q2 earnings call, TVS said it believes costs will not rise in the next two quarters. Secondly, the upcoming launches means more spending on advertising thus weighing 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.
Additionally, the rising competitive intensity in electric vehicles could weigh on profitability and may hurt demand for ICE (internal combustion engine) vehicles.The good news is that TVS has an upper hand in the electric vehicle segment with a market share of about 22% in October, according to Vahan registrations. In comparison, Bajaj Auto’s electric vehicle market share stood at 12%. Thus, there would be scale benefits for TVS. Plus, the company is making profits at the contribution level for electric vehicles. During Q2, TVS ramped up production to 25,000 units per month.
Overall, consistent volume growth would aid operating leverage benefits to kick in. Here, demand in the international markets is slowly reviving. In Q2, TVS’ exports were up sequentially but fell year-on-year. The company sees the export market picking up pace in the second half of FY24. Back home, the festival season would bring cheer. Motilal Oswal Financial Services’s interaction with leading channel partners indicates a 15-20% year-on-year retail growth for two-wheelers during the Navratri period. TVS noted that it has grown ahead of the industry during the Dussehra season, and it expects the momentum to continue during Diwali as well. But rural demand remains muted.
Meanwhile, in Q2, the company’s auto vehicle and parts subsidiaries saw a rise in loss at the earnings before interest and tax level, which is worrisome. “Rising investments in the subsidiaries to cover their losses is an area of concern, leading to free cash flow challenges,” said analysts at Incred Research Services in a report on 31 October. In the first half of FY24, TVS invested ₹623 crore. It expects to invest ₹800-900 crore in FY24.After the sharp run-up in the shares, valuations are on the higher side. The stock trades at nearly 30 times their FY25 estimated earnings, showed Bloomberg data. But should the company deliver on margins, then valuations may find support.
