TVS Motor Company posts decent Q1 numbers, but there are concerns. Read on

TVS Motor Company Q1: Shares of TVS Motor Company hit a 52-week high of Rs 1,388 apiece on the BSE on Tuesday (July 25), a day after the company released its June quarter numbers (Q1FY24). The auto company said its consolidated net profit increased by 42 per cent to Rs 434 crore in the first quarter ended June 30, 2023, on account of robust sales. The stock eventually ended at Rs 1,384.15, up 5.94 per cent.

Total income rose to Rs 9,142 crore in the June quarter as against Rs 7,348 crore in the year-ago period. The company said its overall two-wheeler and three-wheeler sales, including exports, grew by 5 per cent to 9.53 lakh units in the quarter ended June 2023 as against 9.07 lakh units registered in the same period of the 2021–22 fiscal.

TVS Motor Company Q1 review and outlook

The company's volume growth, as per analysts, is likely to be driven by a recovery in the domestic two-wheeler market, new products, and a recovery in exports. TVS Motors is enjoying the benefits of economies of scale and operating leverage, which help it sustain earnings before interest, tax, depreciation, and amortisation (EBITDA) margin at a double-digit level. However, TVS Motors earns nearly 40 per cent of its overall EBITDA from the domestic scooter business, making it vulnerable to electric vehicle (EV) disruption, note analysts at Motilal Oswal Securities.

Apart from this, analysts have raised concerns over the company's high investment plans in its subsidiaries. It plans to invest Rs 9 billion in subsidiaries, of which it has invested Rs 2 billion in TVS Credit Services, Rs 1.8 billion in SMEG, and Rs 2 billion in Nortan. Pramod Amthe, a research analyst with InCred Equities, notes that the management’s guidance of Rs 19 billion capex and investment in subsidiaries in FY24F are areas of concern. The brokerage has retained a "REDUCE" rating on the stock due to its rich valuation. The target price is set at Rs 926. 

Global brokerage Citi also shares similar views. The brokerage says that TVS Motor has invested heavily in subsidiaries, which resulted in increased debt levels and could negatively impact earnings. It has assigned a "Sell" rating to the stock with a target price of Rs 900. CLSA also has a "SELL" rating on the stock with a target price of Rs 1,190.

Further, the company might face short-term headwinds in its EV portfolio due to a reduction in the FAME II subsidy. But the management is confident that demand will come back in 2HFY24 and is ramping up production capacity to 25,000 per month, analysts say.

"Valuations at 29.9x/26.2x FY24E/FY25E EPS largely reflect its strong earnings growth, as well as the increasing risk of EVs, Motilal Oswal Securities, said in its report released on July 24. It has maintained a "Neutral" rating on the stock with a target price of around Rs 1,300 (premised on ~22x Sep’25E EPS + Rs 125/share for NBFC).

What is the FAME-II subsidy?

The central government launched the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles in India (FAME-II) Subsidy Scheme in 2019, in which the electric vehicle manufacturers were provided subsidies by the government for every electric vehicle sold. This was done to enhance the EV market in India.

Earlier, The government was providing about a 40 per cent subsidy, which has been reduced to 15 per cent, effective June 1, 2023.

TVS Motor's EBITDA margin

Another point to be considered is the company's EBITDA margin, which has been stuck at nearly 10–10.5 per cent for the past eight quarters due to factors like adverse input commodity costs, a rising mix of e2Ws, and a weak domestic 2W market, among others. TVS Motor is looking forward to improving its margins. This is despite a rising mix of e2Ws, as it is aiming at improving the contribution per unit of e2Ws and also ramping up scale simultaneously, note analysts at ICICI Direct.

The brokerage has maintained an "ADD" rating on the stock with a target price of Rs 1,442, implying 25x FY25E core earnings per share (EPS).

Nirmal Bang Securities has an ACCUMULATE rating on TVS Motors with a target price of Rs 1,339. "We value TVSL at 15x June’25E EV/EBITDA and TVS Credit at 2x P/BV to arrive at a target price (TP) of Rs1,339. We expect TVSL to continue to outperform 2W industry growth in FY24/FY25. We also factor in the margin expansion of 110 bps from the current level till FY25, owing to RM cost tailwinds and product premiumisation," it added.

TVS Motor Company's share price

In the past 12 months, the stock has rallied around 50 per cent, Trendlyne data show. In comparison, the benchmark Nifty50 index has risen 18 per cent.