Motilal Oswal maintains a neutral rating on TVS Motor with a target of Rs 445. Net sales grew by 6% YoY to Rs 46b as volumes declined 2% YoY and realizations grew 8.1% YoY (-1.1% QoQ) to Rs 53.1k (v/s estimate Of Rs 54.7k), driven by the BS-VI cost pass-through. Gross margins contracted 70 bps QoQ (-320 bps YoY) to 23.5% (estimate of 25%) on the impact of BS-VI cost inflation (as contribution margins have not yet been passed through). Although, the impact was diluted by favourable forex (estimated at 120 bps). The EBITDA margins expanded by 55 bps YoY to 9.3% (v/s estimate of 8.6%) on lower other expenses. EBITDA grew 12.6% YoY to Rs 4.3 bn (v/s estimate of Rs 4 bn).

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Margin beat led by favourable forex and lower expenses.

Cost cuts and volume growth to drive margins going forward:

TVS Motor Company (TVSL)’s operating performance was led by favourable forex and lower cost. However, commodity cost inflation, INR appreciation, and the reversal of employee cost to pre-Covid levels from Oct 20 would dilute margins. Motilal Oswal cut their FY21E EPS by 9% due to an increase in depreciation and interest, while they maintain FY22E EPS.

Highlights for Q2 Sept 2020:

Despite Covid-19 challenges TVS Motors strengthened its supply chain during the Sep 20 quarter. The production and sales improved consistently from July 20 onwards. In the month of July 20 the total 2-wheeler sales was 2.44 lakh numbers, it improved to 2.77 lakh numbers in Aug 20 and in Sep’20 sales further improved to 3.13 lakh numbers. Consequently, the total 2W sales of 8.34 lakh for the quarter were almost in line with last year's second quarter number of 8.42 lakh. 2-wheeler export sales grew by 7.8% compared to Q2 of last year. Strong focus on cost reduction initiatives helped the company to improve EBITDA for the quarter to 9.3% compared to 8.8% during Q2 of 2019-20. Profit before tax before exceptional items for the quarter is Rs 267.4 cr compared to Rs 234.3 cr of last year.

Highlights from management commentary:

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Retail sales grew marginally during Navratri and Dussehra, predominantly in premium products. With urban market retail reaching pre-Covid levels and rural is positive, the company expects good sales during Diwali. Financing penetration stood at 46% (v/s 56% in Q4 FY20 and 46–47% in Q2 FY20) TVS Credit has 50% share. TVS Credit Services is seeing collections at similar, if not better than, pre-Covid levels. Employee cost was lower in the first half due to salary cuts; it has been restated to pre-Covid levels from 1st Oct.
Capex:

It has increased its capex target to Rs 5 bn for FY21 (v/s Rs 3b earlier). Furthermore, it would invest additional Rs 1bn in TVS Credit ( Rs 0.5 bn) and Norton. In the First half of FY21, it invested Rs 1.5 bn in subsidiaries.