TVS Motor share price soars 13% on strong results; Jefferies raises target price to Rs 800

TVS Motors 4Q volumes fell 6% QoQ but EBITDA rose 5% QoQ (20% above JEFe) as margins expanded 60 bps QoQ to 10.1% (a new high). It delivered 2-6% EBITDA/PAT growth in FY21 despite Covid and rising input costs. Indian 2W demand has weakened amid Covid spike, but cyclical recovery in FY 22-23 is seen; exports are improving too. TVS Motors is also raising its focus on EVs with new products planned in FY22. Jefferies has therefore, raised its above-consensus FY22-23 EPS by 8-13% and retained a Buy on TVS Motors.

Jefferies highlights that Indian auto demand is likely to be under pressure for the next few months due to the recent spike in Covid. However, Jefferies says it believes 2Ws are still ripe for a strong cyclical rebound after the worst slowdown in 4 decades. TVS Motors was optimistic on export demand given stability in oil prices and exchange rates. Jefferies says it continues to like its product capabilities which have helped it gain market share across scooters, premium motorcycles and exports in recent years.

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The sharp rise in metal prices is pushing up input costs for autos; however, TVS Motors has managed the cost inflation well delivering margin expansion in this period. It expects 190 bps further commodity cost headwind in 1Q but has already taken a 1.6% price hike in April. This leaves just 30 bps of net impact, which can be largely offset through internal cost controls. Jefferies believe TVS Motors has an opportunity to further improve margins in FY22-23 amid a strong demand recovery. Jefferies factor in EBITDA margins of 10.0%/11.4% in FY22/FY23.

Notwithstanding near-term Covid issues in India, Jefferies says it expects a synchronized demand recovery in domestic and export markets driving strong 14%/13% volume growth for TVS in FY22/FY23. Jefferies raised FY22-23 EPS by 8-13% factoring in higher margins, and are 17-31% above consensus. Jefferies expects earnings to rise at 58% CAGR over FY21-23. Its 26x FY22 P/E is not cheap, but we think the stock deserves a premium over Hero Motocorp / Bajaj Auto given its strong earnings outlook, potential for margin expansion and a gradually improving franchise. 
Jefferies has retained a Buy on TVS Motors with Rs 800 price target (earlier Rs750) at 25x FY23 P/E.