TVS Motors share price hits 10% upper circuit: Jefferies retain Buy with Rs 655 price target

TVS Motors's Q3 volumes rose 20% YoY while EBITDA and net profit grew 41-44% YoY, 17-35% above Jefferies estimate. Q3 EBITDA/vehicle rose 17% YoY to an all-time high despite rising commodity costs and certain export incentives going away. TVS Motors gave positive commentary on demand for both domestic and export markets. Jefferies like TVS Motors strong volume growth outlook and potential for margin improvement amid a demand recovery.  Jefferies raised FY22-23 EPS by 8-14% and retained Buy with a Rs 655 price target.

TVS Motors All-time high margins in Q3:

TVS Motors's Q3 volumes grew 20% YoY while ASPs improved 3% QoQ. EBITDA rose a sharp 41% YoY and came 17% above Jefferies led by better than expected margins. Q3 gross margin was up 40bp QoQ despite higher commodity prices and helped offset the impact of higher staff costs. Q3 EBITDA margin was up 10bp QoQ (up 70bp YoY) to 9.5% while EBITDA/vehicle rose 4% QoQ, both all-time highs. This was despite the benefit of MEIS export incentives going away in Q3. Recurring net profit rose 44% YoY and was 35% above Jefferies Estimate in Q3.

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TVS Motors Demand outlook positive:

TVS Motors gave positive commentary on demand for both domestic and export markets. In India, rural demand is holding up well while urban demand should pick up pace as these regions open up. TVS is also seeing a rising share of higher-priced variants in products such as Apache (premium bike), NTorq (125c scooter), and Jupiter (100cc scooter). Domestic inventory levels are normal at about four weeks. TVS was also optimistic on export demand given stability in oil prices and exchange rates. The company added that the 20% YoY growth in export volumes in Q3 was achieved despite limited shipping container availability.

TVS Motors is managing margin headwinds well:

The sharp rise in metal prices is pushing up input costs for auto companies; however, TVS Motors seems to be managing the cost inflation well. TVS Motors believes that its 2% price hike in January will leave just 70-80bps of net commodity cost impact, which can be largely offset through internal cost controls. Jefferies factors in EBITDA margins of 8.5%/9.3%/10.5% in Q4 FY21/FY22/FY23 vs 9.5% in Q3.

TVS Motors Maintain Buy Rating:

The synchronized demand recovery in domestic and export markets should drive strong 21%/11% volume growth for TVS in FY22/FY23. TVS's higher exposure to the moped segment (20% of volumes) could be a headwind, but it has shown good product capabilities in scooters and premium bikes and has gained market share in these segments. Its 29x FY22 PE is not cheap, but Jefferies believes TVS Motors should continue to get a premium over Hero MotoCorp / Bajaj Auto given strong earnings outlook, potential for margin expansion and a gradually improving franchise. Jefferies retained Buy with Rs 655 price target based on 25x FY23 PE.