TVS Motors TP raised to Rs 650 on margin performance

Positively, strong FCF generation in FY21 resulted in a net debt reduction of Rs 14.5bn.

Notwithstanding the significant commodity headwinds, record 4Q FY21 EBITDA surprised the Street positively. Improved brand acceptance, diversified revenues and strong R&D capability provide long-term defensiveness. Strong and consistent margin performance drives our increase in TP to Rs 650 (from I`580).

Scaling new heights. TVS’s margin performance has surprised the Street positively for the fourth consecutive quarter, with EBITDA margins of 10.1% in 4Q FY21 (vs Street expectation of 8.5%). The double-digit milestone was achieved for the first time in more than a decade.

This is particularly noteworthy, in light of the significant increase in commodity prices through the quarter. The company has been able to pass on the cost increase through frequent and calibrated price hikes which, in our view, is on account of improved brand acceptance and a strong product portfolio.

The three key brands — Apache, Jupiter and Ntorq -have visibly improved the positioning for TVS, in our view. We also expect product mix improvement over the medium term, backed by strong R&D capability and product interventions. 4Q21 also marked record 2W exports with volumes in March crossing 100K units for the first time (compared to an average of c30K units in FY16 and 50K units in FY20). Exports contributed to 35% of total volumes in 4Q21 versus 26% in 3Q21 – partly helping the strong margin performance as well.

A growing export footprint and recovery in 3Ws should add to the defensiveness of the company. While the rise in COVID-19 cases in the domestic market remains a key risk in the near term, the export exposure should cushion any temporary impact.

4Q FY21 update: TVS reported largely in-line revenues of`53bn (vs consensus expectation of Rs 52bn). Average selling price was up 5.3% q-o-q led by a better mix and price hikes. The company took a further price hike of c1.6% in April to offset the impending commodity headwind of c190bp in 1Q22e. Cost efficiency measures and mix helped margins in 4Q21 to the tune of 100bp as per management. Positively, strong FCF generation in FY21 resulted in a net debt reduction of Rs 14.5bn.