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The highlight of Q2 is the sharp improvement in the operating metrics of TVS (Hemant Mishra/Mint)
The highlight of Q2 is the sharp improvement in the operating metrics of TVS (Hemant Mishra/Mint)

TVS Motor’s margin gains impress, but valuations may face headwinds

The festival season sales of TVSL have started on a good note, but persistence of sale volumes will be watched

TVS Motor Co. Ltd’s Q2 results have seen a surprisingly good jump in margins due to cost savings, but it will be hard for the automaker to sustain these margins in the next few quarters. The stock made sharp gains of nearly 8% following the results, driving valuations higher. That could face headwinds too.

No doubt, the Ebitda margins at 9.3% rank among its highest after cost savings due lower to staff and advertisement expenses. Yet they could weaken in the coming quarters. TVSL has rolled back the salary cuts it had effected in the second quarter, which is bound to increase margin pressure. Ebitda is earnings before interest, taxes, depreciation and amortization.

Besides, the firm may have to incur higher advertisement expenditures to push volumes in the domestic market. “With the eventual volume recovery, key costs such as advertisement costs will come back as TVSL remains a challenger brand in most segments that it operates (except mopeds). Further, sharp increase in raw material costs, too, act as headwinds for margin expansion," said a Prabhudas Lilladher client note.

Export volumes, however, was seen to be cruising at a good pace of about 8% y-o-y in Q2. Demand for personal mobility around the world is driving demand for two-wheelers. The management has highlighted that exports could grow faster than the domestic market in the near term, and that should keep the revenue momentum on high gear.

Revenue growth of about 6% y-o-y has come in at the levels the Street was expecting. Realizations per vehicle increased by about 8% y-o-y as TVSL took a price hike during the quarter. It also raised prices in October.

TVSL volume sales have kept good pace given the circumstances, and is just about 2% lower compared with the year-ago quarter. This shows that sales volumes are decent despite the price hikes.

The festival season sales have kick-started on a good note, said analysts. The persistence of sales volumes beyond the festival season will be keenly watched, though.

TVSL’s slow progress in the domestic market is a bit of a dampener. “Over the past four years, the company has managed to gain market share by only 40 basis points in the domestic two-wheeler market and improved its Ebitda margin by only 30 basis points," said analysts at Kotak Institutional Equities in a client note.

This also casts a cloud on its valuations. “Valuations are expensive with core price-earnings at 28 times FY22 earnings in comparison with 15-21 times for larger peers on FY22 earnings," said Emkay Global Financial Services in a client note.

That should keep investors wary after the stock’s sharp gains. The TVSL stock is just about 7% away from its pre-covid highs.

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