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TVS Motor Co. Ltd faced the odds and reported a steady performance in the June quarter of FY23. While auto companies so far have reported a drop in their Ebitda (earnings before interest, tax, depreciation and amortization) margins, TVS has bucked the trend.

The company has sustained its Ebitda margin at 10% for the fourth consecutive quarter amid severe cost pressures and chip constraints. The measure has expanded by 300 basis points year-on-year. One basis point is 0.01%.

Investors were visibly thrilled. TVS’s shares hit a new 52-week high of 953.20 apiece intraday on Friday on NSE. The stock rose 9.5% in early trade.

Sequentially, raw material inflation was up by 2% and TVS took a price hike of 1.5%, the company said in the earnings call. This coupled with cost control measures led to Ebitda per vehicle rising by 1.7% to 6,611, which is a multi-quarter high.

“It is enjoying the benefits of economies of scale and operating leverage, resulting in sustenance of Ebitda margin at double-digit level. However, TVS earns about 40% of its overall Ebitda from the domestic scooter business, making it vulnerable to an electric vehicle (EV) disruption in the listed two-wheeler segment," said analysts at Motilal Oswal Financial Services in a report on 29 July.

It is also gearing up its own EV launches with its product, i-Qube, currently in three variants. Production is likely to be ramped up to 10,000 units per month in the near term and to 25,000 per month eventually. In June, production was at 4,500 units per month. The order book stands at 20,000.

While its plans for growing in the EV segment are encouraging, chip shortage is a worry. The company needs to balance between EV production and premium bike production. This crisis weighed on Apache and Raider production in Q1.

But going ahead, the situation is likely to normalize as the automaker is sourcing the component from another supplier. This means a higher mix of premium brands in Q2 which would aid margins.

Further, softening of commodity costs is a positive for margin and it expects slight inflation in Q2. But from Q3, it sees input costs trending flat to lower.

On the demand front, the upcoming festival season and recovery in rural markets with the expectations of normal monsoon augur well. But the demand in some export markets is seen under pressure due to the devaluation of the local currency.

“We expect TVS’ earnings to more than double over FY22-24, and our FY24 earnings per share is 26% above street," said analysts at Jefferies India in a report on 28 July. The broking firm believes the stock’s rich valuations are justified in its view given the strong growth outlook, headroom for further margin expansion and improving franchise.

To be sure, market share loss in the domestic industry and delay in electric transition are key risks. Further, once the ramp-up in EVs is significant in the industry, investors would have to track the demand momentum for TVS’s scooter business in the medium to long term.

 

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