TVS Motor Co. Ltd’s shares vaulted 8.4% intraday to 446.40 apiece within minutes of the company announcing the September quarter (Q2 FY20) results.

Given the rock-bottom expectations from auto firms, investors were evidently surprised by the better-than-expected operating performance. Despite weak sales across segments, TVS Motor easily beat earnings estimates on the Street.

The company clocked an Ebitda (earnings before interest, tax, depreciation and amortization) margin of 8.8%, compared to Bloomberg’s consensus estimate of 7.9%. It was a tad higher than the year-ago period, which is commendable considering the 18% year-on-year drop in sales during the quarter. Note that even net revenue contracted by 13% from a year ago.

The pertinent question is whether the performance will sustain or is this the proverbial flash in the pan. Importantly, it comes when dark clouds of a slowdown are looming over the entire auto industry—both domestic and international.

From the looks of it, a favourable product mix came to TVS Motor’s rescue. Analysts reckon that premiumization of products on the back of success of brands, such as Apache and Ntorq, gave a leg-up to the profits. Further, price hikes, growth in the three-wheeler portfolio and a favourable exchange rate on exports aided net realization, which was 7% higher year-on-year. Even softer commodity prices supported profit margins, while the company reined in employee and marketing costs.

Therefore, the 11% year-on-year contraction in Ebitda at 382 crore was not as severe as pencilled in by the Street. Net profit at 192 crore, after adjusting for exceptional gain of 72 crore, was 9% lower. That said, it still brings relief to investors who were expecting 27% year-on-year drop for the quarter.

Mitul Shah, vice president (research) at Reliance Securities Ltd, said while TVS Motor could outperform the two-wheeler industry, it still has to contend with a tough business environment. “Increasing competitive intensity, higher commodity costs and upcoming BS-VI transition could be challenging for the company," he added.

Analysts who attended a call with the company management said the commentary was cautious, stating that it would take a few more quarters for sales to improve.

Indeed, some improvement in sales and lower production at the company could bring down inventory levels in the future. There is a slight increase in sales due to buying ahead of the transition to BS-VI emission norms, considering that prices of two-wheelers are likely to go up by 10-12% after that.

That apart, the TVS Motor stock trades at a rich valuation of 21-23 times estimated FY21 earnings. This could cap the upside in the stock, unless the festive season quarter ushers in some colour to an otherwise gloomy outlook.