TVS MOTORS LTD

Company Overview Rating: BUY | Target : 539

TVSM is the flagship company of TVS Group and is the third largest Market Data
2W manufacturer in the country. TVSM is the only manufacturer
CMP 475
present across all three categories of 2W, viz. motorcycles,
scooters, and mopeds. Motorcycles and scooters contribute 40% Mkt. Cap (INR Bn) 225.67
and 33% of volumes, respectively, while mopeds constitute 23%. O/S Shares (Cr) 47.5
TVSM also manufactures three-wheelers (3W, 5% of overall
volumes) mainly for the export market. TVSM has been focusing on 52 Week High / Low (INR) 505/240
growing exports with the overseas market contributing about 25% Face Value (INR) 1
of overall volumes.
Beta 0.95

Industry Overview
Shareholding Q2FY21
The automobile industry in India is the world’s fourth largest. India (%)
was the world's fourth largest manufacturer of cars and seventh
largest manufacturer of commercial vehicles in 2019. Indian Promoters 57.4%
automotive industry (including component manufacturing) is FII / FPI 10.64%
expected to reach Rs 16.16-18.18 trillion (US$ 251.4-282.8 billion)
DII 21.91%
by 2026. The industry attracted Foreign Direct Investment (FDI)
worth US$ 24.21 billion during April 2000 to March 2020 Others 10.05%
accounting for ~5% of the total FDI during the period according to
the data released by Department for Promotion of Industry and
Internal Trade (DPIIT). Financial Ratios FY’21E
EPS (INR) 11.06
Domestic automobile production increased at 2.36% CAGR
between FY16-FY20 with 26.36 million vehicles being ROE (%) 13.2
manufactured in the country in FY20. Overall, domestic ROCE (%) 12.3
automobiles sales increased at 1.29% CAGR between FY16-FY20
Dividend Yield (%) 0.7
with 21.55 million vehicles being sold in FY20.
Two wheelers and passenger vehicles dominate the domestic
Indian auto market. Passenger car sales are dominated by small
and mid-sized cars. Two wheelers and passenger cars accounted
for 80.8% and 12.9% market share, respectively, accounting for a
combined sale of over 20.1 million vehicles in FY20.
Overall, automobile export reached 4.77 million vehicles in FY20,
growing at a CAGR of 6.94% during FY16–FY20. Two wheelers
made up 73.9% of the vehicles exported, followed by passenger
vehicles at 14.2%, three wheelers at 10.5% and commercial
vehicles at 1.3%.
 Investment Rationale
Good performance in Q2 amidst covid, expect a robust FY21
Q2FY’21 Summary
TVS Motors Limited’s (TVSM) Q2FY2021 results were higher than estimated by most, driven by better-than-
expected margin performance. Overall revenue grew by 6% Y-O-Y, driven by an 8% Y-O-Y increase in realization due
to price hikes on account of BS6 norms. Volumes dropped marginally by 2% Y-O-Y. Operating profit margin (OPM)
stood at 9.3%, highest in the past decade and beating our expectation of 8.5%. Margin improved on a Y-O-Y basis
despite cost pressures on account of BS6 norms. Cost-control measures led to margin improvement. Demand in
domestic market has improved, driven by strong rural sentiments and increased preference for personal transport.
Initial festive sales have turned positive with marginal growth on a Y-O-Y basis. TVSM expects to continue
outpacing the industry, driven by new product launches and enhancing distribution network. Exports have picked
up strongly reporting 19% Y-O-Y growth in Sept-Oct 2020, driven by recovery in key markets and tapping of new
geographies. Margin improvement is expected to sustain given cost-control initiatives and benefits of operating
leverage.

Outlook
Sector Outlook - Retail sales continue to improve; Expect strong recovery from FY2022
2W demand has been improving on M-O-M basis and the trend has continued in the initial festive days of Navratri
and Dussehra. The decline in retail demand has narrowed to 5%-6% in the initial festive season of Navratri and
Dussehra as compared to 12% drop in September 2020. Strong rural sentiments due to higher kharif sowing and
government reform measures along with increased preference for personal transport is leading to improvement in
volumes. Strong recovery is expected from FY’2022, driven by normalisation of economic activity and pent-up
demand (the industry has been in down cycle for the past seven to eight quarters).
Company Outlook - Fastest earnings growing company in the 2W space
TVSM has gained market share in the 2W industry on the success of new launches and enhancing distribution
presence. TVSM’s market share has improved from 11.8% in FY2014 to about 13.8% in FY2020. Moreover, the
company has been able to strengthen its presence in the high realisation scooters and motorcycles category with
share of mopeds coming down from 41% in FY2014 to 26% in FY2020. Cost-control measures, better vendor
negotiations, and operating leverage benefits due to better scale have resulted in TVSM emerging as the fastest 2W
earnings company with strong 15% earnings CAGR over FY2014 to FY2020. TVSM is expected to remain the fastest
growing company going ahead.

Valuation & Investment Theme

Demand in the domestic market has improved, driven by strong rural sentiments and increased preference for
personal transport. TVSM expects to continue outpacing the industry, driven by new product launches and
enhancing distribution network. Exports have picked up strongly, reporting 19% y-o-y growth in September 2020,
driven by recovery in key markets and tapping of new geographies. Margin improvement is expected to sustain
given cost-control initiatives. We recommend a buy on the stock with a target price of Rs. 539 (42x FY22 EPS).

Key Risks & Concerns

Analysts: Joel Johnson, Supratim Endow, Arjun Vekariya
TVS Group is considering levying royalty on group companies.
Team: The BattleTVSM
Hawks is the flagship company of the group and any
levy would adversely impact margins. Prolonged slowdown in volumes due to COVID-19 could impact performance.
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