TVS Motor's (TVSL) FY20 annual report highlights the potential impact of COVID-19 on demand. While recovery is expected only from 2HFY21, we believe social distancing norms could be an opportunity for the two wheeler (2W) industry.

-       TVSL has invested in multiple digital platforms in the fields of internet of things (IOT), predictive maintenance and credit underwriting to be future ready. It has acquired Norton to enhance its global portfolio and gain access to new markets with Norton's existing network.

-       TVS Indonesia reported marginal EBITDA loss with margins improving from -11.5% to marginal -0.1% on the back of 45% YoY growth in revenue.

 

Outlook remains tepid; Recovery only in later part of year

-       TVSL expects the sharp sales decline witnessed during 1QFY21 to partially ease in 2QFY21. Possibility of any upside should play out only in the later part of the year.

-       The new long-term practices of social distancing could see consumer preferences change toward personal mobility. This could provide an opportunity, especially to the 2W industry.

-       A sustained trend of low crude prices may also impact export market growth in oil dependent economies of Africa. However, the economic impact of COVID-19 is expected to be more pronounced in LATAM markets. African countries seem to be less impacted with core demand expected to return sooner.

Domestic market share declines marginally

-       TVSL's domestic market share declined by 95bp YoY to 13.85%. Motorcycle market share declined by 70bp YoY to 6.7% as 'economy' segment's market share dropped by 360bp to 5.4%. However, 'premium' segment's market share improved marginally by 20bp to 14.75%

-       Scooter market share stood at 18.3% with marginal decline of 20bp, supported by 24% YoY growth in TVS NTORQ 125. The 'Racing' edition of TVS NTORQ 125 created good momentum for the brand.

Exports: 3Ws gain substantial share; share of 2Ws fairly stable

-       The 2W industry grew 7% YoY in the export market due to stable crude oil prices during major part of FY20 and continued growth in Africa.

-       TVSL's 2W exports declined 18% in FY20. However, its share in 2W exports from India increased by 30bp to 19.3%.

-       3W exports for TVSL improved 11.2%, driving market share increase of 7.6pp to 32.3% in FY20.

Norton acquisition: To enhance global portfolio and network

-       TVSL acquired Norton Motorcycles in an all-cash transaction for a consideration of GBP16m through one of its overseas subsidiaries.

-       The iconic models Norton, Commando, Dominator and the more recent V4RR enhanced TVSL's global portfolio. Besides complementary products, the acquisition also brought markets and capabilities to the table.

-       TVSL believes that it can leverage Norton Motorcycles' geographical network reach and global supply chain capabilities to expand to new markets and audiences for its existing and upcoming products.

TVS Indonesia: Very close to EBIDTA break-even level

-       While the Indonesian 2W industry was stagnant during FY20 at ~7.2m units, PT TVS' 2W sales grew 31% YoY to 53,650 units (v/s 40,760 units in FY19). 3W sales volume increased 3x to 8,100 units (v/s 2,700 units in FY19).

-       Revenue grew 45% YoY, which in turn drove YoY improvement in EBITDA margin from -11.5% to -0.1%. But, a 2.5x increase in forex loss further deepened losses by 21%.

-       In FY20, TVSL further invested USD5m in ordinary shares of PT TVSM.

TVS Singapore: Invested in 4 new digital platforms for higher efficiency

-       TVSL has invested SGD26.48 in TVS Motor (Singapore) Pte Limited. In turn, TVS Singapore invested USD16.57m in four companies involved in IOT, predictive maintenance and credit underwriting. The four companies are:

-       Tagbox Solutions Private Limited (24.3% stake, INR266m) - The company provides IoT-based solutions for sensing, monitoring and analysis across supply chain activities.

-       Predictronics Corporation, USA (23.5% stake) - The company is an AI driven Predictive Maintenance Analytics solutions provider. The goal is to reduce unplanned down time, increase productivity and improve product quality

-       Altizon Inc. (14.1% stake)- It specializes in industrial internet of things (IIoT) and addresses manufacturing industries. The idea is to integrate machine data with related information from other IT systems on the shop floor to build a manufacturing data lake. Analysis of this data would bring visibility and predictability into its manufacturing value chain and make the system cost efficient.

-       Scienaptics Systems Inc. (17% stake) - It uses AI enabled platform 'Ether' to provide customer solutions. It will help the company to improve risk and credit assessment and monitor evolving fraud patterns among other benefits.

TVS Credit Services Limited (TVS CS)

-       Disbursements grew 7.3% YoY to INR75.85b and AUM increased 10.6% to INR92.15b.

-       Total income grew 23.2% YoY to INR20.15b and PAT stood at INR1.5b (v/s INR1.48b in FY19).

-       In FY20, TVSL invested a further sum of INR450m in TVS CS.

Other highlights

-       TVSL forayed into the electric vehicle space with the launch of its first electric scooter - TVS iQUBE. The product comes with many 'industry-first' features - like geo-fencing, ride statistics, telematics, remote charge status and navigation assist - all brought together to give the customer an overwhelming connected experience.

-       Partnership with BMW Motorrad - TVSL has produced over 72,000 units of BMW 310cc motorcycles till date. FY20 supplies of the BMW 310cc motorcycles grew 43% to ~21,293 units.

Financial highlights of FY20

-       Revenues declined 10% in FY20 to ~INR164.2b, impacted by 17% decline in volumes. However, it was supported by 7% higher realizations due to its product mix. EBITDA/PAT declined 6%/15% to INR49b/INR5.7b.

-       FY20 EBITDA margins improved 30bp YoY to 8.2%, driven by gross margin improvement of 240bp to 27.7%. However, there was inflation in all other cost heads such as staff cost (+2% YoY or 60bp), other variable cost (+60bp) and other fixed cost (+50bp), which diluted the benefit of gross margin improvement.

-       Core working capital improved by 10 days to -15 days while payable days increased by 9 days.

-       RoE in FY20 declined by 520bp to 16.3%, impacted by lower asset turns.

-       CFO from operations grew 27% to INR13.9b, driven by reduction in corporate tax rate and working capital. Capex was stable at INR7.3b. FCFF grew 83% to INR6.7b. Post the strategic investments, TVSL's FCF surged 229% to ~INR3.7b.

-       While DPS was stable at ~INR3.5/share, dividend payout increased to ~34% of PAT (v/s ~30% in FY19).

Valuation and view

-       We expect subdued volumes in 1HFY21 due to 12-15% cost inflation for BS6 compliance and the impact of Coronavirus. Earliest recovery is expected from the festive season starting in Aug-Sep'20.

-       We expect TVSL's market share gains to slow down as there are limited products in its portfolio currently. Further, electrification of 2Ws could threaten TVSL's competitive positioning in scooters as we expect it to be cannibalized by e-scooters.

-       The company has several levers to improve margins such as (a) better mix, (b) forex benefit, (c) cost-cutting initiatives, and (d) operating leverage (particularly on marketing and employee costs). Hence, we estimate EBITDA margin expansion of 100bp (over FY20-22E) to 9.2% by FY22E. This should result in standalone EPS CAGR of ~18% over FY20-22E.

-       Maintain Neutral with TP of INR354 (18x Jun'22E EPS + INR38/share for value in NBFC).