(TVSL IN, Mkt Cap USD2.6b, CMP INR402, TP INR392, 3% Downside, Neutral)

2H recovery, price hike of 1.1% with cost cutting to drive margins

-       TVS Motor Company (TVSL)’s operating performance was supported by lower other expenses. It expects cost-cutting efforts to boost margins, with volume recovery and the Premium portfolio outperforming.

-       We upgrade our FY21/FY22E EPS by 2%/5% to factor volume recovery. Maintain Neutral, with TP of INR392 (~18x Sep’22 EPS + INR40 for NBFC).

Op. performance driven by substantially lower other expenses

-       1QFY21 revenue declined 68% to ~INR14.3b, and reported EBITDA / adj. loss of ~INR0.5b/INR1.4b.

-       Volumes fell by ~71% YoY (-58% QoQ). Realizations grew ~10.8% YoY (-2.5% QoQ) to INR53.6k (v/s est. INR56.2k), driven by the BS6 cost pass-through.

-       Gross margins contracted 90bp QoQ (70bp YoY) to 24.1% (est. 25.6%), weighed by a weaker product mix (lower export mix and Apache) and the impact of the BS6 cost inflation (as contribution margins are yet to be passed through).

-       Furthermore, op. deleverage resulted in EBITDA loss of INR488m (v/s est. loss of INR663m), although the impact was diluted by cost-cutting initiatives and cost deferment, as reflected in lower-than-expected other expenses. It reported loss of ~INR1.4b (v/s est. loss of ~INR1.64b).

-       Interest cost increased due to additional borrowings in 1QFY21 to ensure timely payment to suppliers.

Highlights from management commentary

-       Demand outlook: The company expects demand recovery in 2HFY21, with TVSL performing better than the industry on account of its portfolio.

-       The company expects premiumization to continue, albeit delayed by one or two quarters due to the COVID-19 impact. This should benefit Apache and Ntorq.

-       For operational dealerships, demand is back at pre-COVID-19 levels. At the start of Jul’20, 85% of dealerships were operational. However, this has dropped to 75% due to fresh lockdowns in select markets.

-       Production bottlenecks prevailed in Jun’20, but are easing in Jul’20. Apache faced severe production-related challenges, which impacted the mix in 1QFY21.

-       Expect margins to improve in 2H, driven by cost cutting and focused market strategy. Jun’20 EBITDA and PBT were positive, with July thus far faring even better.

-       It took a 0.7% price hike in 1QFY21 and has taken a 0.4% price hike in July.

-       Finance: Finance penetration increased to 52% v/s 46% YoY. TVS Credit holds 54% share of TVSL Financing. TVS Credit’s moratorium is currently at 14% (incl. Morat 2.0) v/s 37% earlier, backed by strong collection efforts. Collections are now at pre-COVID-19 levels.

-       Capex would be INR3b for FY21 and investment in TVS Credit would be ~INR750m.

Valuation and view

-       We upgrade our FY20/FY21 EPS by 2%/5% to INR10.3/17.5 to reflect volume recovery. Valuation at 39.1x/22.9x FY21E/FY22E EPS already reflects the large part of earnings recovery. Maintain Neutral, with TP of ~INR392.