Volume, margin pressures may slow down TVS in Q1

Stock trading at 74% premium to Hero at valuation of 24.5x its FY23 earnings

TVS Motor surprised the Street with a sharp margin expansion in the March quarter, even as its peers in the auto sector struggled to cope with the pressure on profitability.

Price hikes, higher exports, an improving product mix, and cost reduction efforts led to a 246-basispoint jump in stand-alone margins helping it cross the elusive 10 per cent-mark.

The better-than-expected margin performance, compared to the Street’s expectation of 8.5 per cent, led to the highest single-day surge in its stock for over seven years. At close, shares had gained 14 per cent.

Though raw material costs were elevated as compared to the year-ago period, a higher proportion of scooters and twowheeler exports in the sales mix, along with a sharp decline in staff/other costs, aided margin gains.

While strong operating leverage (Q4 volumes rose 46 per cent) helped the company overcome the spike in raw material costs, it could face near-term headwinds.

IIFL Research says the near-term outlook is challenging from both the volume and margin perspectives, owing to the second wave and input cost pressures.

The management indicated that the June quarter would see the overhang of Covid restrictions; it expects a strong recovery in the other three quarters.

In addition to market share gains and new product launches, what could offset some of the domestic weakness are exports. This segment accounted for 35 per cent of volumes in Q4, as compared to the 19-26 per cent range in the last three years.

Given the Q4 performance, the company’s confidence in sustaining cost reduction efforts, and volume growth assumptions, most analysts have revised their earnings estimates by 13-18 per cent over the next two years.

However, the price surge leaves little upside in the near term, and valuations at 24.5x its FY23 earnings estimates means TVS Motor is trading at a 74 per cent premium to market leader Hero Motocorp.

Investors should await consistent margin performance in the coming quarters and a correction before considering the stock.