TVS Motors’ impresses on margins in Q2 but valuations may face headwinds


TVS Motors Ltd’s second-quarter margin improvement has gone down well with the Street. The stock got a sharp lift post the results gaining about 7% in trade on Friday. But while the growth story could continue, the valuations are stretching considerably and could act as speed bumps along the way.

The revenue growth of about 6% year on year (y-o-y) has come in at the levels the Street was expecting. Realizations per vehicle increased by about 8% y-o-y as TVSL took a price hike during the quarter. TVSL also raised prices in October. TVSL volume sales have also kept up pace compared with last year with just a 2% blip in volumes. This shows that sales volumes are decent despite the price hikes.

But the highlight of Q2 is the sharp improvement in its operating metrics. Ebitda margins were up an impressive 9.3% in Q2 against 8.8% in the year-ago period, thanks to a fair bit of cost savings on staff. Other expenses such as advertising were also lower. It’s a pointer that TVSL has done well to also mitigate the impact of higher raw material costs in the second quarter.

But one worry is whether the impressive margin gains may sustain in the coming quarters. TVS may have to incur higher advertising expenditures to drive volumes. “With the eventual volume recovery, key costs like advertisement costs will come back as TVSL remains a challenger brand in most segments that it operates (except mopeds). Further, sharp increase in raw material costs, too, act as headwinds for margin expansion,” noted a Prabhudas Lilladher client note.

Nevertheless, the festival season sales have kick-started on a good note, say analysts. The persistence of sales volumes beyond the festival season will be keenly watched, though. Exports have been encouraging and could continue as demand for personal mobility has been on the rise and crude oil prices remain stable.

The one hitch that may act as a speed breaker for the stock is higher valuations compared with the competition. “Valuations are expensive with core price-earnings at 28 times FY22 earnings in comparison with 15-21 times for larger peers on FY22 earnings,” said Emkay Global in a client note. That should keep investors wary of the stock’s sharp jump. After the stock tumbled nearly 48% in the covid-19 sell, the stock is now trading 7% away from its pre-covid highs.

News Source:- livemint

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