TVS Motors reported Q2FY20 revenues in line with our estimates. Lower raw material costs assisted the company to report EBITDA margin at 8.8% vis-à-vis our expectation of 7.4%. Higher other income and a one-time gain of Rs760mn assisted PAT. TVS reported an overall improvement in its domestic two wheeler market share from 14.0% in Q2FY19 to 14.3% in Q2FY20. Based on the company’s strong RoE & RoCE, improvement in its domestic market share and expected margin expansion, we value the stock at 23x FY21e (earlier 22xFY21e). We maintain our ACCUMULATE recommendation with a price target of Rs480.
Q2 FY20 results highlights: At Rs43.5bn, revenue was down 13% YoY. In Q2 FY20, TVS sold ~842,400 two-wheelers, 20% lower YoY. Three-wheelers performed better, accelerating 9% YoY. Average realisations were up 7% YoY led by higher three wheeler sales and lower moped sales. They reported 8.8% EBITDA margin versus our expectations of 7.4%. This was primarily led by lower raw material costs. PAT came at Rs2.5bn. PAT includes a one-time gain of Rs760mn. Adjusting for that, PAT came in at Rs1.8 vs our expectation of Rs1.5.
Improvement in 2W market share: TVS reported an overall improvement in its domestic two wheeler market share from 14.0% in Q2FY19 to 14.3% in Q2FY20. This was primarily driven by its growth in scooter segment where its market share grew over 200bps YoY at 19.2%.
Strong brands to assist higher growth: We believe TVS Motor is the only company that enjoys a premium brand acceptability (Apache and Jupiter) in both motorcycle and scooter segment. The early signs of festive season have been encouraging for the industry and if the momentum continues, these brands will assist TVS to grow ahead of its peers.
Valuation: Assuming a 3% volume CAGR for FY19-21 and the margin expanding from 7.9% in FY19 to 9.0% in FY21, we expect revenue, EBITDA and PAT to grow at a CAGR of 8%, 15% and 21% respectively. At CMP, the stock trades at 21xFY21e. Based on the company’s strong RoE & RoCE, improvement in its domestic market share through significant outperformance to its peers and expected margin expansion, we value the stock at 23x FY21e. We maintain our ACCUMULATE recommendation with a price target of Rs480.