The auto sector has been reeling under many pressures. First, it was hit by a semiconductor shortage, followed by geopolitical tensions that intensified supply issues. Although pandemic restrictions waned out after February, inflationary pressures and low demand affected the retail sales of the auto sector. This affected earnings and revenue for the companies in Q3FY22 and Q4FY22, before recent green shoots emerged in wholesales and retail sales growth.

TVS Motors, a market leader in the two-wheeler (2W) segment also saw a similar trend. The tide has turned for the company since Q3FY22 as it reported better net profit and revenue growth – in Q1FY23 TVS Motors’ net profit grew 6X YoY to Rs 320.5 crore. It also saw a growth in wholesales from April to August. This comes as a surprise given the fact that August is considered to be a seasonally weak month.

The company has recorded growth in all its major segments. Both motorcycles and scooters are seeing a rise in wholesales. With people returning to offices, demand for two-wheelers and scooters has jumped. According to TVS Motors’ management, a pick-up in the economy and an increase in mobility have helped improve sales for the company.

However, a concern the management points out - as retail sales are still slow to pick up - is rising inflation affecting the spending patterns of customers. According to CEO K N Radhakrishnan, third-party insurance prices have increased up to 45% but salaries haven’t increased at the same pace, which is hurting buyers. Rural income is also yet to come back to pre-Covid levels and these reasons need to be factored in to understand the demand trend in recent and upcoming quarters.

Exports hit by inflationary challenges, but trend may change in coming quarters

One can see slow but steady growth with wholesales and retail for TVS. The company’s current philosophy of keeping only 25 days of inventory to make sure that all vehicles at the dealership are sold and no customer gets an old vehicle, seems to be working. The company’s wholesales grew 18.5% MoM in August and retail sales rose 9.8% MoM.

The company’s inventory planning and the onset of the festive season did help in improving sales in the domestic market.

However, the export market continues to see headwinds. Challenges are multiplying in developing economies due to soaring inflation and trade deficits. Both Sri Lanka and Bangladesh are going through economic crises. According to Radhakrishnan, Sri Lanka used to be one of the top markets for TVS in terms of sales. TVS Motors performed well in the Iran market as well, another geography experiencing multiple crises.

Given the volatile global scenario as well as a still tight supply chain in semiconductors, the export trend may remain subdued.

However, the management is hopeful that Sri Lanka, Myanmar, and Indonesian markets will bounce back in the coming quarters. Radhakrishnan says that TVS Motors will see exponential growth in Indonesia, given that exports have been doing well in this market for the last two years. On a positive note, he also adds that Nigerian markets are still seeing some retail sales. He says, once the existing stock is liquidated, the company will plan to stock up more vehicles.

TVS’ competitors have pointed out similar challenges with exports. Hero MotoCorp’s management also sees a fall in exports in Sri Lanka, Nepal and Bangladesh. In its Q1FY23 earnings call, they highlighted that the falling rupee against the US dollar will impact sales in foreign markets as prices would need to be revised to cover costs. However, Bajaj Auto sees headwinds only in the African market due to inflation, and expects other export markets to remain steady. It expects double-digit growth in exports in FY23.

Performance to improve, EV space to lead growth

While talking to analysts, TVS Motor management said that performance will improve in the coming quarters. According to the CEO, industry CAGR is at 9% while TVS Motors is growing at 18%. According to this screener, the 2/3-wheeler industry is down 2.1% in the past month while TVS Motors is outperforming the industry as it is up 7.4% in the past month. With commodity prices down by nearly 20%, future pricing strategies carried out by the company can improve margins in the coming quarters.

On the outlook side, the management remains positive and expects EBITDA to grow in the next three years. CEO Radhakrishnan says, “Three to five years I promise you, we will continue to grow on top line market share, costs will come down, EBITDA will move up.” The company has also planned maximum launches in this FY, given that it is able to navigate supply chain issues.

The company also expects EV (electric vehicle) sales to go up. In June the company’s production capacity of its EV model ‘TVS iQube’ was around 4,500 units in June which increased to more than 6,000 units in July. It expects to ramp up production to 10,000 units per month by January 2023.

New launches are lined up in the next 8-12 months in both the domestic and export market. In its recent report, Sharekhan gives a ‘Buy’ rating to TVS Motors as it expects an improvement in customer footfalls, better EV sales, and gradual growth in exports over the next two quarters. And, with the company’s capex guidance of Rs 700 crore in FY23E, the management seems prepared to aggressively invest for growth.

Disclaimer: This analysis by Trendlyne is meant for investor education - to help understand companies and make informed investment decisions on their own. It should not be considered an investment recommendation.