TVS Motors: Decent Q3; valuation at elevated levels

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26 Aug, 2025 12:21

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Nitin Agrawal
Moneycontrol Research 

Highlights:
- Strong volume growth across segments in Q3 FY19
- Improved realisation led by price hike, rich product mix and a weakening rupee
- Short term business outlook for the two-wheeler segment is weak, positive for the long-term
- Three-wheelers continues to show strong momentum
- Stock priced to perfection
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TVS Motor Company (TVS) posted a strong set of numbers despite multiple macro-economic challenges. The robust performance was driven by volume growth and improvement in realisations. Operating margin witnessed a marginal uptick led by operating leverage and price hikes taken by the management to pass on the raw material price increase.

Despite its strong positioning in the domestic market, we have a neutral stance on the company. This is because the counter is priced to perfection (27.7 times FY20 projected earnings), leaving little room for comfort.

Quarter in numbers

Key positives

Volume – all segments are firing
In Q3 FY19, TVS posted a 20 percent year-on-year (YoY) volume growth, led by a 20.3 percent and 31.7 percent growth in motorcycles and scooter segments, respectively. Three-wheeler (3W) segment posted a stellar showing, with volumes clocking 46.9 percent growth on the back of strong demand after end of the Permit Raj.

Exports are doing well
Export volumes rose 25.8 percent, much higher than the 15.2 percent growth achieved in the domestic market.

Improved realisation
Overall realisation improved six percent, led by rich product mix, multiple price hikes undertaken by the management to pass on the rise in raw material (RM) prices and higher export revenue due to weakening of the rupee.

Strong volume growth and improvement in realisation led to a 27 percent growth in net revenue.

Key negatives
RM prices continue to exert pressure on profitability. Earnings before interest, tax, depreciation and amortisation (EBITDA) margin continues to remain lower than the double-digit margin guidance issued by the management.

Outlook

2W industry outlook sluggish in the near term
The short term outlook for the overall two-wheeler (2W) industry continues to remain sluggish on the back of muted consumer sentiment, driven by tight liquidity, non-availability of retail finance, higher interest rates and insurance cost. However, we believe the long term outlook to be very positive due to government’s focus on rural areas, leading to a rise in rural income and demand coming in from urban areas.

Strong 3W market
The overall three-wheeler (3W) market continues to gain strength after end of the 'Permit Raj' in Maharashtra and new permits in Delhi. This led the company to post strong volume growth in the 3W segment. We believe TVS should continue to perform well in this space.

Improving export markets
The overall export markets seem to be stabilising and benefiting TVS as is evident from its quarterly volume numbers. Weakening of the rupee is also aiding growth.

At present, TVS caters to 62 countries and has been gaining significant market share there. In fact, it has been outperforming industry growth in those markets due to its product range.

Operating margin: Far away from double-digit guidance
EBITDA margin continues to remain under pressure due to RM prices and increasing competitive intensity. It is still far away from its target of achieving double-digit EBITDA margin. The management has highlighted that new launches, strong traction in the export market and cost efficiencies would help the company achieve its target.

Valuation at elevated levelsDespite 24 percent fall in stock price from its 52-week high level, valuation continues to remain at elevated levels. The company is currently trading at 27.7 times FY20 projected earnings, which leaves little room for comfort for investors.

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