Driving Global Expansion And Innovation To Ignite EV Market Leadership

Key Takeaways

• Strategic focus on EVs and premium motorcycles is expected to boost product offerings, enhancing margins and earnings.
  
• International expansion and cost reduction initiatives drive revenue growth and profitability, supported by robust performance in financial services.
  
• International market challenges and heavy investments could pressure margins, while reliance on rural growth and EV pricing strategies pose revenue risks.

Catalysts

Engages in the manufacture and sale of automotive vehicles and components, spare parts, and accessories in India.

• The continued growth in both the internal combustion engine (ICE) and electric vehicle (EV) segments, with EV sales increasing by 31% compared to the previous year, suggests potential for revenue expansion as the company captures a larger share of the emerging EV market.
  
• TVS Motor's investment in new product development, especially in the EV sector and premium motorcycle category (e.g., TVS Apache RTR 310), is expected to enhance its product offerings, likely leading to higher margins and increased earnings over time.
  
• The company's strategic expansion into international markets, particularly with a focus on Latin America and Asia, is set to drive revenue growth, supported by improving retail trends in these regions that outperform local industry benchmarks.
  
• The company's sustained cost reduction initiatives and focus on improving EBITDA margins, which have already increased by 70 basis points year-over-year, are key to enhancing net margins and overall profitability.
  
• The growth and diversification in the financial services arm, TVS Credit, with a 13% increase in book size and a diversified loan portfolio, support improved earnings, as these financial services can provide higher-margin opportunities compared to traditional auto sales.

TVS Motor Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TVS Motor's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.5% today to 10.1% in 3 years time.
• Analysts expect earnings to reach ₹50.1 billion (and earnings per share of ₹105.46) by about November 2027, up from ₹18.9 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 42.1x on those 2027 earnings, down from 61.9x today. This future PE is greater than the current PE for the IN Auto industry at 16.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.48%, as per the Simply Wall St company report.

TVS Motor Future Earnings Per Share Growth

Risks

• Challenges in international markets, such as the transit issues in the Red Sea and currency depreciation in the Middle East and Africa, could impact revenue from those regions.
  
• The discussion about increasing interest rates and local currency depreciation affecting the Middle East might lead to reduced demand, thereby impacting net margins.
  
• Heavy investments in future technologies and higher employee costs could pressure net margins if revenue growth doesn't keep pace with these increased expenses.
  
• Dependency on rural market growth due to its recent favorable turn might be risky if weather conditions or other rural economic factors change, potentially impacting domestic revenue growth.
  
• Competition and pricing strategies, especially in the EV segment, where price adjustments were necessary, indicate pressure on pricing power and could affect future earnings.

Valuation

• The analysts have a consensus price target of ₹2607.38 for TVS Motor based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹3350.0, and the most bearish reporting a price target of just ₹1630.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹494.5 billion, earnings will come to ₹50.1 billion, and it would be trading on a PE ratio of 42.1x, assuming you use a discount rate of 19.5%.
  
• Given the current share price of ₹2460.0, the analyst's price target of ₹2607.38 is 5.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.