Business outlook remains strong
Mahindra CIE Automotive's (MACA) Q1CY21 operating margins were a beat on consensus expectations driven by faster improvement across Europe and India. Key takeaways from call: a) management is hopeful of exports growing to ~20% of overall sales (~11-12% currently), b) growth to remain ahead of industry on the back of new customers and new programs ramp-up, c) margins outlook across both India and Europe is strong; expect to improve from 1Q position. We expect cumulative FCF of ~Rs11.6bn over CY21-CY22E (CY20 - Rs2bn). Stock remains undervalued (9.5x P/E / 10.3% FCF yield on CY22E basis). Maintain BUY.
Key highlights of the call:
- MACA's growth in Europe in EUR terms was 11% YoY with CIE forgings, MFE and Metalcastello posting 10%/2-3% and ~50% growth, respectively. The off-road segment in Metalcastello witnessed strong demand from North American customers.
- Breakeven revenue for Europe business stood at Rs5bn while that for India business stood at Rs3bn. Overall contribution margin of the consolidated business stood at 20-25% (including labour charges).
- Raw material cost inflation had a 4.5% impact on the domestic sales which was pass-through to its customers while Europe business is likely to witness RM cost inflation from Q2 onwards.
- Margins in Europe have improved across divisions including the heavy truck business (MFE), management reiterated that margins would further improve going ahead,
- In India the gears and magnets verticals are benefitting from the shift in customers' strategy of diversifying vendor base beyond China.
- In India business, production is likely to be impacted due to the shutdown of factories by various OEMs but is expected to covered up in H2CY21.
- Capex for CY21 is expected at 5-6% of turnover (CY20: Rs4bn). The company has already spent ~Rs1bn capex in Q1.
- Bill Forge Mexico operations have improved as the business received new orders from new customers in FY21. New capacity addition is expected from Sep'21, adding new press with a total ~EUR4mn in investment.
- Company introduced distribution policy to payout upto 25% of consolidated profits.
Shares of Mahindra CIE Automotive Limited was last trading in BSE at Rs.173 as compared to the previous close of Rs. 172.15. The total number of shares traded during the day was 38229 in over 927 trades.
The stock hit an intraday high of Rs. 174 and intraday low of 168.65. The net turnover during the day was Rs. 6589118.