Mahindra CIE Automotive's (MACA) Q2CY21 result was a beat on consensus expectations driven by strong European performance (ten-quarter high margins: 14.1%) even as India business was impacted (revenue down ~17% QoQ) due to covid lockdowns. MACA continues to deliver on its targets with India business benefitting from new domestic customer/product additions and exports opportunities, while Europe business continues to improve margins while focussing on new programs (e.g. EV). We believe MACA's profitability (PBT) would continue to pivot towards India (CY17:45%/CY22E:57%), thus likely to aid valuation improvement. Maintain BUY.
Key highlights of the quarter:
- MACA to establish a new subsidiary for the greenfield state-of-the-art plant at Hosur, Tamil Nadu which would be led by Bill Forge. The plant would mainly have advanced forging and machining operations for key customers (e.g. PSA, Hyundai Kia, Royal Enfield) with exports also being a key focus area. This plant would be eligible for lower corporate tax rates (~15% + surcharge), thus could aid in reducing effective tax rates for MACA.
- On semiconductor impact, Q2CY21 was affected by shortage; May/Jun'21 saw higher impact. Management expects semi-conductor supply to improve (Sept'21 onwards as indicated by OEM production plan) and further shortages are likely to reduce significantly by Q4CY21.
- MACA has passed on the input costs to OEMs with price hikes of ~6% QoQ for both in India and Europe. Management expects H2FY22 to witness strong revenue growth (YoY) due to better demand outlook and easing semi-conductor shortages.
- Vendor consolidated exercise is being done OEMs even in India, smaller suppliers are unable to sustain. This has led to the rise in the share of business for MACA.
- AEL is doing well and is currently expanding facilities with focus on both domestic and exports. MACA targets it to become aluminium HPDC leader in India.
- Aluminium forging capex is not expected to be excessive as existing presses in Europe can be interoperated over steel forging. Minor investments would need to be made in the lines. For EV's on forging chassis and driveline parts would be key products for which they are working with OEM's.
- In next 12-15 months, Metalcastello is likely to grow significantly led by new customer (North America) for EV products (shafts and gears).
- Strategic plan announcement for MACA is likely in Q3CY21 which would give guidance on long term trajectory for key financial metrics, forging assets integration.
Shares of Mahindra CIE Automotive Limited was last trading in BSE at Rs. 244.05 as compared to the previous close of Rs. 241.9. The total number of shares traded during the day was 53978 in over 1738 trades.
The stock hit an intraday high of Rs. 248 and intraday low of 240.1. The net turnover during the day was Rs. 13150095.