Mahindra CIE Automotive - Resilient margin performance - ICICI Securities

Mahindra CIE Automotive's (MACA) Q3CY20 operating margins came in ahead of consensus estimates. Consolidated sales declined 8.2% YoY to Rs16.4bn (India/Europe revenue share turns 50%/ 50% for the first time) with Adj. EBITDA margin up 30bps at 12.5%. MACA had one-time restructuring cost (~140bps of margins). India EBITDA margins surprised positively as it exceeded pre-covid margins (13.6%, up 60bps YoY). European margins(Adj.) also reflected resilience (dropped only 20bps at 11.3%) even as revenues dropped ~12%. European business is expected to remain weak (down ~35-40%) in CY20, rebounding to >15% growth in CY21. We except India business is expected to clock >20% growth in CY21 due to new customer additions, new order wins. MACA remains undervalued (~11xPE /8.5% FCF Yield on CY21 basis). Maintain BUY.

- Key highlights of the quarter: Consolidated organic revenues declined ~8.2% with Europe business down 12.3% to ~Rs8.2bn as commercial vehicles forging business remained weak. Adj. EBITDA margin dropped only 20bps ~11.3% excluding the Rs270mn of restructuring cost in MFE and Metalcastello (Rs614mn in 9MCY20). India business declined 3.8% to Rs8.2bn as CV segments recovery remained slower vis-à-vis PVs/2Ws/tractors. PBT was down ~18% to ~Rs937mn.

- Margins resilience remains the cornerstone amidst uncertainty: a) gross margins improved 173bps YoY at ~53%; however, employee costs continued to be sticky at 19% (up 285bps) with other expenses also up 117bps YoY; b) management has indicated restructuring through consolidation and downsizing in the low-margin CV business in the past quarters, benefits of which are likely to bring down the breakeven levels to improve profitability; c) AEL recognized grant income of Rs12mn in Q3CY20 (Rs134mn in 9MCY20) which helped operating margins; d) with second wave of Covid hitting major EU countries, MACA sales are likely to be affected in case lockdowns are re-implemented; e) India business is expected to perform better in Q4CY20 (we expect ~10% growth) due to continued demand momentum from tractors and 2Ws along with possible improvement in CVs.

- Maintain BUY: We believe MACA is a well-diversified MNC supplier with products and technologies across end-segments. We raise our estimates (up ~15% in CY21) factoring-in higher margin resilience from MACA, roll forward in CY22 as we introduce CY22E estimates. We prune our target multiple factoring in mid-cycle growth to 13.0x (earlier: 16.0x) Sep'22E EPS of Rs15.4. We maintain our BUY rating on the stock with a revised target price of Rs200/share (earlier: Rs151).

Shares of Mahindra CIE Automotive Limited was last trading in BSE at Rs.135.5 as compared to the previous close of Rs. 137.6. The total number of shares traded during the day was 12923 in over 567 trades.

The stock hit an intraday high of Rs. 138.15 and intraday low of 131.2. The net turnover during the day was Rs. 1746124.

Source : Equity Bulls

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