Below est.; Weak op. performance in both India and EU
Focus on new orders and restructuring to drive strong recovery
* Mahindra CIE (MACA)’s adverse operating performance in 3QCY20 was attributable to weaker revenue in India and restructuring cost in EU. While it is focusing on new orders / exports in India, it is also cutting cost to reduce breakeven points for the EU business.
* We marginally cut our CY21E EPS to factor in lower revenue growth. Maintain Buy, with TP of ~INR165 (13x Sep’22 consol EPS).
Operating deleverage and restructuring cost in EU impact performance
* 3QCY20 consol. revenue/EBITDA declined 9%/28% YoY, but PAT grew 4%. For 9MCY20, revenue/EBITDA declined 34%/69% and posted net loss.
* Consol EBITDA stood at ~INR1.5b (v/s est. INR2b), impacted by lower revenues in India and restructuring cost in the EU business (INR270m).
* Higher other income in the EU business on the sale of real estate in Jeco boosted PAT to INR607m (+4% YoY).
* India business performance was below estimates, with revenue declining by ~6% YoY to ~INR8.6b (v/s est. ~INR9.3b). The India EBITDA margin stood at 12.6% (v/s est. 12.7%).
* EU revenues declined ~9% YoY to ~INR8.7b (v/s est. ~INR8.1b), with 22% decline in EUR terms. EBITDA margins stood at 5.2% (v/s est. 10%), impacted by INR270m restructuring cost in the German CV business.
Highlights from management commentary
* For India, demand momentum is expected to continue in 4QCY20; however, management is cautiously optimistic on demand post the festive season. Average capacity utilization is at 90%.
* The India business would grow faster than the market on the back of: 1) exports growing from 12–13% of sales to 20% (to see benefit from 2HCY21) and 2) increasing contribution from new orders to 25% of sales from 15%.
* Post the restructuring, the EU business breakeven revenue stands at INR5.5b/qtr. This would further reduce to INR5.3b/qtr after the completion of the restructuring by 4QCY20.
* Capacity utilization is at 90% in India, 80% in the EU (PV forging), and 65– 70% in the EU (CV forging). Metalcastello is at the bottom of the utilization cycle.
* Capex: India CY20 capex would be at ~INR2.5b (INR2b capex for 9MCY20) toward growth in capacity expansion. CY21 could be higher if the company wins additional business.
* CIE increased its stake by purchasing from the market. Stake now stands at 60.18% (v/s 58.02% in 2QCY20 and 56.29% in 3QCY19).
* Net consol debt stands at INR16.1b.
Valuation and view
* MACA’s growth story is on track, driven by its organic initiatives (new products/customers) and M&A focus.
* The stock trades at attractive valuations of 12.7x/10.3x CY21E/CY22E consol. EPS. Maintain Buy, with TP of ~INR165 (13x Jun’22 consol EPS).
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