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Strong performance amidst multiple headwinds

Mahindra CIE’s (MACA) reported strong beat with EBITDA margin coming in at 11.5% vs our estimate of ~10%, down by a mere ~150bps YoY, with gross margin largely flat YoY despite input cost adversities. Consolidated revenues were up 18% YoY, driven by 15%/20% YoY growth in India/EU sales. Half of the growth in EU was driven by steel cost pass-through while India growth was led by growth in PVs/CVs and metal inflation. Power cost escalation impacted EU margin by ~200bps YoY and MACA is trying to get it included under the pass-on clause. We expect the company to deliver mean FCF of ~Rs5bn p.a. in CY22E-CY23E. With RoE improving to ~14% by CY23E (~8% in CY21), ~7% FCF yield, 2% dividend yield and lean balance sheet, we believe MACA is an attractive BUY. Maintain BUY on the stock and value it on DCF, with a target price of Rs296/share (earlier: Rs287), implying ~14x CY23E EPS, keeping CY22/CY23E estimates unchanged.

* Key highlights of the quarter: Revenues were up 18% YoY (25% QoQ) while EBITDA margin shrunk by only 163bps YoY to 11.5%, with flat gross margin and elevated energy costs (~20% impact on other expenses) despite savings from employee VRS. Strong performance in India (up 15% YoY) was propelled by M&HCV/PV volume pick-up, despite semiconductor shortage amidst weak 2W/tractor demand. EU business was up 20% YoY due to strong demand from Metalcastello and steel inflation pass-through.

* Key takeaways from earnings call: a) EU revenues are up from historical high performance of Metalcastello (up 35% YoY) and Bill Forge revenues at EUR2.5mn per month (EUR4mn-5mn peak monthly revenues are expected once production normalises, or on securing of new orders); b) in EU, 70-75% capacity utilisation with Metalcastello lines fully booked; for India business, the gear segment orderbook and capacity is fully booked; c) capex for CY22 is expected at 5-6% of sales as cashflows continue to be robust amidst supply constraints; and d) steel inflation contributed 12% of the 20% YoY growth in EU revenues; MACA was able to pass through only 25-30% of energy cost inflation and targets to achieve a stabilised ~15% EBITDA margin at a consolidated level; d) company in no a hurry to do M&A.

* Improving cashflows to drive valuation multiples; BUY: MACA is a welldiversified MNC play with dominant India contribution (~55% PBT share in CY21). With parent CIE’s capability to service global EV OEMs, we believe it is a matter of time MACA would also start making EV components for EU PV market. The stock is trading at ~7% forward FCF yield with a lean balance sheet. We maintain BUY on MACA at Rs296/share (earlier: Rs287) based on DCF, implying ~14x CY23E P/E.

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