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Strong India operations outweighing weak EU

We recently interacted with Mahindra CIE management (MACA) and following are the key takeaways: 1) company is targeting to take India revenue mix to ~60% vs 50% currently, driven by fast-growing profitable opportunities visible 2) M&M India revenue mix is now at 35%, with newly-launched SUVs pushing up per unit value-addition; 3) strong demand from PV makers (e.g. Tata Motors, M&M, Hyundai and Kia) has led to MACA adding capacity across stamping, magnetics and warm forging operations; 4) ~20%/~25% of India/EU businesses are under EV disruption risk and management is well prepared to scale up the EV parts business to combat the risks; 5) PV demand in the EU is yet to see major impact amid the current macro-issues though CV demand would get impacted 6) in EU forging operations, power cost constitutes 4% of revenue (thus, surging power cost accounted for 700-800bps of overall cost inflation, though it got partly mitigated with the passing-on of ~50-60% of the rise in electricity cost); 7) management is confident of sustaining India EBITDA margin at ~15% and take it up to ~17-18%. We expect MACA to deliver a mean FCF of ~Rs5bn p.a. in CY22ECY23E, with RoE doubling to ~15% by CY23E (from ~8% in CY21). This would deliver ~7% FCF yield on a lean balance sheet. Maintain BUY with a DCF-based target price of Rs345/share, implying ~14x CY23E EPS.

* In the EU, Metalcastello is fully booked and management expects it to deliver ~EUR80mn revenue in FY23 while the two CIE plants are expected to clock EUR250mn in CY22. However, CV forgings business continues to be under pressure and drag overall Europe margins down, with elevated gas/power costs causing the drag. No growth capex / M&A is planned for the EU barring some capacity addition in Metalcastello ahead.

* In India, PVs+CVs currently account for ~50% of revenue vs ~30% from 2Ws+tractors. Management expects FY23-FY24 India revenue growth in mid-tohigh teens driven by strong demand from the existing ICE PV portfolio, addition of new customers / new component orders, and the run-up to EV transition across PVs/2Ws.

* Company has no plans to add more CIE assets as of now though it is open to M&A opportunities to bolster the EV and plastic part portfolios along with addition of new APAC customers. Hyundai and Tata Motors have diversified their offtake from MACA by adding new castings/stampings.

* Capex is planned at 5-6% of sales as cashflows continue to be robust despite margin challenges in the EU. Management expects Rajkot facility expansion to help increase revenue from gears/shafts from existing customers (e.g. Maruti Suzuki). In forgings, MACA is expanding the Chakan facility to include warm forgings. It is also expanding the Hosur BillForge capacity, where it can make forgings for nonBillForge customers too. MACA is targeting EVs through AEL, as the components would require large castings.

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