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We recently interacted with the management of Mahindra CIE (MACA) and following are the key takeaways from the meeting: 1) MACA is prepared to deliver 800bps higher than OEM industry growth in the longer run through mix of portfolio diversification and wallet share gains; 2) set to cater EVs in India and EU through steel and aluminum casting/forging other than stamping and gears; 3) confident of ~17-18% and ~16-17% India and EU EBITDAM in CY23-24, driven by productivity improvement in India and stabilising power cost in EU; 4) EU EV risk to get mitigated by expansion in aluminum forging capability in coming years and thus, MACA is looking forward to deliver ~5% revenue CAGR in EU; 5) to keep capex/sales ratio ~6% in coming years and use FCF proceeds to pare off debt and fund inorganic growth needs, especially in areas like plastic parts and EV parts; 6) EU truck forging sale deal is likely to get executed within the next couple of quarters and may help MACA reduce debt further. Maintain BUY with DCF-based unchanged target price of Rs466, implying 16x CY24E earnings. We believe the ability of MACA to weather EU-ICE to EV transition, without hurting consolidated earnings growth and RoCE, would be an important aspect to monitor going ahead.

Key takeaways and our views:

* MACA has been diversifying business in terms of processes, user segments and customers on a continuous basis. Recently, it added orders from Stellantis group, Bosch and Royal Enfield for forged components, Mitsubishi, Nidec, MAN, American Axles etc. for aluminium and casting components and M&M for EV gears. Other than these, MACA will be catering for aluminium housings used in battery systems for Tata Motors EVs. With rise in acceptance of EVs in PV/2Ws, MACA India is looking forward to expand its capability under stamping, composites, aluminium and going ahead in plastics. This is not going to stop its focus towards forging and casting businesses, as limited capacity of these polluting processes in EU would help MACA garner export orders. MACA is increasing its aluminium casting complexity in order to gain new export orders in an era focusing towards light weighting.

* In EU, MACA post factoring ~50% car electrification by CY30 from current ~10% is aiming to deliver ~5% revenue CAGR, with bulk of revenue lost in forging process set to get balanced through aluminum forging process ahead. MACA is planning to do minimal capex on its existing CIE forging assets (largely towards heat treatment) and transition smoothly to the more complex aluminum forging process. Metalcastello is operating at revenue run rate of Euro80mn and will be executing the EV transmission part order of Euro20mn p.a. from CY23, thus, cushioning its business cyclicality from industrial sector.

* MACA is looking forward to sustainable EBITDAM of ~17-18% in India and ~16-17% in EU, resulting in consolidated EBITDAM of ~17% ahead. With lower margin truck forging business moving out of operations in EU and power costs rationalising back, EU margin is set to revive towards ~16-17% in CY23, we believe. For India, productivity improvement is the key margin driver ahead other than gradual reversal in gross margin, to take EBITDA up from current ~15% to ~17-18% in CY23-25, as per MACA.

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