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Healthy quarter with promising growth outlook…

About the stock: Mahindra CIE (MCI), part of the Spain-based CIE Automotive Group, is a multi-technology, multi-product automotive component supplier

* CY22 consolidated revenue mix – Europe 36%, India 64%.

* Forging is ~59% of consolidated sales (78% in Europe).

* In India it derives 49%, 23%, 20%, 8% of sales from PV, 2-W, tractors, M&HCV, respectively. In Europe it now derives 75% of sales from PV space.

Q4CY22 Results: Company posted healthy Q4CY22 results

* Consolidated revenue from continuing operations came in at |2,246 crores, nearly flat QoQ (Sequential growth in Europe, OEM led decline in India)

* EBITDA came in at |292.4 crores with margins at 13%.

* Company reported Loss at the PAT level amounting to ?658 crores vs. profit reading on QoQ and YoY basis, largely attributable to impairment charge for placing Germany forging business up for sale. Profit from continuing operation stood at ?195 crore for Q3FY22 and ?711 crore for CY22

What should investors do? MCI stock price has grown ~11% CAGR past 5 years (from ~? 230 levels in Feb 2018), outperforming the Nifty Auto index in that time.

* We retain BUY, tracking healthy demand outlook, value accretion post selling of its German forging operations; improved financials; order wins in EV space, strong CFO yields (~7%) & healthy double digit return ratios

Target Price and Valuation: Rolling over our valuations & switching to PE valuation methodology, we now value MCI at ?500 i.e., 20x PE on CY24E EPS of |25/share

Key triggers for future price performance:

With healthy underlying demand across major clients (like M&M, Tata, Maruti Suzuki) in Indian operations and PV centric Europe exposure, sales at MCI are expected to grow at 12.4% CAGR over CY22-24E.

* With o/p leverage at play & efforts on operational efficiencies post sale of German forging business, margins are seen improving to 14.1% by CY24E

* Robust order wins during year amidst consistent efforts to de-risk the base business with EV orders crossing |3 billion (per annum basis) mark in India

* RoE/RoCE is seen improving to 15%/17% respectively by CY24E amid superlative CFO/FCF yields which are pegged at ~7%/5% over CY22-24E

Alternate Stock Idea: Besides MCI, in our ancillary coverage, we like Apollo Tyres.

* India CV revival beneficiary, focused on debt reduction, higher return ratios

* BUY with target price of ?390

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