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A mix of diversity, consistency and efficiency

We hosted Mahindra CIE (MACA) management in our annual investor conference at Singapore. Following are the key takeaways: 1) being a tier-2 B2B component supplier, MACA’s core focus is on process efficiency and automation in order to maximize profitability and, at the same time, give customers competitive pricing; 2) management is confident of benefiting from the EV transition across segments in India and maintain 8% value growth outperformance over industry volume growth in the longer run; 3) management is confident of delivering ~17-18% consolidated EBITDAM vs current ~15.5%, driven by productivity improvement in India and sustaining current EU margins; 4) company is now open to inorganic growth, preferably in India, with a clean balance sheet and cashflow visibility, in order to add plastic/EV parts; 5) company name change formally got done in May’23 to CIE India Auto Limited as guided earlier, and potentially should pave the way for fresh orders from new clients; 6) stake sale process for EU truck forging business is on with multiple parties doing due diligence and a deal is expected to be closed in CY23 itself. Maintain BUY with a DCF-based target price of Rs553 (earlier: Rs494) implying 18x CY24E earnings. The change in target price results from: 1) ~60bps increase in EBITDAM for CY23/CY24E leading to ~5% increase in CY24E EBITDA, and 2) roll-over of our estimates by a quarter.

Key takeaways and our views:

* MACA emphasised that it is a tier-2 component supplier, hence its core focus is on productivity and process-efficiency improvement rather than R&D to develop new components. It believes its key to success lies in manufacturing the same product in the best way possible with focus towards cost reduction without compromising on quality – thereby enabling competitive pricing of the products. This gives the company an edge over peers to get new orders, gain wallet share, diversify portfolio and grow profitably.

* New forging parts orders under Bill Forge for Bosch, Royal Enfield and Stellantis group would add to revenue growth in CY23 from new Hosur plant. Supply of ~20 aluminum casting components per model for Tata Nexon/Tiago EVs would start soon, adding to revenue growth in CY23. The 2W segment, which accounts for ~25% of MACA’s India revenues, was subdued in CY22 and management expects it to recover from H2CY23 onward, especially for its key 2W customer (Bajaj Auto). From an EV risk perspective, Bill Forge and AEL are largely devoid of any risk with total India powertrain parts exposure being to the tune of Rs6.5bn (Rs4bn PV forging and Rs2.5bn 2W crank case). MACA is confident of new EV parts balancing off the potential revenue risk in coming years and is clear about its path to ~8% higher value growth over industry volume growth.

* May’23 witnessed completion of change in MACA’s name from MCIE to CIAL along with residual ~3% stake sale of M&M, with the EU truck forging business sale pending development. We believe these events would act as triggers for business rerating from current valuation levels, allay investor fears and give better clarity on business prospects ahead. With MACA being a net-debt-free entity by CY23E-end and operating at a post- tax RoCE of ~15%, we believe there is scope for rerating from the current CY24E P/E multiple of ~15x.

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