Buy Mahindra CIE Automotive For Target Rs.598 (INR 553) - ICICI Securities Ltd
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CIE Automotive India (CAIL) reported Q2CY23 consolidated PAT of INR 2.1bn, up 16% YoY, and in line with our estimate, aided by 5% YoY increase in revenue at INR 22bn (adjusting for discontinued operations) and improvement in EBITDAM at 17.7%, up 260 bps YoY. The beat in margin was driven by ~160bps QoQ rise in EU EBITDAM at 19.2%, with Q1 operational margin being maintained and partially driven by big stock generation for summer period (one-time effect that will have reverse impact in Q3. EU revenue declined 11% QoQ to INR 8.6bn (up 6% YoY adj. for discontinuing operations) due to slowdown in Metalcastello, and is likely to improve from CY24. India revenue was flat QoQ at INR 13.4bn, affected by weakness in 2Ws/CVs, metal deflation and adverse mix in PVs.
We are factoring in consolidated revenue CAGR of 11% for CY22-24E, EBITDAM at ~16-17% and capex/sales at ~6%. We maintain BUY on CAIL with a revised DCF-based target price of INR 598 (earlier INR 553), implying 20x CY24E earnings, with the change in TP being mainly driven by rolling over valuation.
Key takeaways from the conference call and our views
* EU revenue growth of ~6% YoY (adjusted for continuing operations) included ~15% YoY decline in Metalcastello revenue (cylical OTR vehicle gear maker), adjusted for which car forging business would have grown at ~9-10% YoY, despite metal deflation. Currency benefit (weaker INR vs EU) is yet to reflect in EU revenue and can be seen going ahead. EU EBITDAM of 19.2%, up 160bps QoQ, included one-time inventory benefit impact of 160bps. Thus, with operational margin remaining the same QoQ, this one-off benefit should reverse in Q3CY23. EV transmission system order from the US-based customer for Metalcastello of ~EURO 20mn p.a. may get fully reflected in CY24 revenue (CY22 Metalcastello revenue at ~EURO 80mn), thus, protecting it from the downcycle post a couple of quarters. EU business is gradually adding up orders for EVs, both under aluminium and steel forging processes.
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