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Margins and return ratios shift orbit; poised for re-rating…

About the stock: CIE Automotive India (CIE), 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.

Investment Thesis:

• Strategic focus to grow India business; European operations to focus on efficiencies: Sensing organic growth opportunities in India as well as export potential that it holds CIE has strategically aligned its goals wherein it intends to incur growth capex in India while at the same time focus upon improving operational efficiencies at its European operations. Indian operations are currently recording ~17% EBITDA margins while its European operations post discontinuance of its German forging business and normalisation of power costs have started to clock ~18% EBITDA margin profile. For its European operations on the back of limited scope of organic growth amidst developed nature of these economies and faster transition towards electrification CIE’s aim is to consolidate its position in ICE space, win new orders in the EV domain and further work upon operational efficiencies. At its Indian operations, given the developing nature of domestic economy amidst underpenetrated Passenger Vehicle category and cyclical upswing in CV space, steady demand in 2-W & tractor space and growing thrust on exports amidst China+1 trend, CIE is well poised for double digit revenue growth and further improvement in margins amid o/p leverage gains.

• Strong margins, return ratios, CFO Yield merit PE re-rating for CIE Automotive: On the consolidated basis, Topline/EBITDA at CIE is expected to grow at a CAGR of 11%, 21.3% over CY22-24E. EBITDA margins are seen improving from 13.4% levels in CY22 to 16% in CY24E. RoCE in the similar timeframe is seen improving from 13.4% to 18.4%. Cash flow generation has been the key USP and differentiating factor at CIE with EBITDA to CFO generation at healthy 75%+ with present CFO yield pegged at attractive ~7% thereby making PE re-rating imminent for CIE automotive. CIE also has lean B/S with Debt/Equity at 0.2x as of CY22 with net debt <?300 crore and is expected to turn net cash positive in CY23E amid broader intent to spend ~5% of sales as capex.

Rating and Target Price

• We assign BUY rating on CIE Automotive tracking healthy growth at its Indian operations, efficiencies at bay at its European business, improving margins and return ratios profile and consistent healthy cash flow generation (CFO yield ~7%)

• We also like CIE Automotive amidst its increasing presence with EV-OEM’s’

• Our target price for CIE is ?625 i.e., 22x P/E on CY24E EPS of ? 28.4 per share

• This is our conviction pick in mid-cap auto ancillary space

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