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Strong performance amidst challenges

Mahindra CIE Automotive’s (MACA) Q1CY21 operating margins were a beat on consensus expectations driven by faster improvement across Europe and India. Consolidated sales rose ~30% YoY to Rs20.8bn of which India grew 41% at Rs10.5bn while Europe grew ~21% at Rs10.4bn. India business clocked sevenquarter high margins at ~15.5% (up ~242bps) while Europe clocked ten-quarter high margins at 13.9% (up 340bps).

India PBT contribution in 1Q rose to 55% (up 500bps YoY), although European business is improving, bulk of MACA’s future profitability would be driven by India business. We expect cumulative FCF of ~Rs11.6bn over CY21-CY22E (CY20 – Rs2bn). Stock remains undervalued (9.5x P/E / 10.3% FCF yield on CY22E). Maintain BUY

* Key highlights of the quarter:

Consolidated revenue rose 30.1% YoY while EBITDA margins jumped 301bps to ~14.7% on the back of strong performance across verticals in both Europe and India. India business has already crossed the 15% CIE margin target (second successive quarter) even as industry cycle enters a recovery cycle in CY21/CY22. Consolidated PBT grew ~133% to ~Rs2bn. The company took one-time non-cash charge on deferred tax of ~Rs1.4bn caused due to amendment in depreciation policy w.r.t to goodwill by the Finance Act,2021.

* Margin delivery continues; growth also coming back strongly:

Management’s focus continues on improving internal efficiencies and has laid out a growth strategy focused on value-added products in the domestic market, and exports. European business is expected to witness profitability improvements as the company focuses on a) reducing fixed costs, b) increasing new product sales (e.g. knuckles) in European PV business, and c) riding on the recovery cycle across industrial, automotive customers. China-plus global supply chain rejig, PLI scheme and increased outsourcing from CIE is expected to aid export growth for MACA.

* Maintain BUY:

We believe MACA is a well-diversified MNC play with dominant India contribution (~58% as PBT share CY22E/ up 11% since CY19). We revise our estimates by -12.4%/5.8% for CY21E/CY22E, respectively, factoring in the improved European margin performance. Stock remains inexpensive at ~10% FCF yield on CY22E. We maintain our target multiple to 15x CY22E EPS of Rs18. Maintain BUY with a revised target price of Rs264/share (earlier: Rs253).

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