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Strong India performance balances weak EU

Mahindra CIE’s (MACA) reported resilient performance in an adverse environment with its Q3CY22 EBITDA margin at 12.8% (mere 51bps down QoQ due to elevated energy and input costs in the EU). Consolidated revenues were up 31% YoY driven by 33%/28% YoY growth in India/EU sales with RM inflation pass-on benefit of 6%/15% in India/EU respectively, as MACA was able to pass-on 60-70% of RM cost inflation to customers. Demand in India continued to be robust driven by key customers (M&M, Tata Motors). We expect EBITDA margin for India operations to exceed ~15% levels in the coming quarters. We also expect MACA to deliver mean FCF of ~Rs5.5bn each year in CY22E-CY23E. With RoE improving to ~15% by the end of CY23E (~8% in CY21), FCF yield at ~6% and lean balance sheet, we believe CMP of the stock is attractive. Maintain BUY with a DCF-based target price of Rs378/share (earlier: Rs345), implying ~14x CY23E EPS.

Key takeaways from earnings call : 

MACA reported ~9% QoQ revenue decline in the EU markets in INR terms due to multiple challenges such as Aug’22 plant shutdowns, geopolitical issues, supplychain challenges and adverse currency moves (down 11% YoY). EBITDA margin at 10% was 164bps QoQ lower due to energy cost rise (exerting 10% higher impact on margins QoQ), which is likely to be passed on to the extent of 60-70%. MACA continues to have a strong orderbook pipeline to execute with Metalcastello facility working on full capacity. The PV forgings business too witnessed strong demand despite it being a seasonally weak summer quarter. Post a flattish CY20-CY22, MACA is looking forward to a stronger CY23, led by new order wins for EV products and easing of macro challenges related to the ongoing Russia-Ukraine war.

India business reported 12% revenue growth QoQ and continues to grow on the back of strong demand with Tata Motors and M&M leading the growth across segments, including PVs. India EBITDA margin was sustained at ~15% despite elevated raw material costs, through better operating leverage and cost management. Fall in input commodity prices is yet to get fully reflected in the gross margin. Strong demand outlook from key OEMs gives MACA conviction to add capacity across segments to deliver a stronger performance in CY23. Consolidated capex is set to stay at around 5-6% of revenues, with the bulk of it to be for India expansion. Metal inflation aided India business growth by ~6% YoY and EU business growth by 15% YoY.

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