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Continues to walk the talk

Mahindra CIE Automotive’s (MACA) Q2CY21 results were a beat on consensus expectations driven by strong European performance (ten-quarter high margins:14.1%) even as India business was impacted (revenue down ~17% QoQ) due to covid lockdowns. Consolidated sales dropped only ~7% QoQ to Rs20.4bn while margins remained resilient at ~14% (down 69 bps QoQ).

MACA continues to deliver on its targets which is well reflected in FCF improvement trajectory (CY20/H1CY21: ~Rs2bn/1.7bn respectively), we expect it to clock cumulative FCF of ~Rs12.5bn over CY21/22E. We believe MACA’s profitability (PBT) will continue to pivot towards India business (CY17:45%/CY22E:57%) and this is likely to aid on improvement of valuations. The stock remains attractive (~6%/8% FCF yield CY21/22E). Maintain BUY.

* Key highlights of the quarter: Consolidated revenue rose 178% YoY (base effect) while EBITDA margin jumped 2579bps YoY to ~12.7% on the back of strong performance across verticals in Europe despite semiconductor shortage impact. India business suffered from lockdowns, movement restrictions and OEM plant shutdown in May’21. Consolidated PBT declined ~17% to ~Rs1.7bn. The company also announced additional plans to invest in new capacity for customers in Hosur, Tamil Nadu, which supplements our strong growth outlook for India business.

* Margin delivery continues; growth is also making a comeback: Management has laid out growth strategy focused on value-added products in both domestic exports aided by continued focus on improving internal efficiencies. European business is expected to witness profitability improvements as the company focuses on a) reducing fixed costs, b) increasing new product sales (e.g. new EV products) in European PV business, and c) riding on 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 (~57% as PBT share CY22E/ up 10% since CY19). CIE (parent) recently has laid down strong growth plans (CY25) (Link) which bodes well for MACA’s medium term prospects. We tweak estimates by ~3%/10% for CY21E/CY22E, respectively. We maintain our target multiple at 16x CY22E EPS. Maintain BUY with a revised target price of Rs312/share (earlier: Rs285).

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