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Strong performance amid supply chain issues

Mahindra CIE Automotive’s (MACA) reported stellar Q3CY21 results driven by strong growth in India performance (revenues up 22.3% QoQ) even as Europe business was impacted by seasonality (revenues down ~15% QoQ). Consolidated sales grew 21% YoY / 2% QoQ to ~Rs20bn while margins remained resilient at ~14% (down 5bps QoQ). MACA continues to deliver on its targets, which is well reflected in FCF improvement (CY20/CY21E: ~Rs2bn/5.2bn respectively). We expect the company to clock cumulative FCF of ~Rs13bn over CY21-CY22E. We believe MACA’s PBT would continue to pivot towards India business (CY17: 45%, CY22E: 58%), which would aid valuations. Stock remains attractive (~6%/8% FCF yield for CY21/22E). Maintain BUY.

* Key highlights of the quarter: Consolidated revenues rose 23% YoY / 2% QoQ while EBITDA margin jumped 291bps YoY to ~12.8% from the strong performance in India (up 22.3% QoQ) propelled by M&HCV volume pick-up, despite semiconductor shortage impact. Europe business (down 14.5% QoQ) suffered from holiday seasonality and semiconductor chip shortages even as covid impact was minimal. Consolidated PBT rose ~91% YoY to ~Rs1.8bn. Revenues from AEL and Bill Forge for Q3 were similar at Rs2.4bn (AEL: 9MCY21 – Rs7bn).

* Key takeaways from earnings call: Management indicated: a) demand from North America is strong; MACA has won EUR20mn annual contract for EV transmission and driveline components (start from CY22) and similar contract for India business for both PVs and 2Ws; b) in EU, sales were up 11% YoY (Eur terms) and improved demand for CVs is likely to lead to higher than industry growth; Metalcastello business is performing well; MACA will focus on converting its existing forging capacity towards EV products (e.g. via Aluminium technology) in Europe; c) capex for CY21 is expected to be Rs4.5bn, of which Rs4bn is already spent towards new plant in Hosur and doubling of capacity at Bill Forge, Mexico; and d) Q3 exports stood at 11-13% of sales and are expected to reach 20% in CY22.

* Maintain BUY: MACA is a well-diversified MNC play with dominant India contribution (~58% as PBT share in CY22E, up 11% since CY19) as the company continues to beat its targets amid strong focus on EV components, which is likely to aid margin improvement. We tweak our earnings estimates by ~1%/4% for CY21E/CY22E, respectively. We maintain our target multiple at 16x CY22E EPS of Rs21. Maintain BUY with a revised target price of Rs326/share (earlier: Rs312).

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