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Long term growth intact.

Mahindra CIE (MCIE) is one of the top global forging players with a strong presence in both Europe and India. Currently 2/3rd of the revenue comes from Europe, while the rest is from India.

• We believe despite demand push back for short term, MCIE’s key customer’s are outperforming the industry growth. As a result, the current order remain strong for the company.

• Increased business with existing customers owing to supplier consolidation and shifting the production to India, as primary hub for export is adding value for the company.

• Q1CY22 revenue came at 18.2%YoY due to growth coming from both India and Europe business by 15% and 20% respectively.

• EBITDA margin came at 11.5%YoY (-170bps QoQ) with gross margin largely flat, despite input cost pressure.

• We firmly believe that the strong cost control initiatives and positive order book will help MCIE to tide over the crisis. We value MCIE at 12x CY23E EPS and maintain our rating as Buy.

Current order book to continue.

New business from large OEMs in Europe and US has led to overachieve the industry growth. Current order book continue to be strong till October. The growth in the Metal Castello business continue to outperform. Similarly, strong performance from Mahindra & Mahindra and Tata Motors are driving the growth story in India business. In addition, post covid, the company foresee large supplier consolidation with respect to the delivery rates on time and MCIE holds successful track record with its customer during these crisis. The transition to India from China as a hub for export has grown significantly. The company has targeted to improve the export mix from current 12% to 25% in the next 2-3 years.

Strong performance across segment.

MCIE’s consolidated revenue came at –18.2%YoY on the back of strong growth coming from India and Europe business. As a result. MCIE business saw a sequential sales growth of 25.4%QoQ. Despite semi conductor shortage, European business margin came at 10.2% positive on QoQ (+110bps). EBITDA margin from India business shows tremendous improvement of +300bps QoQ, owing to strong order form its key customers. We expect the company’s margin improvement trend to continue on YoY basis in the coming quarters due to lower base and poised to benefit from the past restructuring exercise. We expect revenue to grew by 14% CAGR over CY21-23 estimate respectively,

Margin to expand through cost rationalization.

We expect the EBITDA margin to expand and to reach 13% by CY23, owing to Superior product mix, productivity improvement, and product rationalization in Mahindra Forging Europe business. Similarly restructuring in Germany to concentrate more profitable products is on track. We believe improvement in the performance of new products especially in EV share and pick up in the European car demand will lead to better utilization of the assets in the medium term.

Valuations

MCIE holds a strong position in its balance sheet with a D/E ratio of 0.3% and positive cash flow on CY21. We believe that the large supply disruption have been factored in the price and looks for a revival on QoQ basis. We marginally upgrade our revenue estimates of CY22 by 5% owing to strong pick up expected from its key clients both in the domestic and European business. Considering the growth potential and inexpensive valuation, we rollover our estimate to CY23 and value MCIE a 12xCY23E EPS and arrive at a target price of Rs236 and maintain our buy rating.

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