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Above est.; led by strong performance across geographies

Growth strategy for India, consolidation in EU to drive RoNA expansion

* Mahindra CIE (MACA)’s strong operating performance in 1QCY21 was driven by strong performances from the India and EU businesses, with decline achieved in the breakeven point in CY20.

* We upgrade our CY21E/CY22E EPS estimate by 26%/11%, factoring in stronger revenue growth in India / the EU as well as cost-cutting in the EU. Maintain Buy.

Strong outperformance in EU; continued growth in India

* 1QCY21 consol. revenue grew ~32% YoY to ~INR21.8b (v/s our estimate of ~INR17.5b), driven by strong recovery in the EU (22% YoY growth) and India (+43% YoY).

* Consol EBITDA stood at ~INR2.9b (v/s est. INR2.2b), implying growth of 57.4% YoY. Adjusted PAT stood at INR1.53b (v/s est. INR0.98b), implying growth of 144% YoY. It incurred a one-time tax expense of INR1,425m, resulting in reported PAT of INR101m.

* The India business performance was above our expectation, with revenue up 43% YoY to ~INR11.1b (v/s our estimate of ~INR9.4b). This was supported by a 4.5% pass-through in commodity prices. The EBITDA margin stood at 13.7% (v/s our expectation of 14%).

* EU revenue grew ~22% YoY to ~INR10.7b (v/s our estimate of ~INR8b; 11% growth in EUR terms), driven by sharp recovery in Metalcastello (+54% YoY) and CIE Forgings (+10%). The EBITDA margin stood at 12.5% (v/s our expectation of 10.5%).

Highlights from management commentary

* It is optimistic about the future of the India and EU businesses – although 2Q might be weaker due to COVID as well as semi-conductor scarcity.

* All its India plants are currently operational. April has seen limited impact, while some companies have announced shutdowns in May. However, in PVs, inventory is very low, which would offset any impact of the shutdowns.

* EU sales recovery was above the market average, and all verticals are performing well at pre-COVID margins. 2HCY21 is expected to be good on the back of a strong order book.

* Breakeven revenues/quarter stood at INR3b/INR5b for India/ EU.

* It has amended the dividend distribution policy. It now allows dividend payout (if any) of up to 25% consol. PAT v/s no dividend payout to date.

Valuation and view

* MACA’s growth story is on track, driven by its organic initiatives (new products/customers) and M&A focus. This, coupled with cost-cutting initiatives in both India and the EU, would drive margin expansion.

* The stock trades at attractive valuations of 11.1x/10.5x CY21E/CY22E consol. EPS. Maintain Buy, with TP of ~INR234 (14x Mar’23 consol EPS).

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