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Revenue beat in both India and EU; lower tax boosts profitability

Optimistic about 2HCY21 for India and EU

* MACA’s strong performance in 2QCY21 was driven by strong revenue trajectory in India and the EU, and benefit of cost cutting in the EU.

* We largely maintain our EPS estimates, despite a good beat in 2Q, as we build in impact of semiconductor shortages in 2HCY21. We maintain our Buy rating.

Strong all round performance, led by management initiatives

* Consolidated revenue declined by 6.7% QoQ (+178% YoY) to ~INR20.4b in 2QCY21 (est. INR18.2b), led by a beat in both geographies as there was a 6% QoQ benefit of steel price pass through.

* EBITDA margin contracted by 40bp QoQ to 12.7% (est. 12.5%). EBITDA fell 9.4% QoQ (LTP YoY) to ~INR2.6b (est. INR2.3b). Lower tax restricted the PAT decline to 10.4% QoQ at INR1.36b (est. INR1.1b).

* India business revenue declined by ~16% QoQ (253% YoY) to ~INR9.3b (est. ~INR7.8b). EBITDA margin fell 150bp QoQ to 12.2% (est. 12.8%). Sales fell sharply in May’21 (30% sales drop), but Jun’21 witnessed positive sales, which reached 85% of 1QCY21 levels.

* Revenue from the EU business grew ~3% QoQ (136% YoY) to ~INR11.1b (est. ~INR10.3b). EBITDA margin improved by 70bp QoQ to 13.2% (est. 12.3%). Strong sales recovery, coupled with restructuring measures undertaken in the past, is driving a sustained improvement in margin.

* Net debt/equity improved to 0.22x (v/s 0.26x in Dec’20).

Highlights from the management commentary

* It is optimistic about a recovery in India and Europe during 2HCY21, with the semiconductor shortage expected to ease from Sep’21.

* It has approved a new wholly-owned subsidiary – CIE Hosur – to set up a greenfield plant at Hosur to support its Bill Forge unit and lower corporate tax. It will be a state-of-the-art plant producing existing products as well as some new products. Production is expected to start from CY22.

* Its European business has delivered a good performance across verticals, despite COVID-19 and the semiconductor shortage.

* EV strategy in EU: It is working with most customers to align with the changing tech landscape (EVs) as well as focus on increasing share in chassis and suspension components. It was nominated for an EV program (for electrified powertrain) by a new American customer.

Valuation and view

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

* The stock trades at valuations of 15.5x/13.7x CY21E/CY22E consolidated EPS. We maintain our Buy rating with a TP of ~INR295 per share (15x Sep’23E consolidated EPS)

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