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Buy Mahindra CIE Automotive Ltd For Target Rs.253

CY20 performance closes on a strong note

Mahindra CIE Automotive’s (MACA) Q4CY20 operating margins were ahead of consensus estimates. Consolidated sales rose ~14% YoY to Rs16.4bn. India revenue share in Q4 (52%) surpassed Europe (48%) while India PBT contribution rose to ~64%. India business clocked six-quarter high margins at ~15.3% (up ~271bps YoY) while clocking ~17% revenue growth. MACA incurred incremental costs to streamline Europe operations, which restricted margins (down 86bps at 11.9%). Company registered healthy FCF of ~Rs2bn in CY20, and we expect cumulative FCF of ~Rs11.8bn over CY21E-CY22E. We expect India revenues to grow at ~20% CAGR CY20-CY22E driven by market growth and new order wins. Bulk (>60%) of MACA’s profitability (PBT) is now driven by India business (Chart 2) while consensus still seems focussed on the Europe business. Stock remains undervalued (~11x P/E / 9% FCF yield on CY22E basis). Maintain BUY.

* Key highlights of the quarter: Consolidated revenues rose 13.9% YoY driven by India region growth of 17% at Rs9.7bn while Europe business was also up 7.1% to ~Rs8.9bn. India business grew on the back of new customer additions (25 added in CY20). Consolidated EBITDA margin rose only 99bps to ~13.7% inclusive of the additional cost to streamline the Europe business. India business has crossed the 15% CIE margin target (clocked ~15.3%) even as the industry cycle enters a growth phase in CY21/CY22. Consolidated PBT grew ~33% to ~Rs1.6bn.

* Margin improvement delivered; growth to be driven by new products: Management has laid out a growth strategy focused on value-added products in the domestic market, and higher exports. India is expected to drive revenue growth while the focus in Europe remains on: a) improving profitability, and b) increasing new product sales (e.g. knuckles) in European PV business to mitigate the impact of BEV sales increase. Strong cost reduction exercises have reduced breakeven levels across both India and Europe. Management expects the tailwinds of Chinaplus global supply chain rejig, PLI scheme and increased outsourcing from CIE to aid export growth for MACA.

* Maintain BUY: We believe MACA is a well-diversified MNC with India revenue/PBT share reaching ~51%/63% in H2CY20. We raise our estimates (by ~6%/4% for CY21E/CY22E respectively) factoring-in the better margin trajectory in domestic business. We raise our target multiple in view of the rise in contribution of India profitability to 15x (earlier: 13x) CY22E EPS of Rs17.1. Maintain BUY with a revised target price of Rs253/share (earlier: Rs213).

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