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Strong performance across segments

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.

* Q1CY21 revenue came at 32%YoY on the back of strong growth from both India and European business. The growth was largely driven by strong order intake and new customer addition.

* EBITDA margin came above our estimate at 13.1% (+210bps) due to superior product mix and improving internal efficiency. We expect margin expansion to continue in the coming quarter.

* Despite weak industry growth, increase business with existing customers owing to supplier consolidation and shifting the production to India as primary hub for export is adding value to the company.

* Current order book from Europe and India is driving revenue growth. We believe despite demand push back for short term in India, lost volume recovery expected before the end of the year.

* We firmly believe that the strong cost control initiatives and Europe’s positive opening will help MCIE to tide over the crisis. We value MCIE at 14x CY22 EPS and upgrade our rating from Accumulate to Buy.

Strong performance across segment.

MCIE’s consolidated revenue came at 32%YoY on the back of strong growth from both India and Europe business. MCIE India segment grew by 41%YoY and European business by 21%YoY. EBIDA margin expanded by 210bps owing to internal efficiency and superior product mix. We expect the company’s margin improvement trend to continue in the coming quarters. PBT grew by 133%YoY supported by higher other income. However PAT declined by –84%YoY. A change in the according standard, an amendment to sec32 of Income tax (IT) act 1961, whereby goodwill of a business will not considered as a depreciation asset and depreciation of the goodwill will not considered as deductible expenditure effective April 2020. In accordance to the IT requirement the company has recognized a one time adjustment of Rs143cr as an outcome to the event.

MCIE top line numbers reached to the pre–covid level

The company faster improvement in the growth rate and internal efficiency enabled to reach its performance to the pre– covid level by Q4CY20. 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 grew by 50% for the Q1CY21. We believe H2 is likely to witness strong demand uptick in European business due to normalization in the economic activity owing to Europe achieving maximum vaccination. 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.

Margin to expand through cost rationalization

We expect the EBITDA margin to expand and to reach 14% by CY22 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 as on CY20. We believe that the large negativities have been factored in the price and looks for a revival on QoQ basis. We upgrade our earning estimates of CY21 & CY22 by 4.6% and 18% respectively, factoring strong revival starting H2CY21. We value MCIE at 14xCY22E EPS and arrive at a target price of Rs219 and recommend buy rating from accumulate.

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