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Re-rating in valuation.

CIE Automotive India Ltd. (CIE) is the part of Spain -based, top global forging player with a strong presence in both Europe & India. Currently, 60%of the revenue comes from India, while the rest is from Europe.

• We believe the current growth story in the domestic market and the focus on building the EV product portfolio and operation performance in the European business are likely to push the margin forward.

• Despite lower sales due to higher pass-through to customers for Q2, CIE’s consolidated margin expanded by 217bps on the back of benign metal prices and cost control initiatives by discontinuing German operations.

• Though the current order will suffice for the required growth in the near term. However, Global macro turbulence could delay capacity expansion from Major OEM.

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

• We expect a re-rating in valuation similar to listed MNCs in the automotive sector and recommend BUY rating at CMP (21x CY24E EPS).

Strategic move to enhance profitability.

The board approved the name change from MCIE to CIE Automotive India Limited (CAIL) after increasing its stake from 60.8% to 65.7%. Additionally, to enhance profitability, the decision by CIE to hive off its German operations is viewed as a positive move, as this division has been a drag on the company's EBITDA margins (3– 5% versus 13–15% in CY22). Following the spinoff, it is anticipated that the EBITDA margins of the European business will increase and accelerate the company's consolidated EBITDA towards the targeted 17–18%, which would be consistent with the CIE global operations of the parent company. The company launched a programme in December 2022 to locate a buyer for CFG and its subsidiaries, JECO, GSA, FALK, and SCHO. The transaction (CFG sells subsidiary shares to Mutares) was approved by the Board of Directors on August 23, subject to obtaining the necessary approvals in accordance with the applicable laws of the respective countries and the approval of CIE India's shareholders. Mutares SE & Co. (German Pvt. Equity) and CIE Automotive India (CIE) have reached a definitive agreement to sell the forging division of CIE's German GmbH (CFG)

Margin positively affected due to better passthrough

CIE’s consolidated revenue came in line with our estimate of 5% YoY on the back of positive performance in India and big commercial efforts in Europe to offset huge cost increases. EBITDA margin from India business sustained at 16.8% owing to stabilising raw material prices and strong orders from its key customers. The European automotive market is showing recovery as semiconductor shortages ease. Margins are positively affected by a better pass-through of Energy and inflation, which add extra costs to customers. We expect the company’s overall margin improvement trend to continue for India and European business (~15-16%), due to cost rationalizing and supplier consolidation in the international business

New business is projected to from EV.

The current order suffices the requirement for growth in the near term due to supplier consolidation. Though we believe the next growth story in the domestic & International businesses is focusing on building the EV product portfolio and operating performance in the European business, Over 50% of the new business is projected from EV in the next 2 years (a substantial increase from the current 30%), with a key focus on developing cutting-edge technology in stamping and light-weight Aluminium forging. With a wider portfolio catering to the e-2W, e-3W, and e-4W segments, it aims to elevate margin and return ratio to new heights.

Valuations

We expect normal growth in the domestic car segment for the year due to a high base and fading pent-up demand. In addition, there is the possibility of a tightening in the International business in the near term. However, the long-term growth prospects are intact, and we expect a re-rating in valuation similar to listed MNCs in the automotive sector. We value CIE at 21x CY24E EPS and recommend a buy rating with a target price of Rs. 576.

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