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Our Take:

Mahindra CIE Automotive Ltd. (MHCIE) is a multi-technology automotive component manufacturer. Its domestic revenue is well diversified across technologies and end-use segments. In Europe, MHCIE's revenues primarily come from forging technology and PV and CV segments. The Indian and European PV market is expected to grow by 11% and 5% CAGR respectively over FY20-FY25, according to IHS Global, while CRISIL expects domestic 2W market to grow at 5-7%. The company is looking to increase its exports share from 12% to 20% in the next few years through a variety of initiatives including a shift of orders from Europe to India, tie-ups with some of the CIE Group companies in Europe and explore new customers especially for Bill Forge and AEL businesses. MHCIE’s well capitalized balance sheet with best in class products and technology continues to be a strong moat for the company which makes it’s a preferred supplier for leading OEMs. The Indian business is debt free and European business has a very low cost debt.

The management expects strong growth in the European business in H2 as restrictions/lockdowns are lifted with an increase in vaccination. Further it is working on products that cater to EVs which would limit the impact of transition going forward.

On April 28, 2021, we had initiated coverage on the stock with a recommendation to ‘Buy at LTP and add on dips in Rs 142-144 band’ for base case fair value of Rs 178 and bull case fair value of Rs 192 (Link). The stock had achieved our base case target on April 28 and bull case target on May 25, 2021.

Valuations & Recommendation:

We expect MHCIE revenue to grow at 23% CAGR over CY20-CY22, led by the strong India business. EBITDA and PAT margin are expected to expand 576/595bps during the same period. RoCE/RoE (excl. Goodwill) are expected to improve from 10.1/11.5% in CY20 to 35/46% by CY22E. MHCIE has added 25 new customers over the last two years, across its product lines and end markets, and it is now targeting at least 25% of its annual revenue (earlier 15%) to come from the new customers. We believe investors can buy the stock in the band of Rs 265-270 and add on dips to Rs 238-242 band (13x CY23E EPS) for a base case fair value of Rs 296 (16x CY22E EPS) and bull case fair value of Rs 315 (17x CY22E EPS).

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