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Profitability to maintain as growth moderates

India to remain a key growth driver in the near term

We recently met with the management of CIE Automotive (CIEINDIA), and following are the KTAs from the discussion. The domestic market is experiencing a weak demand phase in the tractor and PV segments, while 2W continues to perform relatively well. The global auto market, particularly in Europe, remains sluggish. The EV transition in India continues to evolve as a growth opportunity, given the healthy new order wins. Additionally, the risk of EV transition in Europe remains mitigated, given that: 1) most European OEMs are now reconsidering their EV transition deadlines and 2) hybrids are likely to gain traction in Europe, which augurs well for CIEINDIA. However, the management remains committed to focusing on: 1) outperforming the core domestic industry growth in the long run; 2) further improving operational efficiencies in India; and 3) revising costs in Europe to the new normal. Given its focus on operational efficiencies, CIEINDIA has evolved into a highly resilient company. Some of the financial attributes unique to the global ancillary player include: being net debt free, having strict capex/inorganic expansion guidelines, generating positive FCF, and tracking an improving return trajectory. We reiterate BUY with a TP of INR650 (based on ~21x Sep’26E consol. EPS).

Well-diversified company with unique capabilities

CIEINDIA is well-diversified, notable for being the only company that houses seven different automotive technologies under one roof. Moreover, it is amongst the top 2-3 suppliers in each of the technologies it supplies. Some of its strong attributes include: 1) the largest supplier of PV crankshafts in India; 2) a dominant player in forged steering parts; 3) one of the two strategic suppliers of aluminum castings to a leading domestic 2W OEM; 4) the second-largest supplier of crankshafts in Europe; 5) a strategic supplier of gears to a global leading supplier of construction and mining equipment; 6) the largest supplier of stampings and gears to one of the leading SUV/tractor OEMs in India; and 7) a supplier with the unique ability to supply crankshafts through both castings and forgings.

India: Outlook appears weak, with 2Ws as the only bright spot

The management has indicated that demand remains weak across most segments in India, including PVs, CVs, and tractors. However, the demand for 2Ws continues to be healthy. While the demand for tractors is expected to revive in H2, it is yet to pick up. However, M&M (UVs) and BJAUT, which are its key customers, are currently experiencing healthy demand trends on account of their new model launches.

CIEINDIA will continue to outperform core industry growth:

CIEINDIA aims to continue outperforming the domestic auto industry growth by 5- 7% in the long- run. As highlighted above, its anchor customers, such as M&M and BJAUT, continue to experience strong demand traction. CIEINDIA is featured in most of M&M’s upcoming and recently launched models. Additionally, it has a strong presence in Bajaj’s recent new launches. Apart from its anchor customers, CIEINDIA has around 10-12 growth customers, each contributing to about 3-6% of its revenues. CIEINDIA experiences a healthy demand traction from these customers and targets to ramp up its presence in this area. Additionally, the company’s growth is expected to be driven by new opportunities emerging from the transition to EV and hybrid technologies.

Europe: Industry outlook likely to remain weak at least in the near term

The automotive demand in EU remains weak, primarily due to uncertainties surrounding the transition to EVs, according to the management. With many OEMs reevaluating their EV transition strategies, there is significant uncertainty among customers about whether to opt for EVs or ICE vehicles, which the management cites as a reason for the weak demand. Although the company has orders in hand, delays in execution by OEMs are adversely affecting its revenue traction from the region. The market is expected to experience a 7-8% decline this year, with 2HCY24 expected to perform worse than 1H and even weaker than the usual H2 levels.

Electrification in India opens up new growth avenues

About 20% of CIEINDIA’s business involves crankshafts or other engine-related components for 4Ws and 2Ws. Another 50% of this comes from PV EVs. Since the EV transition in PVs is expected to take longer in India, the company’s exposure to engine components is fairly limited in the country. Nevertheless, the management views the EV transition as an opportunity rather than a threat, given its multiple new order wins in the Indian segment. The company is engaged in 3W EVs with its largest customer. It also has a strong presence with two of the four largest PV EV OEMs in India. Further, the company has garnered a fair share of orders from 2W EV OEMs in the country. As of H1CY24, CIEINDIA’s EV order book contributed ~30% to India’s overall order book. While EV transition in India remains a strong growth opportunity for CIEINDIA, it is important to note that the EV penetration in the country is progressing much more slowly than envisaged.

Slow pace of electrification in EU and emergence of hybrid to bode well

In Europe, 4W forgings contribute EUR275m-EUR300m to CIEINDIA’s revenue (~81% of EU’s revenue), approximately half of which comes from crankshafts. Thus, the rapid EV transition in Europe is certainly a risk for the company’s European business in the long run. However, while the current EV penetration in Europe has reached 12%, most OEMs are reworking/postponing their EV transition plans following multiple headwinds in this segment. Given these trends, OEMs are likely to focus on pushing hybrids as a temporary solution before the EV transition picks up pace again. Nonetheless, almost 55% of its H1 order book in Europe was from EVs. The company is also looking to ramp up its presence in aluminum forgings by showcasing its capabilities to multiple global OEMs. Thus, the EV transition risk in Europe for CIEINDIA appears to have materially subsided and the company would continue to focus on diversifying its revenue stream, in turn mitigating any material impact on its financials in the long run.

Focus on optimizing growth and profitability

While the management is confident in achieving long-term outperformance relative to the broader industry, it acknowledges the near-term challenges posed by weak demand in both domestic markets and Europe, as highlighted above. However, the company will continue to emphasize prioritizing profitability over simply maintaining topline growth. The management has indicated that it will not pursue growth without ensuring a requisite level of profitability. In India, the company aims to continue increasing margins by enhancing its operational efficiencies. CIEINDIA’s parent company specializes in automation/digitization initiatives globally. It incentivizes production managers and measures their performance, not only on the production output but also on the ROI delivered from their respective plants. Given these practices, notably, the company’s margins in Europe are comparable to, or even better than, those in India. Despite the weak industry demand outlook in Europe, the management aims to sustain margins at current levels in Europe. It targets to achieve this by revisiting all cost heads to new utilization levels.

Other takeaways

* The company’s capex has been in the range of 5-6% of its revenue. It targets to invest INR 15b over the next three years. A bulk of its capex would be invested in India, where it is receiving new orders. In Europe, no additional growth capex is required as utilization remains around 80%.

* CIEINDIA has evolved into a highly resilient company. Even at the peak of COVID-19, its margins did not fall below 9%.

Valuation and view

* We expect the Indian business to be the primary growth driver for the company in the near future. However, the weak outlook for its EU business and Metalcastello is likely to weigh on the overall performance in the near term. The company will continue to strive to enhance efficiencies in the coming years. Some of the financial attributes unique to the global ancillary player include: being net debt free, having strict capex/inorganic expansion guidelines, generating positive FCF, and tracking an improving return trajectory. The stock trades at 25x/20x CY24E/CY25E consolidated EPS. We reiterate BUY with a TP of INR650 (based on ~21x Sep’26E consol. EPS).

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