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Indian business to remain the growth driver

Europe business unlikely to recover soon We recently met with the management of CIE Automotive India (CIEINDIA), and following are the KTAs from the discussion. For YTDCY24, India business has grown in line with industry trends – underperforming management’s guidance of target to outperform the industry by 5-10%, largely due to the underperformance of its end segments/OEMs that it is exposed to. Going forward, we expect the Indian business to post much better growth, led by: 1) an expected pick-up in CVs and PVs in FY26 post the correction seen in FY25; and 2) a positive rural sentiment, which is expected to drive healthy growth in tractors in CY25. Additionally, the ramp-up of some of the delayed orders and focus on non-anchor customers would also drive growth. Europe’s demand outlook, however, remains weak even for CY25E. Demand at Metalcastello is likely to have bottomed out and should see an uptick from H2CY25 onwards. While the management aims to sustain the margins of its European business at current levels, it is targeting to expand margins of the Indian business to 19% over the next 2-3 years. In order to factor in continued weakness in Europe’s auto demand, we have lowered our estimates for CY25-26E by 4%/5%. CIE possesses some financial attributes which are unique to a global ancillary player, and include: being net debt-free, having strict capex/inorganic expansion guidelines, generating positive FCF, and tracking an improving return trajectory. The stock trades at 19.9x/17.1x CY25E/CY26E consolidated EPS. We reiterate BUY with a revised TP of INR575 (based on ~21x Sep’26E consol. EPS).

India’s growth lagging behind management guidance

* One of the key queries on investors’ minds has been that while CIEINDIA management has guided for outperformance over core industry growth, its growth in the last few quarters has been largely in line with industry trends at 5% for 9MCY24.

* Further, while the 2W industry posted 19% growth, CIEINDIA’s largest 2W customer, BJAUT, has actually underperformed the 2W industry on a YTD basis. Even in PVs, while M&M is its largest customer, one needs to be cognizant that only M&M’s UV segment performed significantly well for 9MCY24. Besides, MM tractor (-3%) and pick-ups (-9%) witnessed very weak demand trends during the same period. MSIL, which is its third-largest customer, also grew only 5% during this period. Apart from this, there have been delays in the ramp-up of some of its new order wins, which include the Stellantis order at CIE Hosur and certain EV orders from domestic OEMs. Additionally, given the weak demand in Europe, its exports offtake has lagged expectations. As a result, exports contribution has come down to 10-11% for Q3 from 14% in CY23.

* While the management’s focus is to outperform core industry growth, the abovementioned factors led to its growth being capped at industry levels for 9MCY24.

India likely to remain the key growth driver going forward

* The domestic 2W industry posted a strong 15% YoY growth on a YTD basis and is likely to end FY25 with around 12% growth. Even after that, the industry is likely to be about 7% lower than its previous peak achieved in FY19. We expect the domestic 2W industry to post a high single-digit growth even in FY26E.

* Further, the PV industry witnessed only under 1% YoY growth for YTDFY25 and is likely to experience flat growth for FY25E. Given this demand moderation in Fy25E, we expect the PV industry to post mid-single-digit growth for FY26E.

* We have witnessed a healthy pick-up in demand from the tractor segment from Oct onwards on the back of positive rural sentiments, with most industry experts indicating a mid-single-digit growth for FY25E (translating into doubledigit growth for H2). Given healthy reservoir levels, industry experts are optimistic about the continued growth momentum in the industry, even for FY26E.

* Further, the CV industry is currently experiencing a weak demand macro and has posted a 4% YoY decline for H1FY25. With elections now behind us, we expect the government to resume its focus on capex spending going forward. Moreover, it is important to note that the industry enjoys favorable demand tailwinds that include: 1) average fleet age has now increased to over nine years; 2) healthy fleet operator profitability; and 3) an expected decline in interest rates going forward. Given these and a corrected base for FY25, we expect the domestic CV industry to post a 6-7% YoY growth for FY26E.

* While the core industry demand is likely to pick up in FY26, we also expect some of its delayed orders to start ramping up from next year. Further, the company continues to focus on growing from some of the non-anchor customers, such as Toyota, Hyundai, and VW. It has several projects in the pipeline from both Hyundai and TTMT. Thus, given the expected demand revival in most of its key segments and ramp-up of new orders, we expect CIEINDIA to post a much better performance in CY25. Overall, we factor in its Indian business to post a 9% revenue CAGR over CY24-26E

EU headline numbers hurt by sharper weakness at Metalcastello

* In Europe, revenues for 9MCY24 were down almost 12% YoY, relative to the Europe LV market decline of 5% in the same period. While it may seem from headline numbers that CIEINDIA’s Europe business has underperformed broader industry growth, it is crucial to note that this underperformance has largely been a function of demand weakness at Metalcastello. Additionally, the management has indicated that the revenue decline is largely in line with the weighted average decline in the LV market in Europe and the OHV market in the US.

* European OEMs continue to experience a very weak production offtake: 1) the single most important reason cited by most European OEMs for the weak offtake is the sharp decline in China’s demand; 2) weak demand in Europe; 3) regulatory push toward EV transition in Europe, wherein European OEMs are losing to Chinese counterparts. Apart from this, European OEMs are also wary of the risk of the new Trump administration levying duties on European goods.

* On the other hand, the off highway market in the US is witnessing a sharp decline in demand as customers are shying away from discretionary purchases. Additionally, Metalcastello had won USD 30m worth of orders for EV pick-up applications for US-based OEMs, which has also not taken off as yet. Each of these factors led to a slower-than-expected ramp-up in the Europe business revenues in CY24.

EU business unlikely to recover soon but Metalcastello likely to have bottomed out

* While CY24 has been a challenging year in Europe, most industry estimates seem to suggest that CY25 is also likely to be weak in Europe. We tabulate below comments from leading European OEMs who have largely put out profit warnings for 2024 and are looking to sharply reduce costs given the lack of demand visibility for CY25.

* Even CIEINDIA management expects the European industry to remain flat in CY25E. However, it isimportant to note that despite weak demand trends, the business of CIE Auto Europe continues to sustain healthy profitability. Given the ongoing challenging macro environment, it expects to witness industry consolidation, which is likely to benefit financially sound players such as CIEINDIA in the long run.

* Further, post the sharp correction, revenue at Metalcastello is likely to remain stable for the next couple of quarters. To put things in perspective, the monthly revenue run-rate at Metalcastello has dropped to EUR4-4.5m from around EUR6-6.5m earlier, which is about a 30% decline. Management has indicated that it expects demand at Metalcastello to revive in H2CY25 (expects Metalcastello to start hitting EUR5-5.5m monthly run-rate in Q3-Q4CY25), once the new government policies come into effect. By then, some of its new order wins would also start seeing a gradual ramp-up.

* Overall, for its Europe business, we factor in CIEINDIA to post a 7% revenue CAGR over CY24-26E.

Europe demonstrates margin resilience; India expects to focus on further improvement India business

* On the back of the guiding principles of CIEINDIA’s parent company, Indian business margins witnessed a significant recovery to 16.7% in CY23 from 11.5% in CY16. Given that CIEINDIA is largely a build-to-print company, such significant margin expansion is commendable, especially since it has achieved most of this by improving 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. CIEINDIA’s management targets to expand the Indian business margins to about 19% in the next 2-3 years by continuing to focus on operational efficiencies. However, management has also indicated that it will not pursue growth without ensuring a requisite level of profitability. In addition, it is crucial to note that subsidy at CACIL is expected to end by Jan’25, which will have some impact on India business overall financials (estimated at ~40bp). Europe business has shown significant resilience

* As highlighted above, despite a 12% decline in revenue for 9MCY24, European business margins are down just 170bp YoY to 16.3%, commendable given the rising costs and the high fixed cost nature of the business. Management has indicated that it would strive to sustain margins at current levels in the coming quarters. We understand that there are very few companies in Europe that would continue to post double-digit margins in this tough macro. This resilience is expected to position the company favorably, as large OEMs are likely to seek partnerships with vendors who demonstrate resilience in tough times. Moreover, once the Europe demand revives, it is expected to post a much stronger performance compared to the past.

* Overall, we factor in the consolidated margins to expand ~40bp over CY24-26E to 15.7%, led by a steady revival in demand in India and Europe as well as the company's consistent focus on improving operational efficiencies across all plants.

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. In order to factor in continued weakness in Europe’s auto demand, we have lowered our estimates for CY25-26E by 4%/5%. The company will continue to strive to enhance efficiencies in the coming years. CIE possesses some financial attributes which are unique to a global ancillary player, and include: being net debt-free, having strict capex/inorganic expansion guidelines, generating positive FCF, and tracking an improving return trajectory. The stock trades at 19.9x/17.1x CY25E/CY26E consolidated EPS. We reiterate BUY with a revised TP of INR575 (based on ~21x Sep’26E consol. EPS).

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