Mahindra CIE Automotive - Focus on margins, growth bode well for CY21 - ICICI Securities

Mahindra CIE Automotive's (MACA) earnings performance in Q2CY20 was below consensus estimates as consolidated sales slumped due to double whammy from Covid-19 pandemic and BS-VI transition impact. Currently, European business is recovering faster; however, India business recovery has dampened due to lockdowns across a few states. Current demand is~ 50-60% in Jul'20 with EBITDA turning positive across regions. Targets for CY21 are a) margin recuperation to pre-covid levels; b) faster than industry revenue growth in India led by exports, increased localisation of China imports and vendor consolidation 0across regions. We maintain BUY.

Key highlights of the call:

- Management indicated focus to scale up exports up to ~15% of revenue. The verticals that would drive this are: a) gears business, b) Bill Forge (forgings); and c) AEL (aluminum castings).

- MACA is likely to gain from vendor consolidation across both India and Europe as customers look to wean away from weak suppliers. Customers are also undertaking China localisation measures, especially in gears and magnets business.

- Company has received Rs122mn in refund against the S-GST paid since 2016. The incentive refund is available up to a maximum limit of Rs2.5bn until CY23.

- Restructuring cost of Rs344mn is implementing a social plan for reduction in headcount; restructuring at Metalcastello is complete and that more could happen in MFE depending on truck demand. This would reduce costs by ~ EUR4mn annually. Fixed cost reduction is likely to lower monthly break-even levels by 10% to Rs9bn.

- Similar restructuring exercise is also being undertaken in India across various divisions with focus on improving productivity

- European government's incentive benefits were availed for April, and May; and partially availed in June as production ramped up. These incentives amounted to ~EUR 4mn.

- Utilisation levels stood at 0%/20-25%/50% in April/May/June, respectively, in India whereas in Europe they stood at 20%/40%/60% during the same period. Utilisation is likely to improve to 65-70% in Q3CY20 as Europe reaches normalcy.

- Capex spends likely to be ~ Rs2.5bn for CY20.

- European business would recover sooner with ~75% of CY19 volumes. However, reaching CY19 peak levels might happen only in CY22.

Shares of Mahindra CIE Automotive Limited was last trading in BSE at Rs.110.15 as compared to the previous close of Rs. 114.1. The total number of shares traded during the day was 12396 in over 444 trades.

The stock hit an intraday high of Rs. 114.9 and intraday low of 109.6. The net turnover during the day was Rs. 1365767.

Source : Equity Bulls

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