EUR 120.00 For Business Accounts Only

MOSL: MAHINDRA CIE: Operating performance in line, as cost pressure offsets beat on revenue (MACA IN, Mkt Cap USD1.2b, CMP INR249, TP INR315, 27% Upside, Buy)

Partial pass-through of EU energy cost; EU demand outlook better for 2HCY22

• MACA’s 2QCY22 operating performance was in line as strong revenue traction was offset by cost pressures. While 2HCY22 is likely to be better than 1H for the European business, India business is expected to gain from demand recovery in 2Ws (on a low base) and demand from M&M’s SUV.
• We raise our CY22E/CY23E EPS by 17%/5%, respectively, to account for: a) stronger-than-estimated revenue growth and b) higher other income, lower interest and lower tax for CY22E. Maintain BUY with a TP of INR315 (premised on 13x Jun’24E consolidated EPS).

 

High other income, lower interest and lower tax drove PAT beat

• MACA’s consolidated revenue/EBITDA/adj. PAT grew 32.5%/17%/39% YoY to INR27.1b/INR3b/INR1.9b (v/s est. INR25.6b/INR3b/ INR1.5b), in 2QCY22, respectively. Revenue/EBITDA/adj. PAT rose 25%/7%/21% YoY in 1HCY22, respectively.
• Higher other income (insurance claim of INR240m in EU business) coupled with lower interest cost (due to FX gain) and lower tax led to consolidated adj. PAT of INR1.9b (v/s est. INR1.5b).
• India business revenue grew 47% YoY to ~INR13.8b (v/s est. ~INR13.1b), partly supported by benefit of RM cost pass through (~10% benefit YoY/1-2% QoQ). India EBITDA margin stood at 13.3% (v/s est. 13.2%, +110bp YoY), driven by RM cost pass through and operating leverage. India EBITDA grew 61% YoY to ~INR1.84b (v/s est. INR1.73b).
• EU business revenue (above est.) rose 20% YoY to ~INR13.25b (v/s est. ~INR12.5b). Adjusted for currency (-7% impact) and commodity cost pass through (+15% benefit), EU business grew 10% YoY. EBITDA margin stood at 9.1% (v/s est. 10.2%, -410bp YoY/-50bp QoQ), impacted adversely by cost inflation, particularly on energy side.
• Consolidated FCFF was slightly negative at INR43m as CFO of INR2.4b was negatively impacted by adverse working capital movement (~INR3b) and capex of INR2.44b.
• Consolidated net debt declined INR2.3b QoQ to ~INR8.7b.

 

Highlights from the management commentary

• Energy cost pass-through negotiations in the EU business are largely concluded, with most of the customers agreeing for partial pass-through (at 60-70%) and the balance to be absorbed by MACA.
• For the EU business, the 2HCY22 production schedule is strong and management expects 2H to be better than 1HCY22. While the order book shows a big increase for 2H, considering the uncertain macro environment, 2H may still be only slightly better than 1HCY22.
• The EU business has parked surplus cash of EUR40m with CIE Auto and is earning interest of 1.5% p.a. On the other hand, MACA has taken EUR80m loan from CIE Automotive for Mexico and other businesses.
• The Sunroof system business is being managed by the parent. Currently, it is imported from China and will remain outside of the listed entity.

Valuation and view

• MACA’s growth story is on track, driven by its organic initiatives (new products/ customers in the India business). This, coupled with cost-cutting measures in both India and the EU, will drive margin expansion going ahead.
• Any significant order wins, or growth in the EV portfolio, can act as a re-rating factor. The stock trades at 13x/11.1x CY22E/CY23E consolidated EPS. Maintain BUY with a TP of INR315 (premised on 13x Jun’24E consolidated EPS).