Mahindra CIE Automotive Ltd (l) Q1 FY23 Earnings Concall Transcript

Mahindra CIE Automotive Ltd (NSE: MAHINDCIE) Q1 FY23 Earnings Concall dated Jul. 22, 2022

Corporate Participants:

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Ander Arenaza — Chief Executive Officer

K. Jayaprakash — Chief Financial Officer

Analysts:

Jinesh Gandhi — Motilal Oswal Financial Service — Analyst

Siddharth Dand — Goodwill — Analyst

Nikhil Kale — Axis Capital — Analyst

Bharat Sheth — Quest Investment Advisors — Analyst

Nemish Shah — Emkay Investment Managers — Analyst

Kirti Agarwal — ICICI Bank — Analyst

Hitesh Arora — Unifi Capital — Analyst

Mohammed Patel — Care Portfolio Managers — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Mahindra CIE Q2 and H1 CY’22 Results Conference Call Hosted by ICICI Securities Limited. On the call from the management team, we have with us Mr. Ander Arenaza, CEO; Mr. K. Jayaprakash, CFO; Mr. Vikas Sinha, Senior VP, Strategy, M&A and Investor Relations; Mr. Oroitz Lafuente, Chief Business Controller; and. Mr. Swapnil Soudagar, DGM Strategy, M&A and Investor Relations.

[Operator Instructions] Please note that this conference is being recorded. And I’ll hand the conference over to the management. Thank you, and over to you.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Yes, thanks. This is Vikas. Good evening, everyone. It is a bit late today. Our apologies. But there are constraints for us and we are grateful you could join.

We start with an overview of the legal structure of MCIE on page 5 of our investor presentation that has been uploaded on the website. Here we see that in line with stated strategy, CIE Automotive, our parent, continues to reaffirm its faith in MCIE by raising the stake from 60.75% equity to 63.44% during Q2 C ’22.

Now let’s look at the Q2 C ’22 results for MCIE India on page 7. So sales have grown by 46% year-on-year compared to the same quarter last year, Q2 C ’21 and the sales figures in this quarter are 12,794 million, which is — and this growth is much more than what our markets grew by. While uncertainties around the Indian economy arising out of global factors remain, the auto industry in India is expected to remain buoyant in the coming months. MCIE India EBITDA margin in Q2 C ’22 was 14.9% which is similar to 15.1% obtained in Q1 C ’22 and higher than the 13.9% recorded in Q2 C ’21. The EBIT and EBT are at 11.1% and 11.4% respectively in Q2 C ’22. Despite headwinds, like steel price increase, inflation and other costs and semiconductor shortages, etc., we have maintained margins in India.

On page 8, we have the Q2 C ’22 results for MCIE Europe. We have seen a growth in year-on-year sales compared to Q2 C ’21, the sales figures being 12,816 million and this is despite the underlying market dropping. The market sentiment in Europe remains uncertain, but we do expect a better second half, that is H2 C ’22 could be and hopefully would be better than H2 C ’21 in terms of the market.

Margins in Europe have been hit in the last few quarters by steep increases in energy costs, rising steel price and inflation and other costs like freight. We have been negotiating with our customers to pass through increases in energy costs and in many cases, these passthroughs are being operationalized. Because of these efforts and the efficiency measures applied, MCIE Europe’s EBITDA margins, which had fallen to 9.1% in Q4 C ’21 rose to 10.2% in Q1 C ’22 and has further increased to 11.6% in Q2 C ’22. You can clearly see an improvement across the quarters. MCIE Europe in Q2 C ’22 had an EBIT of 8.5% and EBT of 7.9%.

Let’s move to Page 9, where we see the consolidated Q2 CY ’22 results taking into account both India and Europe. Sales grew by 32% compared to Q2 C ’21 and the sales numbers are 25,609 million. The consolidated EBITDA for Q2 C ’22 was 13.3%, EBIT 9.8%, EBT 9.7%. Q2 C ’22 performance is the highest quarterly results ever that MCIE has achieved in terms of absolute sales and EBITDA.

Page 11, we have the half yearly C ’22 results, H1 C ’22 results for MCIE India. The sales have been INR24,815 million, maintaining the growth momentum from the semester before that is H2 ’21. The EBITDA is 15%, EBIT 11.1%, and EBT at 11.2%.

On Page 12, we have the H1 C ’22 MCIE Europe results. Sales are INR25,238 million compared to H2 C ’21. In this quarter also India has more sales than Europe — in this semester, sorry, India has more sales than Europe. The EBITDA margin in Europe is at 10.9%, EBT at 7.8% and — EBIT at 7.8% and EBT at 7.2% in H1 C ’22.

On Page 13, we present the consolidated H1 C ’22 results for MCIE. MCIE sales are at INR50,054 million, again continuing the upward trend. Consolidated EBITDA margins for H2 C ’22 12.9%, EBT 9 — EBIT 9.4% and EBT 9.2%.

Let’s move to Page 15, where we have presented the balance sheet position as of 30th, June 2022. The return on net assets is 13.8% and operational return on equity is 13.0%. MCIE’s consolidated RONA has been improving. It was 11.8% as on 30th June 2021 and 11% for CY ’21. So clearly, good improvement in this very key metric.

On Page 16, we present the cash flow situation for H1 C ’22. Operative cash flows have been robust despite having to carry more RM inventory due to uncertain steel availability in certain categories and this is required to maintain continuous production and no customer delivery disruptions.

Net financial debt has increased slightly to INR8,737 million as compared to the end of year 2021, although the net financial debt to EBITDA has been reduced to 0.67 times. MCIE has also invested in growth capex, which caters to the organic growth requirements largely in India and Mexico and all backed by an order book.

We continue to be optimistic about both our Indian and European operations despite the global economic uncertainties that we are facing.

With that, we can now proceed for Q&A.

Questions and Answers:

Operator

[Operator Instructions] The first question is from the line of Jinesh Gandhi from Motilal Oswal Financial Service. Please go ahead.

Jinesh Gandhi — Motilal Oswal Financial Service — Analyst

Hi. Congrats on good numbers. Couple of questions from my side. Firstly, on the European business, if you can share the revenue breakup with respect to on constant currency basis? And also if you can share what was the benefit of RM cost on the revenue growth part?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Revenue in euro terms and what was the effect of steep.

Ander Arenaza — Chief Executive Officer

The revenue in euro — good morning or good afternoon, everybody. This is Ander Alverez speaking. The revenue in euros was 7% higher than the affected in INR as the exchange rate has changed from EUR1, INR88 to EUR1, INR81, INR82. Okay. So there is 7% loss in IRS in sales. And regarding the raw material impact is approximately 15% in the sales, okay, so 15% of the growth is coming from the raw material.

Jinesh Gandhi — Motilal Oswal Financial Service — Analyst

Okay. So if we actually adjust on these two factors, then 10% European growth was almost at about 14%. Would that be the right way to look at that?

Ander Arenaza — Chief Executive Officer

Yes. We could consider about our real growth in constant raw material and constant exchange rate would be approximately 10%. Okay, that is the ratio in a market that was reducing or is affecting negatively due to the European situation.

Jinesh Gandhi — Motilal Oswal Financial Service — Analyst

Okay. Understood. And the second question pertains to the energy cost pass-through. We have indicated about negotiations coming to end. So what kind of price increases have you got? Is it for the entire energy cost inflation? Has that been entirely been absorbed by customer or we have asked you to take certain hit on that as well?

Ander Arenaza — Chief Executive Officer

Okay. We have had a big negotiation — had negotiation with all the customers. Let’s say, the agreements were different in each of the customers. So there is not a pattern there. But with most of them, we reach rationale agreement where the energy cost were passed through partially. Okay, not 100% was accepted. I mean, this was considered in a special situation in the market, so we absorbed part of the cost and the rest was absorbed by the customers. So depending on the customers would be around 60:40, 70:30, this is the range of the agreements we have reached with the customers.

Jinesh Gandhi — Motilal Oswal Financial Service — Analyst

So 60% to 70% pass-through and absorption of 30% to 40% of that?

Ander Arenaza — Chief Executive Officer

That’s right.

Jinesh Gandhi — Motilal Oswal Financial Service — Analyst

Got it. And third question is on the European market demand side. So we are hearing about some bit of slow evolution of demand in the European market despite supplies improving. So what are you picking on that side from your customers?

Ander Arenaza — Chief Executive Officer

Okay. It’s true that the orders from our customers, let’s say, what we call EDIs, the electronic orders that we received in our systems are showing a relevant increase for the next months, okay. So our customers’ expectations are quite strong. And the — we see really a strong Q3 and Q4.

Nevertheless, I would say that we are quite cautious and we — let’s say, we have certain doubts of that these orders will come real in the future, okay, because of the especial situation in the European economy and especially in the geopolitics, the war in Ukraine and the potential shortage of gas in Northern Europe at the end of the year, okay.

So hopefully all these kinds of things will be solved and I hope that the demand will match the orders that we are receiving from the customers. But you are right, the trend, at least the information we received from the customers is really, really good news.

Jinesh Gandhi — Motilal Oswal Financial Service — Analyst

Okay. Got it. And last couple of clarification, the question is to JP. One is with respect to the other income and you seems to be on the higher side what has led to that. And secondly, the interest cost for the Indian market — India business was quite low, so what has led to that?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

JP?

K. Jayaprakash — Chief Financial Officer

Can you hear me?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Yes, we can hear you.

K. Jayaprakash — Chief Financial Officer

So on the other income piece, we have received some insurance things in Europe. So about 240 million in this quarter. So that’s one receipt. And on the standalone interest reduction, you can see it in consolidated also, it’s basically exchange rate positive impact.

Jinesh Gandhi — Motilal Oswal Financial Service — Analyst

Okay. So just take for the forex impact interest rate would be in that — sorry, interest cost will be in INR120 million, INR130 million per quarter range?

K. Jayaprakash — Chief Financial Officer

Yes.

Jinesh Gandhi — Motilal Oswal Financial Service — Analyst

Got it. Can you quantify the forex gain in this quarter?

Ander Arenaza — Chief Executive Officer

In around INR60 million. Yes.

Jinesh Gandhi — Motilal Oswal Financial Service — Analyst

Sorry. I missed the number.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

INR60 million, that’s what already stated.

Jinesh Gandhi — Motilal Oswal Financial Service — Analyst

INR60 million. Okay. Got it. Thanks. I’ll fall back in queue. Thank you.

Ander Arenaza — Chief Executive Officer

Thanks, Jinesh.

Operator

Thank you. The next question is from the line of Siddharth Dand from Goodwill. Please go ahead.

Siddharth Dand — Goodwill — Analyst

Yes. Hi. So my question is what’s the INR2.25 crore intercorporate loan in the cash flow?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

JP?

K. Jayaprakash — Chief Financial Officer

You are talking about the INR2.25 crores outflow?

Siddharth Dand — Goodwill — Analyst

In the cash flows there’s like intercorporate loan that you seem to have given. So could you just —

K. Jayaprakash — Chief Financial Officer

Yes, I will explain. This is basically Europe has seen a very good cash flow in the first half. And almost EUR28 million to EUR30 million in cash flows, which has been. And what are the surplus we get in paying the pocket within the group so at an interest rate of about 1% and 1.5% within additional cash. [Speech Overlap] Sorry?

Siddharth Dand — Goodwill — Analyst

Is it within CIE, the intercorporate loan?

K. Jayaprakash — Chief Financial Officer

No, it is within CIE. It’s with CIE Automotive.

Siddharth Dand — Goodwill — Analyst

It’s with CIE Automotive?

K. Jayaprakash — Chief Financial Officer

Yes.

Siddharth Dand — Goodwill — Analyst

Okay. Like any duration of this something or —

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

See, this is basically cash pooling. So like we explained in the last related party approval we were taking, while CIE can — I mean, this is a loan given, so we can call back anytime.

Siddharth Dand — Goodwill — Analyst

Okay. Why won’t you just pass it on to MCIE India or something, just want to understand?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

MCIE India we would — I mean, the only way we could get it here is through dividend growth, which is not tax-efficient, okay. And so really we will have to think through and we have to see how much money we need there. So we’ll do — we look at it how efficiently it can be used. But as it stands today, we are in decent interest rate on it, so we’re parked in.

Siddharth Dand — Goodwill — Analyst

Why can’t we directly just keep the money ourselves instead of giving it to CIE? I’m just trying to understand.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Keep it where?

Siddharth Dand — Goodwill — Analyst

No, just keep it with ourselves instead of giving intercorporate loan to CIE.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Keep it with Dal-4 [Phonetic] you mean to say?

Siddharth Dand — Goodwill — Analyst

Yes.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Keep it with the bank, you will get nothing.

Siddharth Dand — Goodwill — Analyst

Okay. So you’re giving loan to CIE and they are giving us some interest rate on it?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

That’s what I said. We are earning 1.5% in Europe, which I think is a decent interest rate to earn, right?

Siddharth Dand — Goodwill — Analyst

Okay. And my next question would be how much is Metalcastello benefiting from the fall in the euro compared to the UAB? Is that the primary growth driver there in earnings?

Ander Arenaza — Chief Executive Officer

No, I don’t think that is the reason. I mean, because the growth of Metalcastello was — started several months ago without exchange rate impact, okay. So, the reason of Metalcastello doing well is coming from the recovery of the — of high road components and, let’s say, the infrastructure improvement in the USA. So it’s not related. The growth of Metalcastello is not related to the changes, right. Of course, we will be benefited by that and we hope that in the future perhaps we could see even higher improvement.

Siddharth Dand — Goodwill — Analyst

And what percentage of our total sales in Europe are export?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Metalcastello exports about 30%, a third of Metalcastello revenues are exported to the U.S.

Siddharth Dand — Goodwill — Analyst

No, overall Europe?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

No, Metalcastello has increased the exports revenue to 50%. And Metalcastello is roughly about 20% — 15% to 20% of the European revenues.

Siddharth Dand — Goodwill — Analyst

Okay. And about in the capex India, we have shown interest in the plastic capex or growth over organic or inorganic, so any update over it?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

No we keep looking for it right now, nothing in the plastic space that we have either organic or inorganic, no plans as yet.

Siddharth Dand — Goodwill — Analyst

Okay. And just a Germany-specific question, this particular quarter, was it profitable business in Germany or the energy costs really hitting out over there?

Ander Arenaza — Chief Executive Officer

Our German business is struggling because of the, let’s say, inflation plus the energy cost increase. And, of course, this is a — it was a difficult time before the crisis and the inflation came. Now the situation is also really, really tough, okay. So let’s say that the German business is trying to survive and we are working on the internal efficiencies and we are trying to pass through the customer the real impact that we have suffered in the business.

Siddharth Dand — Goodwill — Analyst

So I would assume made a [Speech Overlap] this quarter. We are not losing money, right?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

We are not losing money, but we are not making money either.

Siddharth Dand — Goodwill — Analyst

Okay. Fair enough. That was known. And just my last question is, any of the profitability being because of the — there have been some fall in metal prices in India. So has there been some lag in pass through because of that profitability is boosted or nothing like that?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

No we have yet not experienced a drop in raw material prices in India. We do expect it to happen, but right now, in this quarter, there is no effect of that.

Siddharth Dand — Goodwill — Analyst

Okay. Perfect. Thank you.

Ander Arenaza — Chief Executive Officer

Thank you.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Thank you, Siddharth.

Operator

Thank you. The next question is from the line of Nikhil Kale from Axis Capital. Please go ahead.

Nikhil Kale — Axis Capital — Analyst

Thanks for taking my question. My first question was on the operating income. So Europe, if I see the operating income, it’s increased quite sharply. So even in Euro terms, if I look at it, the operating income is almost double Y-o-Y. So can you just talk about what’s sits here and what’s driving this increase?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

EBIT. When you say net operating income, you refer to EBIT?

Nikhil Kale — Axis Capital — Analyst

No. Just I’ll tell you the slides. So I’m talking about other operating revenue. Sorry, my mistake. Other operating revenue.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

So you’re talking about Slide 17, right?

Nikhil Kale — Axis Capital — Analyst

Yes, that’s correct.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

So, Slide 17, we have Europe other operating revenue is INR953 million for H1 C ’22 and INR737 million for Q2 C ’22, right. That is the number I was referring to.

Nikhil Kale — Axis Capital — Analyst

Correct.

Ander Arenaza — Chief Executive Officer

[Indecipherable] including all the income directed to the scrap sale. And also as JP has discussed before, we have some income stemming from an insurance claim that we have received this Q2.

Nikhil Kale — Axis Capital — Analyst

Sorry, but the insurance claims, are they sitting in other operating income or in other income?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

It’s in other income.

Ander Arenaza — Chief Executive Officer

It’s in other income, yes, sorry.

Nikhil Kale — Axis Capital — Analyst

Yes. So other operating revenue will be effectively just major part of the scrap sale.

Ander Arenaza — Chief Executive Officer

Yes, other operating income straight to the scrap sales.

Nikhil Kale — Axis Capital — Analyst

Got it. Thanks. Secondly, just wanted your thoughts on how the demand situation, how are you looking at the demand situation in India? I mean EVs and I think tractors is doing quite well, even on the energy side we are seeing good momentum. But what’s the view on the two-wheeler side? What are you hearing from your customers and what’s the outlook going forward here?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Yes, two wheelers has been struggling for some time we all know because of the total cost of acquisition has gone up for two wheelers. But we are seeing an uptick in the two-wheeler schedules as we see today. It is still below, say, the 2008 levels, much below the 2018 quarterly levels. But there is certainly an uptick from quarter-on-quarter basis. So yes, the base is low, but we are seeing some growth in the two-wheeler segment as of now. As I said, everything is subject to no change happening due to the global economic factors.

Nikhil Kale — Axis Capital — Analyst

Got it. And just last question. So specifically with our key customer M&M, we are seeing few new launches that are coming up, the Scorpio, XUV700 is doing really well. Just wanted to understand how is that content shaped up in these new models compared to say the content that we are doing in the past? Has that content gone up and would be benefitted from the kind of response that we’re seeing for these products?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Yes, we will benefit. Content-wise, I cannot give you an exact answer at this point of time. I don’t have an answer to that, but it is true all our business with M&M is growing in every vertical that deals with M&M. So yes, we have benefited and we will continue to benefit from the good performance of M&M models.

Nikhil Kale — Axis Capital — Analyst

Okay. Got it. Thank you. I’ll get back in the queue.

Operator

Thank you. The next question is from the line of Bharat Sheth from Quest Investment Advisors. Please go ahead.

Bharat Sheth — Quest Investment Advisors — Analyst

Hi. Congratulations, Mr. Ander and Vikas and JP on the good performance. I have a question for Mr. Ander. When you said that Q3, Q4, we are anticipating much better demand and much better growth, so this is the YoY or we are talking of H1 to H2?

Ander Arenaza — Chief Executive Officer

It’s H2 [indecipherable] We expect the second half to be better than the first half of the year. Yes. And it’s true that the demand and the EDI is, let’s say, the order that we have there — the order book that we have in our systems now shows big increase for even we are — we are receiving those orders in July, August, September. But there — what I told also is that perhaps these orders will not be executed and the reality will be milder than they are now planning, okay? So we are cautious of what can happen in the European market because there a lot of uncertainties in front of us. But the message from our customers is from all of them, I mean it is a general view is quite optimistic, so let’s see.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

So, Bharat-bhai, in terms of forecast and this is — since it is public, we can tell you, the IHS forecast for H2 is roughly 8.3 million units production compared to 7.6 in H1. So that’s roughly a 9% increase over H1. But as Ander pointed out, given the gas situation, especially in Germany, which is in production area for the European light vehicles, things can’t — the reality can be very different from any of these forecast

Bharat Sheth — Quest Investment Advisors — Analyst

And Vikas, and this is even after factoring that normally H2 has five months operating vis-a-vis?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Yes. H2 is normally five months or even less than five months. It is basically four months and three weeks. Even after that, that’s the forecast as of now, but as Ander has repeatedly pointed out, let’s take it with a grain of salt, not even a pinch of salt, a grain of salt.

Bharat Sheth — Quest Investment Advisors — Analyst

Fair. And second on now Europe during our lockdown, I mean COVID-19 lockdown, we had our potential bring down at the breakeven level, which was around, say, 80 million per quarter run rate at PBT level breakeven. Now with these inflationary costs and an increase in the energy costs, so what level of European business can breakeven at PBT level?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

JP?

K. Jayaprakash — Chief Financial Officer

Yes. Vikas, I will take that. So we talked about — Bharat-bhai, I think because of the energy price increase and all, we will be around EUR100 million to EUR105 million per quarter.

Bharat Sheth — Quest Investment Advisors — Analyst

With PBT level breakeven? And current quarter number is around 155 million, I mean, Q2 in euro term?

K. Jayaprakash — Chief Financial Officer

Yes, around 150 million, yes.

Bharat Sheth — Quest Investment Advisors — Analyst

Okay. And now second question is on India, and for Ander. Currently our CV part contributes around 10% of the India business. Is that fair to estimate?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Yes, roughly, including light commercial vehicles, yes.

Bharat Sheth — Quest Investment Advisors — Analyst

So do we have any plan, I mean, to increase that business because that next two to three years, I mean that business looks much uptrend side. So do we have any plan? And if that, how do we expect that revenue mix of CV to go up in couple of year?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

CVs, we do business with CVs in foundry and in stampings. And if the CV volumes go up, we will commensurately go up with that. And if need be, we can look at increasing our presence there, but we will benefit out of growth in CVs. If the question is that, yes, we will benefit.

Bharat Sheth — Quest Investment Advisors — Analyst

But is there any chance that revenue mix contribution from CV is increasing?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

It may not increase drastically, but that number 8%, 10% can become more than that, but it can’t become 20%.

Bharat Sheth — Quest Investment Advisors — Analyst

Okay. And last question for JP. JP, in last year, our working capital used to be remain negative and this time because of higher inventory as Vikas explained. So how do we see now steel price stabilizing? Do we see that for second half our working capital again go back to negative level and cash flow, positive cash flow can be generated?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

JP, you are taking that? Net working capital position in India, how — can it become better?

Ander Arenaza — Chief Executive Officer

Yes, they are in the following months which we will see a reduction in working capital for [indecipherable]. We expect that the steel price will remain constant or will not go up, so it will help us. I’m not sure will we adapt our stocks to the sales level. So we can — we will at least see a small improvement in the working capital in India.

Bharat Sheth — Quest Investment Advisors — Analyst

Okay. Thank you and all the best.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Thanks, Bharat-bhai.

Operator

Thank you. The next question is from the line of Nemish Shah from Emkay Investment Managers. Please go ahead.

Nemish Shah — Emkay Investment Managers — Analyst

Yes. Thanks for the opportunity and congratulations on good set of numbers. So I had a question on the auto business or so adjusting for the forex and the commodity — RM prices, like Ander mentioned that we have seen a 10% growth. And looking at the production numbers in the Europe, there has been a decline in this quarter and for the first half as well. So just wanted to understand what is leading to this market share gain for us? And do we see — do we anticipate this outperformance continue and what kind of then a growth should we expect in the Europe business?

Ander Arenaza — Chief Executive Officer

Okay. What we see is that our market share has increased in certain customers in some of our business. One of the increases is coming in — is happening in Metalcastello as we explain because the business is growing importantly, that is one of the reasons.

Second reason is in our crankshaft business in Spain, in our passenger vehicle forgings, we have seen also a certain increase in market share, probably because some of our competitors having more difficulties or let’s say the market is moving due to the difficult situation in European countries.

So that’s what we see. But broadly, because of our product mix, we have been benefited by that, okay. So we cannot see in a single course for this improvement, but those are the main drivers.

Nemish Shah — Emkay Investment Managers — Analyst

Yes, that’s it from me. Thanks.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Yes, thanks, Nemish.

Operator

Thank you. The next question is from the line of Jinesh Gandhi from Motilal Oswal. Please go ahead.

Jinesh Gandhi — Motilal Oswal Financial Service — Analyst

Hi. We have couple of questions. One is on the India business, any indication of what was the benefit of commodity cost inflation on the topline?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Effect of RM on Q2 India revenues, JP, will you take that please?

K. Jayaprakash — Chief Financial Officer

It’s approximately 10%.

Jinesh Gandhi — Motilal Oswal Financial Service — Analyst

Okay. And second question pertains to the sunroof system which CIE Automotive has in their portfolio. So is there a plan to launch that in India through the listed entity or that will be to unlisted entity, will come separately that way?

Ander Arenaza — Chief Executive Officer

Okay. That is in different business at the CIE both to — and is managing from different country and this is mainly directed from China. So this business will be directed by CIE directly.

Jinesh Gandhi — Motilal Oswal Financial Service — Analyst

Got it. Got it. Okay, thanks. Thanks and all the best.

Operator

Thank you. The next question is from the line of Nikhil Kale from Axis Capital Limited. Please go ahead.

Nikhil Kale — Axis Capital — Analyst

Hi. Thanks for taking question again. So just taking forward the market share gain point that you talked about in Europe, just wanted to understand for the products that we are present in Europe, how is the competition? Like I mean is there is a decent enough chunk of the smart players or is it fragmented? Why I’m saying that is because in this current kind of cost situation, maybe some of the larger players are better placed and that is driving market share. So do you see enough headroom for you to gain market share with these — all these small players kind of going up?

Ander Arenaza — Chief Executive Officer

Yes, probably we will be benefited. I mean, the stronger players will benefit from the consolidation of the market. This is something that we are forecasting since several months. So that is probably one of the reasons of our — growth of our market share increase in the last quarters. And yes, that is a reality, probably this consolidation will happen, especially if the situation continues as hard as it is in this moment.

Nikhil Kale — Axis Capital — Analyst

Okay. And secondly given that power and energy cost of such a high proportion or other important cost item for the businesses that we are in, again given the kind of cost increase that you have seen in Europe, are there now increasing conversations with customers to do more of the production in India and then kind of exports which could kind of benefit our export business?

Ander Arenaza — Chief Executive Officer

We don’t see that trend in this moment because of the — there is also an additional problem is that the transport costs are increasing tremendously. Also the difficulty of the logistic in this moment, the lack of enough logistic routes and ships to move the product and the material from India, from China to Europe, it’s also blocking that. Also our customers are afraid of the — all the geopolitical issues that are happening around the world. So in our opinion, the local-to-local strategy will be reinforced after all these things that are happening in the world, okay.

So we don’t see that move in this moment. We probably see certain strategy changes in our customers. But at this time, I would say that probably the local to local will be the main strategy followed by the customers. Also we have certain customers that are referring to the CO2 emissions coming from the transport. So from the environmental point of view also the idea is to localize as much as possible.

Nikhil Kale — Axis Capital — Analyst

Okay. Got it. Thank you.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Thanks, Nikhil.

K. Jayaprakash — Chief Financial Officer

Vikas, can I come in for a minute? I wanted to —

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Yes. Please go ahead.

K. Jayaprakash — Chief Financial Officer

This is for everybody because on Slide 17, question on other operating income.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Yes. So this is with respect to that question that was asked regarding the other operating revenue in Europe of INR737 million, right?

K. Jayaprakash — Chief Financial Officer

Yes.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

In Q2 C ’22. Go ahead.

K. Jayaprakash — Chief Financial Officer

So with lot of apologies that number is — Q2 number needs to be corrected. H1 number is correct. The Europe, instead of INR737 million, we should read it as INR478 million. And Q2 total is INR1,463 million. We’ll of course send the correction, but everybody just note.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

JP, will you please repeat it.

K. Jayaprakash — Chief Financial Officer

So if you go to the Slide 17.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Yes. And we are there.

K. Jayaprakash — Chief Financial Officer

The Europe number INR737 million should get replaced that INR478 million.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

INR478 million. Yes

K. Jayaprakash — Chief Financial Officer

And consolidated should be INR1,463 million. So it will more or less fall in line with what was in Q1. So there is not significant increase in other operating revenue.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Okay. Fair enough. Other operating revenue, that’s right?

K. Jayaprakash — Chief Financial Officer

Yes. So the only change is in other income, not in other operating income.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Yes, okay. So that’s for the — for everyone. Apologies for this error.

Operator

Thank you. The next question is from the line of Kirti Agarwal from ICICI Bank. Please go ahead.

Kirti Agarwal — ICICI Bank — Analyst

Yes. So I wanted to know is the EV industries in expanding, so can we get a numerical number is what is the order book in hand for FY — CY ’23. And if we are seeing a major development in the Tamil Nadu plant as the company has incorporated recently? So how is the company planning for the capex of that industry?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Okay. Two questions you are asking. If I may repeat, Kirti Ji, one you are asking is what is the EV order book in India, right?

Kirti Agarwal — ICICI Bank — Analyst

Yes.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

So we had indicated in our year ending call of C ’21 that like we were talking in the range of roughly INR400 crores to INR600 crores in India at that time. So if you refer to our transcripts of that period, of that time. As of now, we don’t have a figure. We will again come back with the same number towards the end of the year. But what we can say is that our presence in the EV order book is we are quite comfortable with whatever is happening, especially we have two businesses which are — which have a significant two-wheeler presence, our aluminum business out of Aurangabad and Bill Forge business out of Bengaluru. And both of them are doing well, especially Bill Forge as far as the EV order book is concerned. Details, right now we don’t have the details, but that is something we can.

The second question you had was with respect to CIE Hosur, I think the investment that we are making. On that, what specifically did you want to know?

Kirti Agarwal — ICICI Bank — Analyst

I wanted to know is planning for the funding of the capex as the company is planning for 5 billion capex, I guess so? 5 billion capex.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

What is the capex for CIE Hosur and when is it going to start production, right?

Kirti Agarwal — ICICI Bank — Analyst

Yes, sir.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

JP on CIE Hosur?

K. Jayaprakash — Chief Financial Officer

So ma’am, we have already invested something like 1.3 billion out of our internal approval. The commercial production has started towards the end of June. So we will also — we started these patches.

Now regarding your 5 billion, I mean that’s a mere MoU to be spent over next five, six years and not immediate. We believe CIE Hosur should be able to generate its own cash flows to meet its capex maybe from a year from now — or year and half from now. It should be able to generate its own cash flows —

Kirti Agarwal — ICICI Bank — Analyst

Okay, sir. Thanks a lot, sir, for answering the questions.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Thanks, Kirti.

Operator

Thank you. Next question is from the line of Bharat Sheth from Quest Investment Advisors. Please go ahead.

Bharat Sheth — Quest Investment Advisors — Analyst

Hi. Thanks for the opportunity again. VIkas, so these — all these capex what we are doing it Hosur and even Rajkot, so can you give some color which are the product line that we are expanding? And in future also the larger capex will be on what kind of a product line?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

No capex is largely in India also. Again this —

Bharat Sheth — Quest Investment Advisors — Analyst

Correct. India I’m talking.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

This everything is in India. Hosur is a whole set of products both for domestic and export customers. Rajkot again, it is because of the expansion of our customers — of our existing customers.

Bharat Sheth — Quest Investment Advisors — Analyst

Which are the major product in Rajkot?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Rajkot we have gears and shafts, the same product line that exist today. Okay. And then Aurangabad Electricals, again new plant we are making again for our existing customers, but non Bajaj. Okay. So there are other areas also we are making investment. We made investment for warm forgings in Chakan, Forgings Chakan I think. And we are making investments in Magnetics — in our Magnetics division. So Magnetics division will be new customers and Forgings Chakan is also a new product because Chakan was not doing warm forging. So this is a kind of synergy between Bill Forge and Forgings Chakan, the warm forgings plant.

Bharat Sheth — Quest Investment Advisors — Analyst

Okay. And question is for Ander. See, we have good presence in hybrid EV side in the Europe, now Maruti has come up very new product, I mean, which is largely in India, hybrid EV was very less. So how do we see opportunity for ourselves in that hybrid EV? And do we expect that that will last little longer than the ICE?

Ander Arenaza — Chief Executive Officer

Okay. There is a big debate on this in the market, okay. The main — let’s say, we see a big advantage to the hybrid because you have the internal combustion engine plus the electric motor, so you can enter into the cities without polluting. I think this was initial idea of the OEMs, they are the producers. But unfortunately, there is a problem with the cost of the hybrid, okay, because you have to double the systems. So the most of the OEMs as far as we know are going directly to the electric cars. Okay. So hybrid will be a temporary solution within four, five years until the infrastructure is there. Then they will go directly to the complete electrical, pure electric vehicles. And that’s how we see the future.

Bharat Sheth — Quest Investment Advisors — Analyst

Okay. Thank you.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Thank you.

Operator

Thank you. The next question is from the line of Hitesh Arora from Unifi Capital. Please go ahead.

Hitesh Arora — Unifi Capital — Analyst

Yes, just wanted to clarify. I think this was asked earlier. On the India business, on a sequential basis, what is the benefit of the RM increase — raw material increase in sales side?

Ander Arenaza — Chief Executive Officer

On sequential, it’s negligible. It’s something like 1% in — not more than that.

Hitesh Arora — Unifi Capital — Analyst

Okay. Thanks. And on the capex that you’ve mentioned, what is the sort of incremental revenue that we can expect in the next calendar year?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

No, again we won’t be able to give that exact number for the capex, but we have an internal rule of meeting a minimum return on investment for every capex. So if the market situation is right, then we should definitely get good returns out of the new capex.

Hitesh Arora — Unifi Capital — Analyst

Did you look in terms of asset turnover as well if you have some?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

No, we look at in terms of ROI. Of course, asset turnover is an integral part of that. So yes — so there are various levels at which we look at starting from the profitability, let’s say, the growth number profitability. So there are whole host of things that we look at, but the most important factor is the return on that particular project.

Hitesh Arora — Unifi Capital — Analyst

Okay. And when do these — most of these come on stream, your expenses then on the —

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

No, there is, of course, certain lag — time period between getting the order and going live with that order. It takes anywhere between 12 to 24 months before capex can go live.

Hitesh Arora — Unifi Capital — Analyst

Okay. So at least 12 months — from at least 12 months on.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Yes.

Hitesh Arora — Unifi Capital — Analyst

Okay. Well, thank you.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Yes, thanks, Hitesh.

Operator

Thank you. The next question is from the line of Siddharth Dand from Goodwill Warehousing Private Limited. Please go ahead.

Siddharth Dand — Goodwill — Analyst

Yes, hi. So I just wanted to follow-up to my previous question. So how much money — how much is our loan to CIE total amount as of H1 ended?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

JP, loan to CIE under the cash pooling?

K. Jayaprakash — Chief Financial Officer

EUR40 million.

Siddharth Dand — Goodwill — Analyst

EUR40 million, okay. And have we taken any loan from them also — some other company or something.

K. Jayaprakash — Chief Financial Officer

So we — our Mexico loan is from them. And in Germany also we have taken loan from them.

Siddharth Dand — Goodwill — Analyst

So how much money have we taken from them and how much do we owe them, can you just give that number, EUR40 million and this side?

K. Jayaprakash — Chief Financial Officer

This side it will be close to about both put together another EUR80 million taken from them.

Ander Arenaza — Chief Executive Officer

We can me it half for Indian market [Phonetic].

Siddharth Dand — Goodwill — Analyst

Okay. Secondly, like we discussed that the German business is not doing well, so is there any goodwill over there we could consider writing off or impairing?

K. Jayaprakash — Chief Financial Officer

So we have goodwill, of course, there, but that’s an annual check we do for accounting. So we go by that.

Siddharth Dand — Goodwill — Analyst

So, because it’s been struggling for, so I’m wondering why we haven’t embedded here.

Ander Arenaza — Chief Executive Officer

We have one unique calculating unit, which is considered for Europe because in the end we can move past some projects for our Spanish plants and German plants. So again we made the testing because the testing of the goodwill, especially in our calculating unit. And every year we do these tests. And up to now, we do not have any signal or any aspect that tell us we should make anything of impairment. So for the moment, we do not see any risk on that part.

Siddharth Dand — Goodwill — Analyst

Okay. Perfect. I just wanted to just request if you will keep a gap between the earnings and the call, so that we can actually go through the number properly next time?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Yes. And, of course, that is the normal practice that we have. We had certain constraints time to that. So our apologies for that. It’s late I do understand and therefore — but instead of waiting till Monday evening or Tuesday, we thought it’s better to do it right.

Siddharth Dand — Goodwill — Analyst

Yes, of course.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Yes, so our apologies, but we do try to keep that in mind and we will keep that in mind.

K. Jayaprakash — Chief Financial Officer

And if there are any follow-up questions, you can always call us.

Siddharth Dand — Goodwill — Analyst

Yes, Vikas. Perfect. Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Hitesh Arora from Unifi Capital. Please go ahead.

Hitesh Arora — Unifi Capital — Analyst

Yes, thanks again. Just on the German business, what are the plans around sort of turning around the business or restructuring the business or bringing it to a part of sustained profitability if you could throw some light?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Germany turn around plan?

Ander Arenaza — Chief Executive Officer

Okay. You know that in our German plants we have been struggling since several years and we have been doing let’s say all the restructuring — lot of the restructuring activities. And it is true that during the last year, despite the negative environment with very low sales and with cost increase in, we have been able to keep the company without losing money, okay. So that was the result of all these activities. Unfortunately, right now we are in front of additional difficulty coming from energy plus the huge inflation that we are facing. And we are attacking that one side, looking for internal improvements in terms of efficiency gains plus passing through the cost to the customer as we cannot afford absorbing those additional cost suffering.

So that’s the evolution of the business. We — on the other hand, we have a very strong order book in front of us. So if the business, let’s say, comes as stay, our customers are planning. And the energy prices and raw materials go down as it was expected by for next year, then we could survive appropriately. Okay, that’s our expectation.

Hitesh Arora — Unifi Capital — Analyst

Sure. Thanks.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Thanks, Hitesh.

Operator

Thank you. The next question is from the line of Anshul Mittal from Care Portfolio Managers. Please go ahead.

Mohammed Patel — Care Portfolio Managers — Analyst

Yes. This Mohammed Patel. So my first question is, what percentage of sales in Q1 FY ’23 are only ICE related products?

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

What percentage of sales are ICE related to digital powertrain?

Mohammed Patel — Care Portfolio Managers — Analyst

Yes.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

So, no that would be a majority of the tech. Like, 90% plus in Q1 ’23. Just think of it this way, in India EVs, I think in two-wheeler segment, I think EV penetration in Q1 ’22 was — Q2 ’22 was about 4%, actually a little less than 4%, 3.5%, 3.7%. In cars, it was negligible, maybe 0.5%, 0.6%. In three wheelers which is a very small segment, it was decent enough. And in Europe, this number of battery electric vehicles, we are not talking hybrids because as was explained earlier, hybrid has both the power trains. So pure battery electric vehicles in Europe is roughly about 8%, 9% in Q2 C ’22 which — or Q1 FY ’23 that you said.

So right now the basic numbers are very low. So our revenues are also quite low. All that we are saying is among the new order book, we are generating a lot of the new orders that we are getting, lot of them pertain to EVs, but then they will start making an impact on the P&L maybe towards late next calendar year or early 2024 calendar year. Okay.

Mohammed Patel — Care Portfolio Managers — Analyst

Okay. My second question is, there is a difference in the sales that were reported in SEBI and investor presentation. For example, India in the SEBI result, it is INR1386 crores, in investor presentation it is INR1279 crores. What explains the difference?

K. Jayaprakash — Chief Financial Officer

Basically in SEBI it is all revenue. So you need to add other operating revenue to the sales number to get the SEBI number. That’s what we give on slide 17.

Mohammed Patel — Care Portfolio Managers — Analyst

Okay. Understood. Thank you.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Thanks, Mr. Patel.

Operator

Thank you. [Operator Instructions] As there are no further questions, I now hand the conference over to the management for closing comments.

Vikas Sinha — Senior Vice President, Strategy, Merger & Acquisition and Investor Relations

Yes, Ander.

Ander Arenaza — Chief Executive Officer

Okay. So we thank you for all of you for the participation and for the good questions and well directed questions. I just wanted to say that in many difficult market scenario, our company has solved and has got good results and show it’s resiliency and we expect to continue improving our results in the next quarters. It’s true that there are certain uncertainties coming from the volatility and the, let’s say, potential problem that would happen in Europe due to the war in Ukraine. But we are quite optimistic and we expect that the next quarter will be much better. So I again want to thank you all the Mahindra team for the good job and thank you to all of you and till next quarters. Thank you very much.

Operator

[Operator Closing Remarks]

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