Mahindra CIE Automotive Ltd (MAHINDCIE) Q3 FY21 Earnings Concall Transcript

Mahindra CIE Automotive Ltd (NSE:MAHINDCIE) Q3 FY21 earnings concall dated Oct. 14, 2021

Corporate Participants:

Vikas Sinha — Senior Vice President of Strategy

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

K. Jayaprakash — Chief Financial Officer

Oroitz Lafuente — Business Controller

Analysts:

Nishant Vass — Analyst

Nikhil Kale — Axis Capital — Analyst

Bharat Sheth — Quest Investment — Analyst

Nikhil Parekh — Tamohara Investment Managers — Analyst

Nimish Shah — Emkay Investment Managers — Analyst

Nagendra — GrowthX Capital — Analyst

Ankit Merchant — Quest Investment — Analyst

Robert Jackson — Banco Santander — Analyst

Niteen Dharmawat — Aurum Capital — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Mahindra CIE Q3 CY’21 Earnings Conference Call hosted by ICICI Securities Limited. [Operator Instructions]

I now hand the conference over to Mr. Nishant Vass from ICICI Securities Limited. Thank you, and over to you, sir.

Nishant Vass — Analyst

Thanks, Stephen. Good evening everyone in India and good day everyone in the rest of world. Thanks for joining us today for this call. From the management side today, we are represented by Mr. Ander Arenaza Alvarez, the CEO; Mr. K. Jayaprakash, the CFO; Mr. Vikas Sinha, Senior VP Strategy; Mr. Oroitz Lafuente, Chief Business Controller; and Mr. Swapnil Soudagar, DGM Strategy.

Now I’d like to hand over the call to the management for their initial remarks. Over to you, Vikas. Good evening, everyone and good afternoon to those who are joining from Europe. I welcome you all on this call as also Ander Arenaza, our CEO. I hope and wish that all your loved ones are taking care and are safe. Thank you for attending the call despite such a late starting time for Asian investors, but this was necessitated, due to the markets being closed tomorrow in India, because of Dusshera. Q3 C’21 began on an optimistic note, which was reflected in our previous results call. India had quickly recovered from an eviscerating second wave of the pandemic in Q2 C’21, while Europe was well placed with the fast-paced vaccination program. However, Q3 C’21 has been hit by an ongoing crisis that all of us underestimated. The semiconductor or chip prices, as it is called, which has burgeoned into a medium-term issue and is now expected to last for a few more months. The light vehicle production in both Europe and India, as well as truck production in Europe has been affected. IHS estimates light-vehicle production in 2021, compared to 2022 to grow by 8% to 9% in India and about 1% in Europe. These are much lower than earlier estimates and thus Q4 C’21 will be a challenge. The saving grace is that the demand sentiment is still strong and we think that almost all the demand lost would be recovered in 2022 and subsequent years. Tractors and two wheelers in India have not been affected much by the chip crisis, but they are following different growth parts. With the decent monsoon and continuing investment in rural infrastructure, the Indian tractor market is expected to remain stable in the near-term, but the growth rates will be modest given the very high base of 2020. Two-wheeler demand in India is recovering slower than expected from the second wave, especially in rural India. Exports of two-wheelers continue to do well and two-wheeler OEMs with greater export presence have an advantage. Steel prices continue to remain high, but stable. Other commodity prices have shown a marked increase this quarter. On top of this, we are now possibly looking at an evolving power crisis in India, due to coal shortage and an increase in energy prices in Europe. A putative third wave of the pandemic could hit India despite the high vaccination numbers and the situation post Diwali will be critical. All these issues have added to the uncertainty in the environment that we as a business are functioning in. We will continue to focus completely on our primary task of ensuring that our profitability is least effected in case of any such occurrence. Now having made a litany of risk factors, let me add that the festive season always brings cheer and optimism and we definitely look forward to that. As we all know, the same quarter last year that is Q3 C’20 was slowly recovering after global lockdowns and it may not be appropriate to make year-on-year comparisons to our Q3 C’21 just with Q3 C’20 when the base was lower, instead we’ll make a comparison with both Q3 C’20 and Q3 C’19 and also sequentially with Q2 C’21 performance. Given this late call, I understand that our investor presentation for this quarter may not have been seen by many, I will highlight the key points as always. We start with Q3 C’21 results for MCIE India are on Page seven. Q3 C’21 sales in India were at INR10,682 million, which is 30% higher, compared to Q3 C’20, 20% higher, compared to Q3 C’19 and 22% higher, compared to Q2 C’21. These growths are higher than the underlying market growth rates. MCIE India EBITDA margin in Q3 C’21 was 15.1%. This was higher than the 13.6% achieved in Q3 C’20 or the 13.1% in Q3 C’19 or the 13.9% in Q2 C’21. The twin focus in India on growth and operational improvement that we have spoken about in the last few calls is working. On Page eight, we have the Q3 C’21 results for MCIE Europe. Sales were at INR9,119 million plus 11% versus Q3 C’20 and a negative of 2% versus Q3 C’19, but better than the underlying market. There is a sequential seasonal drop in Q3 sales, compared to Q2 in Europe, but as we know, that’s because of the August holidays. Accordingly, Q3 C’21 sales was 15% lower than Q2 C’21. This is similar to the drop of 17% sequentially between Q3 C’19 and Q2 C’19 sales, so that is nothing out of the ordinary that you see in the sequential drop there. MCIE Europe EBITDA margin in Q3 C’21 was 12.5%, this is versus 9.9% in Q3 C’20 and 11.5% in Q3 C’19. The improved profitability year-on-year is evidence of the fact that the restructuring actions taken last year have worked well. The margin is lower sequentially than Q2 C’21, but that is attributable to the seasonal drop in sales explained above. And now if we go to Page nine, we’ll see the consolidated Q3 C’21 results, which are a combination of India and Europe results Q3 C’21 sales were INR19,801 million plus 21% versus Q3 C’20, plus 11% versus Q3 C’19 and plus 2% versus Q2 C’21 even sequentially also higher. Consolidated EBITDA margin of 13.9% was higher than the 11.8% in Q3 C’20 and 12.2% in Q3 C’19. Consolidated EBIT in Q3 C’21 was INR1,924 million at 9.7%, which is significantly higher than the INR1,080 million at 6.6% achieved in Q3 C’20 and also the INR1,396 million at 7.8% achieved in Q3 C’19. While not comparable due to the seasonal drop, even then the Q3 C’21 EBIT was even higher than the INR1,828 million at 9.4% achieved in Q2 C’21. Similarly consolidated EBT in Q3 C’21 was INR1,790 million at 9%, which is higher than the INR937 million at 5.7% in Q3 C’20 or INR1,198 million at 6.7% in Q3 C’19 or the INR1,698 million at 8.7% in Q2 C’21. On Page 11, we have the nine months C’21 results for MCIE India. Sales was INR29,904 million; EBITDA 14.9%; EBIT 10.4% and EBT 9.8%. On Page 12, we have the nine months C’21 MCIE Europe results. Sales was INR30,164 million; EBITDA 13.5%; EBIT 9.4% and EBT 8.6%. On Page 13, we present the consolidated nine months C’21 results of MCIE. Consolidated Q3 C’21 sales was INR60,068 million, EBITDA 14.2%, EBIT 9.9%, EBT 9.2% and PAT 5.2%. Each of these numbers is higher than the corresponding figure in the pre-pandemic nine months C’19. Let me emphasize that these results have been achieved despite the headwinds around the reduction in demand due to the chip crisis, increase in price of steel and other inputs like logistics and power and the continuing overhang of the pandemic. This shows the resilience that MCIE has exhibited during trying times. Regarding electric vehicles, we are happy to report that we have made progress in developing business in this area. Metalcastello has received a large size order of EUR20 million per annum from a US-based transmission supplier to electric vehicle OEMs. In India, we have received similar orders for transmission and driveline parts for both four-wheeler and two-wheelers at Bill Forge. We will continue our strident efforts in this direction. Please appreciate that we are unable to say more given customer sensitivity. In conclusion, we would like to state that despite functioning in an uncertain and rapidly evolving environment, MCIE has continued its stated path of growth and improving profitability. We look forward optimistically to the normalization of semiconductor supply, which will be the key factor for the market recovery in next quarters. We wish everyone on the call Happy Dusshera, Happy Vijayadashami, Happy Vijaya. May the festival spirit uplift our industry. And now we proceed to Q&A.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] The first question is from the line of Nikhil Kale from Axis Capital. Please go ahead.

Nikhil Kale — Axis Capital — Analyst

Yes. Hi, good evening. Thanks for taking my questions. Congratulations on a good set of numbers. So my first question was on the India business, so despite, I mean, we’ve seen the growth that has happened in the different segments, we have outperformed the industry. So if you could just provide some more color on the India business performance, maybe talk about how the growth is panning out in the different business with stamping, castings, Aurangabad Electrical? So some more color on the India business performance?

Vikas Sinha — Senior Vice President of Strategy

Yes, thanks Nikhil. End of the question is how is India growing at this rate and which parts of India are growing. I will just start of the answer and you can add to that, you know, we have been saying that all our divisions in India are on a growth path. And if you look at the capex figures also, half yearly that we had presented, there was lot of investment going on in India. In fact, this growth is spread across all divisions and it is not really just one division that is growing.

With these remarks, I’ll hand it over to Ander.

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

Yes, Vikas. Thank you. Good evening, everybody. This is Ander Arenaza speaking, okay. My feeling is that the Indian business performed very well in the third quarter in 2021. If you look at the figures, we are already at the same level than the Q1. So the third quarter was — this calendar year, was very strong, the second one was affected by the COVID and in the third one, despite the semiconductor shortage and our customer slowdown, due to this semiconductor shortage, we saw that the Q3 results turnover were up again at the same level than the Q1 and we have the expectation to continue growing in the next quarters. It’s true that there is an uncertainty now in the Indian market, due to this semiconductor issue and we could consider that in the next couple of quarters we will see certain volatility and uncertainty. But after that, we think that there is a very strong end demand in the customers, the automotive market and we expect that all the businesses will continue growing.

Regarding the evolution of — let’s say performance of different verticals, I would say that all of them — they performed equally or similarly. All the divisions are performing well and it’s true that, as Vikas mentioned, that we have the big advantage of the high raw material prices, okay, this is good for the turnover, but it’s affecting negatively the margin, so despite that we were above 15% EBITDA margin. So overall, I think we are quite satisfied with evolution and we are quite optimistic with the future. We were expecting a much better end of the year, that is true. I mean, we — in the last call, we were really optimistic, because all the customers were expecting a big jump by the end of the year. Unfortunately, due to the semiconductor shortage, this jump didn’t happen and, okay, the sales and the turnover will be a little bit lower than expected, but this jump is still coming. So we think that perhaps it will have a delay of four, six, eight months, but the positive trend will continue.

I hope I answered your comment — your question.

Vikas Sinha — Senior Vice President of Strategy

Yes, Nikhil, back to you.

Nikhil Kale — Axis Capital — Analyst

Yes. And then secondly, just on the Metalcastello front, how are you seeing growth over there I think that segment was benefiting from a strong pickup in demand in North America. So what is the situation over there, what has the growth been in this part of Metalcastello?

Vikas Sinha — Senior Vice President of Strategy

Yes, Ander, the question is about Metalcastello. Is Metalcastello benefiting from the increase in demand in North America?

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

Yes, absolutely. I would say that Metalcastello is doing really, really well in this calendar year. You know that, we had very poor year especially starting mid of 2019 when the decline started. And in 2020, we had a very weak year, but after the elections in the USA passed and the COVID is also over, I would say that in the demand from our American customers in Metalcastello is very, very high — is very strong and we are delivering a lot, in fact, we are adding also additional capacity and we are investing to be able to go with a high demand. So yes, in this moment, we are close to the 2019 figures and probably we will end that year very, very strongly. So the evolution of Metalcastello is very positive in the sense.

Nikhil Kale — Axis Capital — Analyst

Great. And just one last question on the number side. So if I just look at the employee cost, I think for the last two quarters, we were around INR3.6 billion on a consol basis, whereas this quarter it’s declined to around INR3.2 billion, so any one-offs there or is this a sustainable number that we should be looking at going forward on a quarterly basis?

Vikas Sinha — Senior Vice President of Strategy

Jayaprakash — JP?

K. Jayaprakash — Chief Financial Officer

Yes. I think you have to look at it from the fact that August was the closure period in Europe. So you cannot take only this quarter number, as well.

Nikhil Kale — Axis Capital — Analyst

Okay. Thanks.

Vikas Sinha — Senior Vice President of Strategy

Thanks, Nikhil.

Operator

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

Bharat Sheth — Quest Investment — Analyst

Hi, thanks. Congratulations Ander, Vikas and Jayaprakash on excellent performance in challenging time. Ander, I have three, four question; one is on, we have already won some order on electric vehicle front in Europe, as well as India, but from medium-term perspective, can you give little more color or elaborate what is our strategy to grow that electric vehicle business, new acquisition of the client, as well as new businesses, particularly in Europe, the EV’s penetrating at much faster pace?

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

Okay. Let’s say that electric vehicle share in this moment in Europe is approximately 7% of the total market, okay?

Bharat Sheth — Quest Investment — Analyst

Correct.

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

And the expectation is that this 7% will continue growing. This 7% are the pure battery electric vehicles, okay. Then we have hybrids and [Indecipherable] and electric vehicles that we are already supplying a lot of companies. In our company, we have — we are already delivering and producing components for electric vehicles, but as the share is very small that our part of the pie is also very small. But what we are now having is we are — all the new contracts or the new projects that we are being nominated from our customers, most of them they are hybrid or electric vehicles. So this is a trend that is in Europe it’s very clear and we will be in that — we will continue with that trend and we will probably increase our percentage of components for the electric vehicles in the next years, and this is the fact.

And regarding the product strategy, Vikas already mentioned that we got big business from an American customer for producing electric transmissions and we are going to invest and produce in very important ways EUR20 million per year to another business with big American customer from Metalcastello plan. And also in our forgings in Spain or in our forgings in Germany, we are also developing components for these electric vehicles. We mentioned in the previous calls that we are developing the aluminum forging, where we hope that we will have news very soon and we will be able to disclose not — we are not in a position to disclose anything yet, but we are working very hard on the transition to these kinds of products where we think that there will be big opportunities for us in the future.

And coming back to India, in India we are already working for certain customers, for example, in Mahindra, we are producing gears or we are also from Bill Forge, producing components for electric vehicles and also we got certain new businesses for one new electric bike costumer, so we are developing the business. I would say that, it’s very complicated to give figures, because the situation is evolving and every day we are fairly developing and the market is moving to that direction. In India, I think the split will be much lower and we don’t expect a major impact in the next 10-years, but perhaps in the two-wheeler and three-wheeler where we will have certain entrants. But in Europe, for example, there will be a faster pace of the electrification and we will be ready to enter into that career. So that’s our view on this.

Bharat Sheth — Quest Investment — Analyst

Okay. And second question the — on our strategy to develop India as a foreign export market. So at this juncture, where we are and how do we see over next two, three year timeframe?

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

Yes. This is one of the — also one of our strategies in Mahindra CIE, okay. We are developing, if you look at the — our capex in the company, I would say that, 75% of the capex is concentrated in India and the remaining 25% in Europe. So all our efforts are reinforcing our capacities, our production capacity in India, because we think that internal market in India will grow. I think there is a big room for improvement in India in the next year. And also the export rate will continue growing. In this moment, we can be at something like 11%, 13% export rate in our production and we will continue growing and we have internal targets to be at 20% in the short-term, that is the clear strategy.

Also, there is one important thing that is happening now that you know that logistic and transport costs are increasing a lot especially on the sea freight, costs has multiplied by four in the last month, so that will probably create certain delay in the export rate, because we think that most of our customers and especially after we looking at what happened with the semiconductor circuits. They are now rethinking [Phonetic] and redistributing their logistic routes for the components that they buy. So we think that in that sense, there will be local-to-local strategy reinforcements in the next figures. So considering this, perhaps the export rate will continue growing, but at the lower pace than we were expecting some months ago, because of this impact of the logistic costs.

Bharat Sheth — Quest Investment — Analyst

And one, on EBITDA improvement, CIS clearly laid down, say, 2.5% EBITDA improvement over next three years’ timeframe. So in that journey, where Mahindra CIE is placed, how do we see EBITDA improvement from year-on-year?

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

Okay. In — we have also our internal targets and we are aligned with the CIE EBITDA improvement strategy. So we should show similar or the same trend than CIE, okay, this year [Phonetic]. Of course in this moment, because of the high increase or the strong increase of the raw materials, the margins are additional challenge for us, especially the volumes are not there. But once the volumes and the market comes again and we are again at the expected volume level, I think that we will continue improving. I think we have a lot of room of improvement, I mean, this is our main job, I always talk about internal efficiency to the teams and we have shown good improvement in the last year, but we are still far from the efficiency that we are getting in other regions in the CIE. So yes, I think that the EBITDA margin improvement will continue, that’s our main target and we will be aligned with CIE.

Bharat Sheth — Quest Investment — Analyst

Sorry last question. See, Ander, in our total capital employed, little less than 50% is sitting goodwill and this goodwill is on account of several acquisitions, which are doing well except one Mahindra Forge in Germany, which is approximately INR500 crores to INR600 crores and it is not — so are we really evaluating of — doing any impairment of that goodwill?

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

No, we are not thinking on making any impairment on the goodwill on Germany. Germany, it’s true that it is one of our most, let’s say, weakest businesses and lower margin business that we have. However, despite the situation on that we had this year with the semiconductor issue and raw material increase and so on, we will be able to have black figures in Germany. So all the restructuring done was — it’s paying result and I think that we are in the good direction. And the goodwill in Europe, it’s a goodwill unified in all forgings in Germany plus the European businesses. So let’s say that the European business is covering all the goodwill with no issue. We don’t see a risk on that.

Bharat Sheth — Quest Investment — Analyst

Okay. And last question, how do we see Europe business in Q4 vis-a-vie Q3 level?

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

This is a very good question because the — relatively some three months ago when I was speaking to all of you about the optimistic view of the end of the year, and I told that, because we had orders, we have firm orders from the customers, the EDIC and electronics that are interchange system with chip. The programs for the next month and we see in three, four months in advance the demand and the demand was by for September, October, November, it was stable, very, very high. Unfortunately, back at the end of August, because of the — they had no semiconductors to — they were not able to build the cars, so they canceled the order, so and in September our deliveries were very, very low.

In this moment, we see certain recovery, but the semiconductor issue is still there. So what we think is that the Q4 will be similar to Q3, something like that, I mean that the expectation is still weak and the recovery will come in 2022. We hope that it will be Q1 ’22 or Q2, that’ the expectation. So we see a challenging Q4 and then probably we’ll see it — probably see in calendar year 2022.

Bharat Sheth — Quest Investment — Analyst

Okay, thank you and all the best question. I have a question, I’ll come back in the queue.

Operator

Thank you.

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

Thank you very much.

Operator

[Operator Instructions] The next question is from the line of Nikhil Parekh from Tamohara Investment Managers. Please go ahead.

Nikhil Parekh — Tamohara Investment Managers — Analyst

Thank you so much for the opportunity. Sir, if you could just share what is the constant currency growth for the Europe division?

Vikas Sinha — Senior Vice President of Strategy

JP. Growth in Europe in euro terms in Q3. I don’t know, all right you have the numbers. Can you hold up.

K. Jayaprakash — Chief Financial Officer

I think 11%.

Nikhil Parekh — Tamohara Investment Managers — Analyst

Euro terms, right sir. Sir, also on the Europe business, our commentary has been that the German forging business will more or less stay stagnant, given robust order outlook from the CV companies, global CV companies bearing the semiconductor issue apart, so how do we see our German forging business over a medium-term say next one or two years? And yes, I will just follow it up with other question.

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

Yes. You know that we were expecting a decline in our German business, but as you said, as the commercial vehicle market, we expect that will perform well in the next 2022 and 2023, because we see that cycle will continue strong for the commercial vehicles. We think that the company will continue at the good sales level, so we see a strong demand and we are already at nice figures despite the semiconductor issue, once this is solved, I think that we will continue — at least we will have couple of good years in Germany, yes, but we have an optimistic view on that.

Nikhil Parekh — Tamohara Investment Managers — Analyst

Okay. And sir, if you could just give a medium-term outlook on how do you see Europe business shaping up over next couple of years?

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

Okay, I think Europe business at this — really perform also as Germany, the European business will perform well. We expect that 2022 to be a good year and in 2023 also the expectation from the IHS shows recovery. You know, that in Europe, we had a big impact in this calendar year 2021, where we will be very close to 2020, I mean, despite being a COVID year, and this year will be similar to 2021. And 2022, we expect growth for the market of about 10%, 11%, so that’s what the analysis is and that’s what we expect.

So in that sense, we think that there will be a recovery of the business in Europe and the only — let’s say concern or the main concern will be first semiconductor issue to be over, this is something that we were expecting by this year and unfortunately it will be next year. Then let’s say to end definitively with the pandemic, the COVID, we think that we are all — the highest recovery starts in who knows, I mean there could be additional impact that are not forecasted. But let’s see we think that in Europe now approximately 80% of the people is vaccinated with two doses. So the risk is very low, so we are optimistic also of that.

And finally, what can be a little bit boring also with inflation, but we can see in Europe close to 4% that has been much higher inflation than we are used to. So that could create certain difficulties especially energy impacts on the industry or labor increases, those are the main issues. But overall, we think that the volumes will be okay and we will be able to manage this new scenario.

Nikhil Parekh — Tamohara Investment Managers — Analyst

Okay. And sir one last question, if you can just share revenue number from our Bell Forge unit and aluminum forging division, if possible for the quarter and for nine months?

Vikas Sinha — Senior Vice President of Strategy

Yes. You know, like Bill Forge is now a vertical of MCIE, so we are — so we’ll have to look at it, we actually don’t look at it separately at this point of time. AEL of course is a subsidiary, so that is — so JP on AEL maybe, but Bill Forge is now part of MCIE.

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

AEL is approximately INR2.4 billion and that’s the size of the AEL in the Q3 and Bill Forge is similar.

Nikhil Parekh — Tamohara Investment Managers — Analyst

Sir, if I can just repeat the number INR2.4 billion you mentioned for nine months?

Vikas Sinha — Senior Vice President of Strategy

That’s right.

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

No for three months — for the last quarter.

Nikhil Parekh — Tamohara Investment Managers — Analyst

Okay, so AEL and Bill Forge number is the same?

Vikas Sinha — Senior Vice President of Strategy

Roughly in the same range.

Nikhil Parekh — Tamohara Investment Managers — Analyst

Okay, all right. Thank you so much for answering my questions sir.

Operator

Thank you.

K. Jayaprakash — Chief Financial Officer

[Indecipherable] INR7 billion.

Operator

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

Nimish Shah — Emkay Investment Managers — Analyst

Yes. Thanks for this opportunity. So I have a question for our Europe business. So if I have to just compare the quarter performance on a sequential basis, so after adjusting for the drop in the revenues, is it fair to say that you have further managed to reduce our cost in that segment for us and reduce our breakeven point, because if I have to adjust for the drop in revenues or we see there would have been an increment in our EBITA margins?

Vikas Sinha — Senior Vice President of Strategy

So Nimish, are you referring to India or Europe?

Nimish Shah — Emkay Investment Managers — Analyst

Europe business?

Vikas Sinha — Senior Vice President of Strategy

Europe business. So Oroitz, the question is have we reduced our breakeven in Europe, because in spite of a drop in revenues, compared to Q2, the margins are still holding up that much. So is there a drop in breakeven in Europe?

Oroitz Lafuente — Business Controller

No, no, there is no change in that. [Technical Issues] costs, but now we have it in our results and that’s why we are showing the benefit of the operating costs improve in future designing.

Nimish Shah — Emkay Investment Managers — Analyst

Sorry, could you repeat…

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

The loss in the margin from in the sequential quarters from Q2 to Q3 in Europe is coming also for the increase on the raw material prices, that’s the steel price increase that when you say the margin from one quarter to another.

Nimish Shah — Emkay Investment Managers — Analyst

Okay. Sure, sir. And another question with this auto PLI scheme, there has been an option in the auto component parts for sunroof systems as well, so are we planning to introduce that product in our MCIE India, any thoughts on that? Any thoughts on that?

Vikas Sinha — Senior Vice President of Strategy

Ander, the question is about sunroof — are we introducing sunroof in India through our sister company.

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

Okay. The sunroof business is being developed also in India, we are planning to do that and we have to analyze if we will include the Mahindra CIE or not mainly, because of some market increase. The sunroof is a pure OEM-directed business and as we are part of — our name is Mahindra CIE the — some of our customers can consider us as a competitor. That’s why we need to analyze that. I mean, we have not yet made a decision on that, as there some marketing issues or analysis that we need to develop and we will decide.

Nimish Shah — Emkay Investment Managers — Analyst

Sure. Well, that’s it from my side. Thank you.

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

Okay.

Operator

Thank you. The next question is from the line of Nitin Dharmavat from Aurum Capital. Please go ahead. Mr. Dharmavat, your line is in talk mode, kindly go ahead with your question please. As there is no response from the current participant, we move to the next question from the line of Nagendra from GrowthX Capital. Please go ahead.

Nagendra — GrowthX Capital — Analyst

Hello, sir. Thank you for the opportunity. Hello?

Vikas Sinha — Senior Vice President of Strategy

Yes, yes. Please go ahead.

Nagendra — GrowthX Capital — Analyst

Yes, thank you for the opportunity and good set of number. And sir I have two questions basically. One is regarding EV market, so you said in the opening remark, you have received EV order in India and from Europe business also, so I just wanted to know what is the quantum of EV order in India? And one more thing, last con-call you said one-fourth of your revenue comes from the crankshaft business, right sir? So with the transition of EV in the next four, five year or 10 year, so how do you see — how much it will impact going forward?

Vikas Sinha — Senior Vice President of Strategy

No, Nagendra ji, first part quantum of business in India, as I said, it is similar to the range that we quoted for Europe, but we can’t get into too much details on that, because of customer sensitivity, but it’s a large size business in India.

The second question is one-fourth dependence on engine-related products and not necessarily crankshaft. Crankshaft is only one part of [Technical Issues] obviously they will not become 100% in one year, but they will become lesser and lesser. But they will be replaced by other EV parts and we will continue to get business in those areas. As we are saying we are working very, very hard on EV-related stuff, as Ander pointed out, lot of our new RFQs in the area in Europe is actually on EV vehicles that we are discussing. So, yes, it would be affected, but as I said, it is a transition and we will be able to transition very — we should be able to transition. So, we are very confident about that.

Nagendra — GrowthX Capital — Analyst

So, I think last time you shared you are entering into aluminum forgings, so that would be a much more focus on going forward, sir?

Vikas Sinha — Senior Vice President of Strategy

Yes. Ander just pointed out a few minutes back that in Spain and Germany, both, we are looking at converting some of our products into aluminum forge products and that is what we are developing and as and when that market becomes bigger, obviously, we will participate in that market.

Nagendra — GrowthX Capital — Analyst

So one last question, sir. Is there any company issue — facing issue with the price size of coal and electricity issues? Does the Company have an impact on this scenario?

Vikas Sinha — Senior Vice President of Strategy

As far as India is concerned, as of now, currently, we are not facing too much of an issue, but going forward, if it becomes a bigger issue that might be — there might be some impact, but as of now, we can report that we are okay with this. JP, you have anything to do? Is the coal shortage causing problems for our plants in India as of now?

K. Jayaprakash — Chief Financial Officer

As of now nothing.

Nagendra — GrowthX Capital — Analyst

Okay. Okay, okay. Thank you for the answers.

Vikas Sinha — Senior Vice President of Strategy

Yeah, thanks.

Operator

[Operator Instructions] The next question is from the line of Ankit Merchant from Quest Investment. Please go ahead.

Ankit Merchant — Quest Investment — Analyst

Yeah. Am I audible?

Vikas Sinha — Senior Vice President of Strategy

Yes, please, Ankit. Go ahead.

Ankit Merchant — Quest Investment — Analyst

Yes, yes. So my question is related more towards the strategy perspective. Is that the CIE’s global derives close to 23% from the roofing systems and then from interior also, it derives. So I understand we won’t be entering those business in Europe, but in India, can we enter those particular business lines in India going ahead?

Vikas Sinha — Senior Vice President of Strategy

No, as far as roof system is concerned, Ander just answered a few minutes back that yes, CIE as a group is evaluating India for roof systems and a decision will be taken in some time. So let’s wait for that analysis to be over. Yeah?

Ankit Merchant — Quest Investment — Analyst

Okay. And even the plastic systems, right, plastic interiors which we do?

Vikas Sinha — Senior Vice President of Strategy

No, plastics is one area where we have talked about both — especially inorganically, we have talked about in the past that we would definitely would like to look at that area, but then in inorganic strategy, like, we have to see if there is something that matches our strategy, only then we will do so. So, yes, both the areas we are looking at, but let’s see what happens.

Ankit Merchant — Quest Investment — Analyst

Sure. My second question is related to the capex guidance. So, you have been guiding close to INR450 crores in this year. How much have we spent in CY ’21 and in CY ’22, have you decided, how much we would be spending?

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

Okay. In CY ’21, we had about INR4 billion already as we have invested, importantly in the last months, especially within our new look subsidiary CIE Hosur with the expansion of the gear business and also in Bill Forge in Mexico, okay? So overall, approximately, we had INR4 billion already this year and we will end slightly above that figure in 2021 and for the next year in this moment, we expect it to continue the same thing. We consider that our capex will be approximately 5% of turnover, 5% to 5.5%, in that range.

Ankit Merchant — Quest Investment — Analyst

And just one last question related to the tax rate. Are we seeing any change for ’21 or ’22?Any change in the tax rate.

K. Jayaprakash — Chief Financial Officer

I’ll take that. No, we’ve been saying we will be around 25%, that’s where we’ll be at consol level.

Ankit Merchant — Quest Investment — Analyst

Okay, thank you so much.

Vikas Sinha — Senior Vice President of Strategy

Yeah, thanks.

Operator

Thank you. The next question is from the line of Nishant Vass from ICICI Securities, please go ahead.

Nishant Vass — Analyst

Yeah, hi, thanks for the opportunity. So first question, I understand you’re not, due to customer confidentiality, not talking about EV size and names, but can you tell us about how the EV order experience is in terms of both product development because I presume some of these parts are completely new for Metalcastello as well as the India Bill Forge entity. So how has that — how that experience of product development cycle has been, what is the customer feedback like with your product. Are you competing with existing vendors on new programs or you are on completely new programs for them. So what is the structure like in terms of the experience curve of product development and what are the learnings from it and how can you populate it for other products.

The second question is from a JV standpoint, how do the EV product stack up vis-a-vis the engines that you were doing, specifically. So how does the JV stack up today?

Vikas Sinha — Senior Vice President of Strategy

Ander, two specific questions with respect to EV parts, especially the questions with respect to EV parts, especially the Metalcastello orders that we are talking about, how has been the experience of product development in the EV space, what has been the feedback from customers on the product development and who are we competing against what kind of competitors that we experiencing in that space. And last question, are the gross value add, so I assume margins, are the margins in this area same as what we experience in our traditional products or are they different?

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

Yeah, okay. The margins of the EV products are similar to the rest of the products. Okay. So there is no big difference on that. What is different in the EV project is that the complexity and the requirement of these products are well above the internal combustion engine components. Okay. They accuracy of the products and the tolerances are much tighter than the current production that we have. Okay? So in that sense, the product is more expensive because it has more operations, gear grinding operations and also tighter tolerances and more requirements. So — and regarding the — how the experience, how was the experience of the development, I mean, the experience was very positive and I think that the customer clearly chosen us because of our capabilities and the good technical skills that our team in Metalcastello and the impression of the feeling that we have both sides is very, very positive and the development has been done properly with no issues. And regarding the competition is the — our competitors we have — as you know there was big and the competitors anywhere in the world. Some of them Indian, some of them Europeans, Americans and they — we compete with with them and I think that sometimes we will be the chosen ones. Sometimes as they will be, so in this moment, what I can say is that we are competing properly and we are also a growth in and getting the business in the same margins that we have — had in the rest of the businesses.

So in that sense, I think the — I think everything is evolving and of course there will be also a consolidation in this business, certainly a lot of people is now growth in — now pushing a lot on the EV components. I think that at the end, there will be able with — the big companies with the best technology with a best management style with the procedures that will be — that we may see in the future. And also the financial capacity to be able to invest the recorded amount of money for these kinds of components because not now — the old machines — cheap machines are not valid anymore because the activity is recorded by the electric vehicle is much higher, okay? So I think that we will be one of the winners in this career and I think that we will be there growing as we did in the [Indecipherable].

Nishant Vass — Analyst

Thanks, Ander. Ander, if I can ask from a incremental capital investment standpoint or — I presume that most of the existing capacity that you would have — whether it is peers in Europe as well as Bill Forge, you can horizontally deploy that for these products. I presume you would mean more machining capacity, but the baseline capacity that you have are tangible for these products. Is that understanding correct?

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

Yes, yes. The main investments are going to the machining and the finishing operations and let’s say with the higher added-value addition to the product, yeah.

Nishant Vass — Analyst

Perfect. My last question is on Bill Forge Mexico. Could you share an update as to where it is in terms of the timeline that you though about in terms of the progress, if you can share some light on Bill Forge Mexico, thanks.

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

In Bill Forge Mexico, we continue with our development plan and we — we are receiving the additional machine, additional price by the end of the year. I mean during this quarter and it will be released from the supplier and will be assembled in the plan. And the expectation is very good as the demand and the customers are pushing us a lot to increase our output from the plant, okay? So what we will see is that the — our Mexican plant will double in the production next year. That’s the size of the jump that we are going to move in the next year and the expectation is good also. So, we are satisfied very much because we are developing a lot of our numbers. I mean, more than 15 different part numbers that we are now developing in this moment and with additional machinery that we are going to implement in next month, so evolution and growth history continues in Mexico.

Operator

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

Nikhil Kale — Axis Capital — Analyst

Yeah, thanks. Just had one follow-up question on the Metalcastello CV orders. When is that order expected to start commercialization of that and when does that happen and assuming that the volumes hold up in line with expectations by — in what year will the order peak?

Vikas Sinha — Senior Vice President of Strategy

Ander, the question on the Metalcastello EV order is — when does it start and when does it — when are the peak number is achieved.

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

Yes, yes. The program starts by the end of next year in calendar year ’22 and will start growing in a steady ramp during the — I think it’s 3 years, something like that. Okay? So we have checking effectively when the peak will happen, but I think the peak will be something like 2025. I will confirm now, okay? But the ramp starts slowly as the electric vehicles have not to get — they don’t have the big share in USA yet. So this growth will be steady.

Nikhil Kale — Axis Capital — Analyst

Okay, thank you.

Operator

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

Bharat Sheth — Quest Investment — Analyst

Hi, thanks for the opportunity. Ander, you say that we are working on product development for aluminum forging from Spain and Germany plant. So what stage we are and how these technologically is different and do we expect — is success of that product can really change the — I mean the profile of German business?

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

Okay. We are now developing these products. I mean our R&D — and with our different plants and from the technology point of view, of course, we are changing the still — to aluminum that requires different process conditions. The concept of the presses are the same. So we can use the existing presses, then we need to add additional heat treatment in machinery and also machining and [Indecipherable] all the, let’s say, auxiliary operations that we need to add, okay? So in that sense, all the development has been done. We are working with a couple of customers very very closely and developing the processes and the — let’s say, all the concept of the production and we hope that we will be able to materialize and to get the — finally the orders soon. Okay?

However, we continue working and what we want to do is we want to make a transition because we expect that in the next 5 years, we will have still massive construction of our current products. You can imagine that the 2020 and 2021 has been a very, very weak year in terms of car production. For next year only, we expect to — the market to grow a little — a 11% — 10%, 11% minimal and for 2023, an additional 9%, 10%. So that means that we will see the market — all the market — 90 million cars again soon. So we think that there will be plenty of crank shafts and engines will be built in the next year, okay? So what we want — and our idea is to start entering into the — these aluminum forgings where we can ramp up these new products and let’s say balance the — our share of the internal combustion plus against the electric vehicle sector, okay? So that’s the idea. And in this moment what we expect is that we will make the transition as smoothly in the next four years, five years.

Bharat Sheth — Quest Investment — Analyst

Okay, thank you very much. That’s all.

Operator

Thank you.

Vikas Sinha — Senior Vice President of Strategy

Thanks, Bharat.

Operator

The next question is from the line of Robert Jackson from Banco Santander. Please go ahead.

Robert Jackson — Banco Santander — Analyst

Hi, good evening. Ander, I have a question regarding the — you mentioned the raw materials, the higher raw material prices has been affecting you in the third quarter. I just wanted to know more or less the breakdown of your exposure to the spot markets and the contract pricing because steel prices will continue — have continue to rise over the last few months and are arising — or more stable now. But looking ahead into the — if you have more annual contracts, then next year is going to be much higher versus this year. So could you give us an idea of what the breakdown is?

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

Vikas, Can you help me? I mean I didn’t catch properly the question.

Vikas Sinha — Senior Vice President of Strategy

Yeah, Robert, we couldn’t catch — the question is in terms of raw — you’re bifurcating raw material prices into two effects?

Robert Jackson — Banco Santander — Analyst

Yeah.

Vikas Sinha — Senior Vice President of Strategy

What was those?

Robert Jackson — Banco Santander — Analyst

The question is your steel still exposure. You steel on the spot market and you buy steel on annual contracts. So I just wanted to know how much of that exposure to spot, which would have been affecting your third quarter or second quarter and third quarter results because the exposure to spot — but if they’re annual contracts, they wouldn’t be — they wouldn’t be effecting you — so far they can effect you next year.

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

Okay, understood. The answer is clear. I mean almost 100% of our steel is under annual contracts, okay? We — every year, beginning of the year, we close the contract for all the complete year and if there is any valuation on the base price, this is also passed through the customer, okay? That’s how we avoid being impacted negatively if something changes in the market. So in that sense, the base price — steel base price is conducted annually from our purchasing teams, okay? So then, there is the second concept of the steel price that is [Indecipherable]. And this is variable, is is fluctuating every month and we have a system to let’s say apply this [Indecipherable] every three months to the customers. So we calculate the average of the previous three months and we apply this in the following three months. So there is indexations with them in place and that’s why this can affect that couple of months, but in the average — I mean during the year, this is not affecting us. That’s the way. So coming back to the steel market situation and demand, what we expect is that, for next year, we will see additional increases, that’s what the market is telling us. I mean the commodity prices are growing and we can expect an further increase for next year.

Robert Jackson — Banco Santander — Analyst

Okay. But for the shorter-term, because of that indexing fixed system, the pressure on the fourth quarter will continue because of that — because of your steel prices have continued to increase over the last few months. So, basically in terms of your margin — your margin for the next quarter will continue to be under pressure because of raw materials.

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

Yes. The steel — the structural steel price is high and we expect that will continue high in this quarter, yes. That’s a good comment.

Robert Jackson — Banco Santander — Analyst

Okay. And my second question is related to, you mentioned that your current market share in — not exactly you didn’t say where, but generally, this growth in market share is because of competition isn’t being able to be efficient enough and hence the market share will continue to increase longer term or is this more of a COVID or temporary gaining market share?

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

Okay. What we see is that the — clearly that we are gaining market share, especially in all the Indian business mainly because I think some of our competitors and especially the smaller competitors, some of them are struggling after the COVID and then with the shortage of the semiconductors and the low volumes, they are struggling. So, in fact some of our, for example, stamping activity that we buy certain small component, and we are integrating them at home because our suppliers are facing difficulties, okay? So we think that this trend of gaining market share will continue in the future. Also, we have a lot of pressure from the customers to increase the capacity. That’s why we are investing importantly in India to be ready for this market share gain. So, I think that’s the main reason of the customers concentrating on the most reliable partners to continue the growth because I think that they cannot afford a stop in deadline or losing sales because of lack of supply, okay? After what happened with the semiconductors, I think the strategy of our customers are now moving to the more reliable companies, and I think all the big companies, we have been benefited from this trend.

Robert Jackson — Banco Santander — Analyst

Okay. And just finally, the export market is still not that relevant, but it did help to compensate some of the weaker domestic markets, but now or looking to the fourth quarter, it’s not going to be able to compensate at all the weaker domestic market, so — hence more weakness in the fourth quarter. Is that — would that be a reasonable comment?

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

Yeah. The export market, yes, will be at the same level in that — than Q3. I mean we expect it to remain at the same 12% — 11%, 12%, 13%, in that range.

Robert Jackson — Banco Santander — Analyst

Okay. Thank you very much for your answers. Thank you. Thank you,

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

Thanks, Robert.

Operator

Thank you. The next question is from the line of Niteen Dharmawat from Aurum Capital. Please go ahead.

Niteen Dharmawat — Aurum Capital — Analyst

Yeah, thank you for the opportunity. I have couple of questions. You mentioned about the EV, wherein you mentioned that the products requires different kind of tolerances, more accuracy is required, and they are expensive products. So as the EV pie grows, would we need additional capex for manufacturing these products or we’ll be able to do it from our existing facilities on you?

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

We will need additional capex, especially for the finishing operations and we are already adding certain capacity of it. So in the last year, we are also adding capacity, especially in the gear grinding and finishing operations where we can get these better characteristics on the product, okay? So, for sure we will need to continue adding capacity, yes.

Vikas Sinha — Senior Vice President of Strategy

But Niteen, just to make the point clear, these are all incremental capex. It’s not as if like — as I said, the overall — as Ander mentioned, the overall capex YTD this year has been INR4 billion. So it is not as if these are all incremental capex. It’s like doing our higher tolerance part. So for that, you may require additional capex. So it does not mean you have to setup completely different lines or completely — like completely different plants. In the same plant, you’ll have to make those incremental capex.

Niteen Dharmawat — Aurum Capital — Analyst

Absolutely. I understand. The second point with respect to EV only, we mentioned that we have got some good traction now, especially in this market. And still, they are size wise, there are small. So if I look at it from three years perspective or maybe five years perspective, where do you see the revenue percentage going — revenue contribution coming in from EV of the total pie for Mahindra CIE? You must be having some estimates and based on that, you must be taking certain action. So, I just wanted to understand your perspective on that.

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

Yeah. What do we think is that, it will be depending in Europe and in India, okay? What we seeing is that in India in four years, five years, there will be — the share of electric vehicle will be very small yet. So the share that we will have will be small also. So, we will be aligned with the market and if the market goes to 4%, we expect to be at 4% in four, five years, no more than that. In Europe, we also expect to go aligned with the market and — as in Europe where the phase will be faster than that in India. What we see that our percentage in EV vehicle will continue, we’ll grow steadily to that percentage that we could expect, okay? If you ask me, in four years, five years, we can be at 12%, 13%, that should be the figure that we should have in the electric vehicles to be aligned with the market.

Our strategy is to not to lose any internal combustion engine sales but also to be in line with the market, so we can go and have a very healthy share between the both technologies and the electric one will continue growing and the other will start declining, but we don’t see the decline yet. I mean we will see the decline probably as you mentioned into the 2025, 2026, not before that.

Niteen Dharmawat — Aurum Capital — Analyst

Got it. Thank you so much.

Vikas Sinha — Senior Vice President of Strategy

And Niteen, just to clarify, when we say EVs, we mean battery electric vehicles. There are a whole host of other things like plug-in hybrid and hybrids, which we consider as traditional business for us, right?

Niteen Dharmawat — Aurum Capital — Analyst

Right. Okay. Got it. Thank you so much.

Operator

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

Vikas Sinha — Senior Vice President of Strategy

Yeah, thanks. And with that, thank you very much for this late hour. And I’ll hand it over to Ander for his closing remarks.

Ander Arenaza Alvarez — Executive Director and Chief Executive Officer

Yes. I wanted to thank you to all the participants for the good questions and the very clever questions that you made as usual. I hope I answered properly and you have the good impression of our Company’s strategy and results. I will say that this has been a very complex year or it’s been a very complex year because of the COVID impact than the semiconductor shortage, than the steel and the commodity price increases. But despite this, the Company is performing well and we are in a very well mood to continue this trend, to continue growing and showing good results.

And as always, I would like to thank to all my team to the great job they did in a difficult situation. So it’s a big pleasure to lead such a good team and we hope that we will succeed altogether. Thank you very much everybody.

Operator

[Operator Closing Remarks]