Mahindra CIE Automotive Ltd Q1 CY23 Earnings Conference Call Insights

Key highlights from Mahindra CIE Automotive Ltd (MAHINDCIE) Q1 CY23 Earnings Concall

Management Update:

• [00:01:48] MAHINDCIE said that during the quarter M&M reduced its shareholding in MCIE from 9.25% to 3.19%. The company said it has also applied for a name change from Mahindra CIE Automotive Limited to CIE Automotive India Limited.

Q&A Highlights:

• [00:07:12] Nikhil Rungta from Nippon India enquired how long does the company thinks the lower energy costs in Europe will continue to benefit its margins. Ander Alvarez CEO said that energy prices in Europe have decreased due to the war in Ukraine and are currently around EUR100-120 per MW, which has helped recover margins. However, geopolitical movements can still affect energy prices and MAHINDCIE margins, so it is uncertain what will happen in the future.

• [00:11:33] Nikhil Rungta of Nippon India asked if the company will be able to recover the impaired goodwill from the discontinued operation given its current book value and quarterly profitability. Ander Alvarez CEO replied that German Forgings had high results in the last quarter due to customer payments, government subsidies, and a one-off payment. The sale process is ongoing with several interested parties and is expected to be completed soon.

• [00:14:16] Nikhil Rungta with Nippon India queried about the capacity expansion plan for Metalcastello given its high-capacity utilization and good traction from big customers in Europe and the US. Ander Alvarez CEO answered that Metalcastello has increased its capacity and invested in new machinery, but is cautious about further expansion due to potential economic changes in the US market where 70% of MAHINDCIE sales are shipped.

• [00:16:41] Nitin Arora from Axis Mutual Fund queried about the overseas EV forging business and customer acquisition on the electric side. Ander Alvarez CEO said the company is active in the EV business, working with several customers and has acquired new business for EV battery packs. MAHINDCIE is also working on other EV components and expect the percentage of new business from EVs to continue growing.

• [00:19:37] Nitin Arora from Axis Mutual Fund enquired that given the decrease in debt and potential for good FCF in the next 2 years, is acquisition a strategy to grow faster in the EV market by acquiring companies in the electric side or light-weighting component companies. Ander Alvarez CEO clarified that MAHINDCIE is interested in acquiring companies related to this field and in the Indian market it is actively looking for different options to continue inorganic growth trend. MAHINDCIE would like to grow 50% organically and 50% inorganically to grow faster than the market.

• [00:21:39] Prashant Kutty at Sundaram Mutual asked that in the European market, where the company has grown ahead of expectations and industry growth, is the growth coming from a higher share of business from existing customers or from new customers in the EV market. Ander Alvarez CEO said the European business grew due to an increase in market share and better performing customers compared to competitors.

• [00:22:04] Prashant Kutty with Sundaram Mutual also asked about the outlook of Europe business. Ander Alvarez CEO replied that the company expects Europe to see a stabilization and normalization of the market, with a slight growth in the next quarters.

• [00:23:54] Prashant Kutty from Sundaram Mutual asked how much of the margin benefit is driven by efficiency and how much is sustainable in the future, given the goal to mirror CIE margins. Ander Alvarez CEO said that it is expected that the margins achieved in 1Q can be improved upon in the next quarter through better energy efficiency, internal efficiency, and higher volume. The goal is to reach 19% EBITDA on a consolidated basis.

• [00:27:53] Jinesh Gandhi from Motilal Oswal asked if the company is looking at M&A in India only or Europe also. Ander Alvarez CEO replied that MAHINDCIE’s focus is on India for M&A and organic growth, with all capex also focused on India.

• [00:31:37] Jinesh Gandhi from Motilal Oswal queried that with the exit of MFE, will the percentage of revenues from IC engines in the European operation still be 20-25% or will it be higher. Vikas Sinha IRO said the dependence on IC engine parts in Europe will be higher because a larger proportion of CIE Forgings is now included in the current portfolio.

• [00:37:15] Priya Ranjan of HDFC Asset asked if the two-wheeler industry in India does not recover, how soon and easily can the company repurpose its capacities to drive for newer segments and will substantial capex be required. Ander Alvarez CEO said MAHINDCIE is focusing on the projects that it launched last year, and waiting for them to ramp up. MAHINDCIE is also waiting for the two-wheeler market to recover before refurbishing any lines with low load due to it.

• [00:40:39] Nishit Jalan at Axis Capital asked if in Europe, were there any one-off benefits beyond the EUR1 million subsidy from the German government, such as price hikes from customers that may not sustain going forward. Ander Alvarez CEO said that the subsidy MAHINDCIE got in Germany was a one-off. No additional one-offs are expected in the future, and energy prices are expected to remain stable. Therefore, margins should stay at the same level.

• [00:41:14] Nishit Jalan at Axis Capital asked that in the India business, have there been any new order wins with existing or new customers in the passenger vehicle, two-wheeler, or commercial vehicle markets in the last 6 months. Ander Alvarez CEO replied that MAHINDCIE received a new project from an important customer in India and the budget for this quarter is in line with expectations.

• [00:44:01] Nishit Jalan at Axis Capital asked about any information about the order book or revenue potential from orders that have not yet translated into revenues and how much faster the company can grow compared to industry production. Arenaza Alvarez CEO said that last year, MAHINDCIE had orders worth EUR10 million. This year, the company expect similar figures. It usually takes 2-3 years from nomination of a product to peak production.

• [00:49:53] Nikhil Kale from Invesco asked how the company is addressing employee cost inflation in Europe this year and the potential reluctance of OEMs to compensate for it. Arenaza Alvarez CEO said the inflation in Europe has been very low for the past 18 years, but it has recently spiked. MAHINDCIE is negotiating with customers to pass through some of the inflation costs, but it’s becoming difficult. The company is also trying to offset these costs by increasing internal efficiency. The goal is to make sure the company doesn’t take a hit on margins as a result of the inflation.