MAHINDCIE Q2 CY22 Result Update!!!
2 Likes
I have analysed the company and made the following observations. Will be happy to hear what other forum members think about the issues highlighted.
- Week RoE profile in the past, indicating unattractive economics of the business, especially of the European operations which has a lot of verticals struggling to stay profitable.
- A lot of existing business is related to traditional powertrains. This includes crankshafts, gears, ICE components such as pistons, transmission components etc. With a global shift towards hybrid vehicles in short term and pure battery EVs in the long term, a significant chunk of the company’s revenue is likely to be under threat - particularly in Europe and other global markets. It remains to be seen how the company tackles this structural change, builds capabilities in the EV space and manages to post healthy growth with improvement in return ratios. A tall ask.
- The OEM industry itself is very cyclical and has been struggling to keep pace with changing technologies and emission norms year after year. Don’t see a lot of value creation from OEM players.
- The impression from concall transcripts is that the ability to pass on raw material price, energy price and labour cost escalation to the OEMs is limited. Again the European operations will be the main drag here because inflation will have a more pronounced effect there.
Conclusion: The company doesn’t seem to be one with a lot of pricing power and is going to face the above mentioned challenges. Considering the above, I don’t see the company crossing the 15% RoE mark or posting a growth of more than 12% growth in residual earnings. Even with those assumptions and expected returns of just 14%, the valuation of the company comes out to be less than 7800 cr, which is lower than the 11,000cr market cap it currently has. Can be looked at after a 30-40% correction.
3 Likes
- A small note on the company I made BEFORE the Recent announcement to change the name to CIE INDIA and classify German operations as asset HELD FOR SALE APPROX 4 months ago.
The company is essentially CIE India, Mahindra has presence only on the board level.
- Mahindra counties to remain 30% of the India business
- Sweet spot would be around 25%, however this should be achieved by growing in other clients, company would not like to lose a single penny of business from them
- There was a slight hint that Mahindra could exit over time and it is just a financial investment now but no communication yet
- Promoter stake is now at approx 75% (65.5+9.5), with bill forge promoter holding additional 2%
- The Company is essentially a “Garage” where they have to be humble unlike OEMs
- A carmaker like M&M can make passionate growth/project decisions but MCIE can’t afford that
- This is primarily where MCIE went wrong in their European acquisitions a decade ago
- The company needs at least 80% of business guaranteed to go ahead with a new project
- Essential to squeeze every penny
- The business is cyclical in a way —- Currently OEMs are preferring to go ahead with Grade A suppliers like MCIE Bharat Forge etc because they want reliable products, after a point they may change it so smaller OEMs to save Costs
- Capital Allocation strategy is clear,
- MCIE will pay up to 25% as dividends
- Major growth capex will all be in India with some growth capex in Metalcastello and remaining being maintenance capex everywhere else
- Brownfield expansions are going in across almost all plants in India
- India is operating at almost 100% capacity
- Europe is at 70% capacity, but Metalcastello is at 100% capacity, Spain + Lithuania is doing decent, but Germany is a HUGE lag.
- Europe energy cost problems are serious,EDITDA margins had fallen almost 500bps
- In Q1CY22 they passed on 30% of increased cost and will make it 50% by Q2 but is unlikely to fully pass-thru till year-end
- German business is a clear liability and shutting it makes little sense because of bad German labour laws, it remains a white elephant
- This is a problem that even their competition is facing in Germany
- The decision to enter Germany by M&M back in the day wasn’t a practical one - Seemed to me Similar to TATA Steel doing Europe ego-led acquisitions
- Goodwill from Bill Forge is around 800cr, 600 from AEL, rest is divided between the MCIE Formation deal and Legacy goodwill. (Need to double check) - Not very accurate
- CIE is unwilling to write down goodwill of german and other operations because they see the entire business as one
- Bill Forge promoter Mr Anil Haridass has now joined the company’s board and continues to own 2% of MCIE
- CIE when they first went deal hunting were quite rudely shocked at the premium expected by Indian companies in M&A
- They will Enter Plastics via Acquisition only if they get companies valued reasonably
- MCIE will have to take debt from Europe due to RBI restrictions on taking debt in India for domestic acquisitions by MNCs
- Sunroofs of the quality that CIE makes are very high end and there is a possibility that they enter that biz directly in India, however, that seems unlikely in the near future
- Absolutely no plans for royalties, only sharing of certain corp expenses
- MCIE does a sizeable amount of Factoring that helps improve the Cash conversion cycle / Working Capital cycle
- The single largest competitive advantage of the company is to ensure maximum efficiency and be process driven
- It is important for MCIE or anyone in the industry to diversify in order to ensure the OEMs don’t put pricing pressure on them, MCIE has done it by being across products and pricing categories, Bharat forge has done it by going into other segments like defence
- CIE is an expert in automobiles and would like to ensure it stays within its area of competence
- EV RISK - A majority of MCIE products, approx 75% - do not face the risk of EVs
- While Europe already has heavy EV penetration, but full BEV are at 10% right now, majority are hybrids
- Co does not believe that EVs pose a big risk, in fact, it could be an opportunity for grade A part makers like MCIE to increase market share
- EV risk in Europe is lower because the “same” clients like VW/Daimler/fiat are coming up with EV products
- EV risk in India is primarily in 2W where there are new brands that are not MCIE clients are currently focused on importing parts
- MCIE believes they will have to slowly integrate with players like MCIE in order to
- MCIE has gained the significant trust of OEMs in the last couple of years, be it in any segment where the company is present, forgings, stampings, gears, etc they come in top 3 preferred suppliers by the OEMs
- Company’s India business mix is 40-45% from 4Ws, 30% from 2Ws, 15% from tractors and rest is between CVs, LCVs, UVs. Except for 2Ws portfolio all others are doing well in India, 2Ws has started showing early signs of recovering in Q2CY22, but Can’t be sure of the sustained recovery.
- Company recently added Royal Enfield has a customer, adding new OEMs is a continuous process at their end. By acquisition of AEL they could access Bajaj Auto as a client, Bajaj drives 20% of India’s business now M&M is 30% Maruti drives 10%, Tata was 3-4% pre covid now stands at 6-7%
- In Europe the demand continues to be challenging, Light vehicles demand is further deteriorated due to war and demand for Heavy Trucks is impacted mainly in Eastern Europe which accounts nearly 30% of the business, Central & Western Europe demand is still stable but energy prices and uncertainty are still elevated that impacts the demand gradually.*
- Would recommend Investors to have an IN DEPTH look at CIE SA (parent). The company is a consistent compounder + Multibagger in a country where the index and economy has gone sideways for decades + Pays back shareholders
Disc - Investor.
8 Likes
- India Business: Includes a profit of 37.8 cr. on sale of land w/o which the EBITDA % would have been 15.7%.
- Europe Business: Demand remains strong and 6% positive effect of exchange rate fluctuations. Energy price reductions seen which affected margins positively.
- Overall, positive performance with highest ever margins (in line with CIE ratios, target is to reach CIE margins of 19%). Plan to maintain the same ratios in the coming quarters. India business to remain positive for better stability in Europe Region.
- Capex: 80% Capex focused in India. Europe Capex will depend on business acquired.
- Actively acquiring new business for EV business.
- Aims to beat overall market performance by 5-10% on a regular basis. Expects two-wheeler market to improve.
- Discontinued operation in German forging has received payment from customers and subsidy from German government, and sale process is continuing. Will be completed in the next 1-2 quarters.
Brokerages are putting in a TP of around Rs. 490 with expected revenues for CY23 to be around 9950-10050 crs. (Arihant giving revenues of 11100 crores) and PAT expectations between 850-850 crs.
3 Likes
CIEINDIA Q2 CY23 Results:
Future Outlook:
- In the medium term, the management is confident of outperformance in India operations led by overall industry growth, demand-backed capex and existing order commitments from OEMs. The management is focused on operational efficiencies to meet CIE parents’ EBITDA standards (18-19%).
- Company will continue to outperform overall market by 5-10% growth in both India and Europe Business.
- EV Portfolio focus: The Company’s Spanish plant has orders for steel forgings used in battery packs and aluminium forging parts for chassis. The Italian plant has orders from US OEMs for EV Transmission parts. CIE has already received several orders for aluminium forgings which will be produced at its Spanish facility. It will be upgrading this facility by adding machinery specific to aluminium forgings such as heat treatment ovens and certain finishing activities.
- Investments in capex are progressing in line with the management’s guidance. Till June, total capex amounted to INR246cr, with ~70%/30% allocated to growth/maintenance capex. The capex-to-sales ratio for H12023 stands at 5.4%. It is expanding operations in India and Mexico under growth capex.
- For sunroof business, the parent’s strategy in India is yet to be finalized currently housed in the parent owned subsidiary
3 Likes
another problem is cie indias big presence in europe ,europe is battling with inflation ,germany has almost entered recession ,so upside is capped in cie automotive india ,while downside is open
results were flattish ,weakness in europe is impacting margins a bit,stock still weak ,no buying juice visible