CIE Automotive India Limited (532756) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 CY '20 Earnings Conference Call of Mahindra CIE hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nishant Vass. Thank you, and over to you, sir.

Thanks, Aisha. Good day, everyone, and thanks for joining us today for the call. From the management side, we are represented by Mr. Ander Arenaza Alvarez, CEO; Mr. K. Jayaprakash, the CFO; Mr. Vikas Sinha, Senior Vice President, Strategy; Mr. Oroitz Lafuente, Business Controller. Now I would like to hand over the call to the management for the initial remarks. Over to you, sir.

Yes. Thanks, Nishant. Good day, everyone. I welcome all of you on this call and also Ander Arenaza, our CEO. Thank you for being with us in these trying times of the COVID-19 crisis. I hope and wish that all your loved ones are taken care and are safe. At the outset, let me give you a quick update on the COVID situation at our plant. While Europe is experiencing a second surge September onwards, our plants have not been affected and are functioning normally. In India, the last quarter was particularly difficult with fast rising cases across the country. It was especially difficult in Pune, where many of our plants are located. Total number of COVID cases at our Indian plants are more than 250, though a large majority has recovered and is back to work. As mentioned on the call last time, a crisis management group has been formed to handle the pandemic. Working groups have been constituted at each plant to review the situation and react as warranted, and all plants are functioning normally. Let's proceed to the presentation. The legal structure of MCIE and its subsidiaries is shown in Slide 3. We would like to point out that in this quarter as well, CIE has chosen to reiterate its commitment to MCIE, by acquiring an additional stake, taking the shareholding to 60.18% from the previous 58.02% at the end of last quarter and 56.25% at the end of last calendar year. The Q3 C '20, MCIE India results is on Page 4. Q3 C '20 showed a marginal drop of 4% in sales compared to Q3 C '19. This is in line or slightly better than the market performance. Q3 C '20 sales in India has seen a sharp recovery in demand. Our sales level are higher than the pre-COVID Q1 C '20 numbers. EBITDA margin has improved to 13.6% as compared to 13.1% last year. EBIT is 7.8%, and EBT has improved to 7.2%. Thus, Q3 C '20 EBITDA margins in India is higher than the Q3 C '19 margins in spite of a drop in sales. This improvement has been achieved by the India team under trying circumstances of a surging pandemic coupled with manpower availability issues because of the migrant workers' situation. This surge in demand in Q3 C '20 in India is expected to continue into the next few months. Various reasons are driving this which you are aware of, pent-up demand, COVID safety concerns leading to private vehicles, inventory buildup in the supply chain in anticipation of festival demand and surge in rural sales. But we are viewing the medium term with caution as reduction in household income due to COVID-induced contraction in the economy [ took ] further problem. Of course, the long-term prospects in India remain positive as there is enough room for growth on vehicle ownership, farm mechanization and road building. To face up to these medium-term uncertainties in demand, we continue to focus on breakeven point reduction at our verticals and are increasing our efforts to bolster our order book, especially through exports. On Page 5, we have the results for MCIE Europe for Q3 C '20. While the demand is coming back slowly, the sales have predictably been lower than the sales of last year. In line with the market drop, MCIE Europe has seen a decline of 22% in euro terms. Car forgings based out of Spain and Lithuania and the gears company based out of Italy have positive expectations for next quarters. But the truck forgings business based out of Germany is still in a challenging situation. The MHCV market, which the German operations serve, continues to be sluggish and is estimated to have dropped by 23% in this quarter. Overall, in Q3 C '20, MCIE Europe's EBITDA percentage was 9.9%, EBIT at 5.4% and EBT at 4.2%. Restructuring actions are ongoing at our German operation and has cost INR 270 million. This negative impact, however, has been partially offset by the sale of real estate at our closed Jeco plant, which has yielded INR 162 million of profit. Net exceptional cost is therefore INR 108 million. Without these, the EBITDA percentage of the MCIE Europe in Q3 C '20 will be higher by roughly 1.3% (sic) [ 1.4% ]. This would only -- is slightly -- if we add this 1.3%, then the EBITDA margin will only be slightly lower than the EBITDA margin in Q3 C '19, despite the sharp drop in sales. That's the point to be noted here. And now if we go to Page 6, we will see the consolidated Q3 C '20 results, which are a combination of both India and Europe, minus 8% growth -- degrowth in sales, minus 12% in EBITDA, 23% in EBIT and 22% in -- minus 22% in EBT when compared with the same quarter of last year. Without restructuring onetime costs incurred in this quarter, operational EBITDA margin would have been higher than what it was in the same period of previous year. On Page 7, we see the 9-month CY '20 performance of MCIE India. This shows the cumulative impact of the 3 quarters. The revenue is INR 18,152 million at an EBITDA margin of 9.7%, EBIT at 3% and EBT at 1.8%. On Page 8, we have the 9-month C '20 results for MCIE Europe. The sales have fallen in line with the market vis-à-vis the same period of QY '19. The revenue is INR 21,376 million, EBITDA of INR 1,253 million. The EBT is particularly noteworthy. EBT is roughly about INR 18 million. The EBT is particularly noteworthy. It is positive despite the lower market scenario and the onetime impact of INR 452 million incurred towards this year due to restructuring at our German and Italian operations. On Slide 9, we have the 9-month C '20 consolidated results of MCIE, which are a combination of a tough first quarter evolution in both India and Europe and a disastrous second quarter with some normalcy restored in the third quarter. We should point out that we have reached EBT breakeven for the 9-month period despite a disastrous Q2 C '20. This shows that the company remains resilient in the face of the crisis. In conclusion, I would like to reiterate that we have begun working to adapt our company to the new scenario, demonstrating our reaction speed and our managerial efficiency. MCIE is on its way to normalcy and well placed to exploit opportunities in favorable market conditions. Thank you. With that, we can proceed to Q&A.

[Operator Instructions] The first question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services.

First, clarification on CIE Europe's accounting. So the restructuring expenses in the Jeco real estate sale profits, which have come...

Jinesh, your voice is breaking. We are not able to hear you clearly.

Okay. Is it better?

Not really. Sorry.

Okay. Let me come back.

[Operator Instructions] The next question is from the line of Nemish Shah from Emkay Investment Managers Limited.

So I have 2 questions. So one is with respect to this restructuring cost. So are we done away with this? Or do we expect some costs...

Sorry to interrupt Nemish, your line is cracking. We are not able to hear you clearly.

Hello, is it better now?

Yes, please go ahead.

Yes. So I have 2 questions. So first was with respect to the restructuring costs. So are we done away with the restructuring costs? Or do we expect some more costs in the next quarter?

Okay. This is Ander Arenaza speaking. Yes, regarding the restructuring costs, as you saw, we had this INR 270 million in the Q3, mainly in the companies in MFE, in Mahindra Forgings, Europe and in Germany, okay? And for the next quarter, we are now analyzing if we can have some additional costs coming. We are doing the fine-tuning depending on the market evolution. And we are not yet sure, but we can expect some additional restructuring costs for the next quarter, not as high as important as it were in the third quarter, but some additional costs can be considered, yes.

Okay. So do we expect to close the year at a normalized EBIT margin? Will that understanding be correct?

Okay. We see a positive trend in the last month. We -- you saw the Q3 turnover figures and sales figure were better than we expected. I -- in my previous call, we were talking about a 65% to 70% of sales for this quarter. And in fact, we were closer to 90%. So it's true that the market evolution and performance was better than expected. And we expect also a better Q4 than expected, okay? So the market is performing well. I think the end of the year will be good. And yes, we expect to continue improving our margins, as we said, because we were doing all the restructuring activities and efficiency, increased activities in the last month, and we hope that these actions and all the jobs that we did will pay results in the next quarter.

Sure. One last question. So in CY '18, we kind of did -- we kind of reached our peak revenues and so just wanted a longer-term understanding in terms of our top line. So in terms of trends and in terms of your discussions with the OEs and your customers, so when we see us hitting those peak revenues that we had in CY '18? So say, if -- can we expect that number, too, in the next 1, 2 years? So just a broad understanding in terms of our top line for the next -- for the long term, say, the next 1, 2 years?

Nemish, Vikas here. We will, of course, not like to talk about forward-looking statements on our revenue. Point to be noted is CY '18 was the highest for the market in general. CY '18 was the year in which the auto market, all segments had perhaps the highest performance in terms of the last 10, 15 years. So that peak for the market itself is not going to come in the next 1 or 2 years. It might go up to 2023 or something like that. We will certainly, as I said, beat the market. We have always been talking about it. So our peak will be earlier than what the market reaches. So if the market is reaching in 2023 the CY '18 numbers, we will definitely reach it before that. So other than this, we would not like to talk much more about.

Understood. Just one small clarification. So this gain in the Jeco plant, does that come under other income for our consol revenue? The gain that we had of around...

No, the revenue is in the other income, cost and other expenses.

[Operator Instructions] The next question is from the line of Nitin Shakdher from Green Capital Single Family Office.

I just wanted to have a bit of an idea on the demand side from all the Indian segments on tractors, 2-wheelers, LCVs and MHCVs. If you could just paint a bit of demand on exact segments and how is the traction looking like?

Nitin, if I can understand your question, you are saying for our major segment, which is basically light vehicles, including the cars, UVs, LCVs and vans, 2-wheelers and tractors, you also asked about MHCVs. What is the demand situation? Are you talking in the near term, medium term or long term?

In the near term. I would say, let's analyze next quarter or the quarter after that?

So I think -- as I said in my opening remarks, I think the next few months are looking quite good for all segments. Of course, among all these segments, I think 2-wheelers and tractors have recovered the sharpest. They continue to be at those levels as of now. MHCV was the laggard, but even MHCVs are showing better results. It still remains below what was last year, but they are showing better results. The other segments are probably showing a little bit of growth on what was happening last year. So the next few months, as I said, are looking quite strong.

Okay. And you see a continued catch-up between the urban segments where the demand rises for specifically 2-wheelers and cars to catch up more? Or do you see the tractors and medium heavy vehicles, which are most used in rural segments, to be doing far better?

As of now, yes, rural side is doing a little better than the urban side, but we have to see how the festival demand shapes up in India. I think the expectation is that it will be a good demand. I think the inventory in the supply chain has gone up quite a bit in anticipation of that. So I would think the festival demand would also see urban sale as much. The question is what happens after the festival season? For that, as I said, we need to be a little bit cautious, and that's the reason why we are focusing more -- we continue to focus on the breakeven at our Indian verticals as well as trying to see if we can shore up our order booking, which there will be a profit. But next few months are looking okay.

The next question is from the line of Hitesh Goel from Kotak Securities.

Vikar, sir, I want to understand what is the OEMs telling you in terms of next 6 months because they tend to indicate in terms of demand trends, volumes to happen. So I got your point that still initially demand could be slightly better, but the OEM could be an indication on how should we look at FY '22 for Indian OEMs as well as abroad. So can you give some clarity what is your expectation on the market demand, both in India and Europe?

No. Hitesh, as -- your -- answer to your question in 2 parts. I'll take your question in 2 parts. The first part is what are the OEMs telling us and what we think would happen in 2021 or '22. So one, the OEMs are quite pleased, and there is a lot of optimism. The reason for caution is -- that we are exercising is really based on what could happen. We know that the economy is going to contract, which would mean that the household incomes will contract. And therefore, that would have an impact on large value, large ticket sales like vehicles. So that is the reason why we need to exercise some caution. But in terms of OEMs, OEMs seem confident, as I said, for the next 6 months, if your question was that. Number two, what happens 2021, '22, as we are saying, in India, there is reason to be optimistic about the market because there is a lot of scope for growth. Nevertheless, whatever happens to the market, we are trying to recoup our 2019 levels as quickly as possible, whether it is 2021, hopefully; if not that, at least in the early part of 2022. That is how we are looking at this situation. What happens to the market, as I said, it's pretty much uncertain. But from our point of view, we would try and be as close to the 2019 figures in 2020 -- in 2021. That's how we are looking.

Okay. And can you also tell us something about -- you said that you'll grow higher than the market. So what is the drivers for that? Are you gaining market share versus OEs more or there's content per car increasing. Can you give us some sense on what is driving it?

One, of course, is export. As we have talked about, we are -- we will definitely raise the level of our exports. Today, we are in -- exports from India is roughly around 12% to 13%. We would like to increase it, definitely over, say, 20% of our India sales. So that will be one of the drivers. And of course, we are looking at increasing our share of business with our existing customers, especially in these times, affording, like, for example, M&M, Bajaj, Maruti, these are some of our key customers and the Tier 1 suppliers. We are focusing on increasing share of business. And also, we are looking at newer OEMs. We have talked about Renault, Kia, and there are a lot of Tier 1 suppliers that we are focusing on, especially at Bill Forge and say, some of our India verticals like Stampings. So we are -- so the strategy is not just OEMs, how to look at -- it's just to summarize, yes, increased share of business at our existing customers, focus more on Tier 1 customers and see exports. That's the reason why we are being confident. Normally -- as we told you last time, normally, we think that in any given year, 15% of the sales will come from the new orders. I think we hope to get much more than that from new orders in any given year for all of these. And that's why we are pretty much -- I think we are pretty much okay with the way things are shaping up for us in that day.

[Operator Instructions] The next question is from the line of Sreemant Dudhoria from Unifi Capital.

Few questions. So could you please comment on any new product introduction or custom acquisition that happened in the quarter 3? And what is in the pipeline now? Any meaningful additions that have come in?

No. The -- in terms of product, no, as I said, product is what the customer asks us to do. So we are not a product-driven company. We are more of a process-driven company. So in terms of customer additions, in Q3, for example, it has happened. Both in -- in Q2, customer additions have happened. And our Forgings vertical has [ happened ]. We are talking about some export customers. Let me not take the names at this stage. We're talking export customers. We are talking about some shift from CIE and MCIE operations from Europe. That has happened. Some Tier 1 suppliers in our gears and foundry business, that has also happened. So both in Q2 and Q3, we have had new additions to our customer portfolio, not necessarily in terms of product. As I said, we are a process company. And whatever the customer asks us to do, that is what we do.

Right. Coming to the Europe CV business, with the back-to-back the -- restructuring one-offs that we have taken, where has the breakeven point come to? And do we need to do any further restructuring to make it profitable at -- on a sustainable basis?

Oroitz, Europe restructuring is -- basically restructuring in Europe and what is the breakeven point there at this point of time? Oroitz, if I can request you?

Definitely. As of now, in Europe, the breakeven point, it's around INR 5.5 [ billion ] per quarter, okay? That will be our breakeven level.

Right. So do we need to make further restructuring? I'm not sure what is the quarterly run rate now. But at what level of utilization, would we breakeven, say, at EBIT level?

Okay. Right now, you know that the -- this is Mr. Arenaza speaking, okay? You know that we have 3 verticals in Europe, okay? One is the passenger car forgings that we don't need any additional restructuring in that division, that vertical is working well, and the market is coming. So we are in pretty good figures in that vertical. Regarding Metalcastello, where we had a drop because of the off-highway product reduction, we already did the restructuring activity in Metalcastello. So we are finished this activity, and we are already also in good margins despite we had a relevant market volume reduction in this vertical. And finally, we go to the critical business. We have the commercial vehicle forgings vertical. This is mainly German activity, our German forging activity. And in this activity, we were -- when we were at, let's say, peak levels, we were very close to the breakeven position with -- because the margins were quite low. Despite we had a huge drop in the sites in the turnover, we were able to reduce our costs through restructuring and through government subsidies. So we were also able to keep this breakeven situation, okay? So that's where we are. So we are adapting our cost structure to the new volume scenario and the expected volume scenario. So in Germany, we -- as I told before, we have certain additional activity to finish our restructuring. So we can expect that in the Q4, we can have some additional costs of restructuring in one of the plants. But the biggest activities are already done. So it's just a last fine-tuning of the adjustment to adapt our cost structure to the current volume scenario. We expect that the current volumes will keep more or less stable during calendar year '21 in the commercial vehicle forgings, okay? So we don't see a revamp in the commercial vehicle business. We can see the revamp in India. We can see the revamp in the passenger car forgings, but not in the commercial vehicle forgings.

Okay. Sure, sir. Is it possible to comment on a current utilization level, both in the European 3 divisions and also in India, plant utilization levels?

Yes. In India, we can be at 90%, more or less, in average. Certain verticals, we are working at 100%, okay? In some divisions like magnets, our magnet division is working at 100% in this moment, okay? But average in India, we can be at 90% more or less. And in Europe, we are slightly lower than that. In the passenger car forgings, we can be at 80%, more or less, that's where the market is in this moment. And in Germany, where we have the higher capacity, now we can be at 70% -- 65%, 70%. That is the situation, more or less.

Right, sir. So in India, are we now redrawing our CapEx plans because we are at 90% to 100% of utilization?

We are now adding capacity as you -- we commented in the previous call in July. We did not stop our investment programs, so -- because we were expecting that the market will come soon, and that's what's happened. So we continue our investment, our CapEx -- capital expenditure plan. So in this moment, this year till -- in these 3 quarters, we invested something like INR 2 billion to increase capacity and to continue our growth path, and we will continue this distance. So yes, we are adding capacity. In certain verticals, we are improving our facilities, so we can continue growing, and we can continue, let's say, our growth trend and our growth expectations that we -- of course, it's our strategy in the long term.

For full year, what would be the number, sir? For 3 quarters, you said INR 2 billion. Full -- FY '20, what number we are looking at?

Okay. We have not yet, let's say, approved the budget for the next year. So I cannot disclose these figures yet, but we can say that in this year, just making -- continuing with the same trend, we will be at INR 2.5 billion, that can be the figure. And we can expect that the next year we can be at those levels or even if we win additional businesses, as we are now winning, probably we can have some more CapEx for the next year. So the reality and the cash explained that in the last months, especially in India, our new order book is performing very well. We are already above the -- our internal targets for the calendar year, complete calendar year. So we expect that these are the best signs because these programs will come back to -- let's say, will be additional sales in 1.5, 2 years. So those are -- the reality is that our order book is performing well, and we are getting -- as we have the competitivity and the quality and reliability that the market requires, we are increasing our -- or improving our position with our customers.

Sure, sir. Sir, one point which you -- which was highlighted to the earlier participants, question was the export mix from India, you're planning to increase from 12%, 13% to 20%. What time frame we are looking for this ratio to change?

Yes, hi. This is Vikas...

Yes, Vikas, yes?

So Sreemant, we will -- of course, we are talking of, let's say, any addition will take roughly between 12 to 18 months to [ certify ]. So that's the time period that we are looking at. So by -- the real impact of all this will start happening from H2 next year on the export side. So it will take that time frame, it does take in activating those orders, so 12 to 18 months. So H2 of next year, you can see for that.

So this will be lumpy from the H2 onwards, if you're giving a time frame of 12, 18 months?

No, it won't be lumpy. If -- it suddenly won't go from 12% to 20% from H2 onwards, it won't happen. I'm saying that increasing revenues from exports will start coming from that period. Sreemant, there were 2 other things that I would like to highlight among your questions on Europe breakeven point. I think in Q3 C '19, in Europe, we were at 11.5% EBITDA. And in this quarter, Q3 C '20, if you add that 1.3% onetime cost, so we will roughly be in the range of 11.2% to 11.3%. So we are very close to that 11.5% number with a 22% drop in euro terms. So when we talk about breakeven points reduction, this is the kind of real results that you are talking about. The EBITDA margin in real terms has dropped only by 0.2% or 0.3% in spite of a 22% drop in euro terms. So that's on breakeven point in Europe. The second point that you were asking was about CapEx. I think normally, we spend about 5% to 6% of our sales as CapEx every year. That is thumb rule in the industry. This year, in spite of whatever capacity additions that we are making in areas we require, it will be lower than that figure. That INR 250 crore figure is lower than that 5% to 6% figure. So we are exercising caution in spite of the fact that there is need to add capacity in different areas. So only wherever it is required, justified and the profitability numbers are assured, we are putting in CapEx. So we continue to be cautious about CapEx, but we appreciate the point that growth is coming back strongly, and we need to keep up with it. So please bear this in mind on CapEx.

My question on the breakeven was specifically on the commercial vehicle business in the Europe, where we have been struggling. So given that the restructuring is happening, are we happy with the margin levels that we are achieving there now? Or is there a scope for further improvement there to reach to our overall margin levels? So I was asking from that perspective.

Look, the margins in our truck forgings business are lower than what other parts of MCIE do, much lower than what CIE expects. So that's a given. So there is scope for improvement of that margins. But whether we'll be able to reach the CIE expectation of EBITDA 15%, I doubt that in the next 2 to 3 years. So this is only for truck forgings business.

The next question is from the line of Shyam Sundar Sriram from Sundaram Mutual Fund.

This is Shyam Sundar from Sundaram Mutual. Firstly, on the Europe business side, we have seen a 22% decline in euro revenues. The passenger vehicle production has been -- has declined by around 8%. I mean, has Metalcastello been much more weaker than 23%, 24% because it doesn't seem to add up. So I'm just trying to understand how have we performed against the market per se?

Shyam, this is CEO, Ander. Yes. The comment -- the answer for the Metalcastello evolution is mainly because you know that our main customer in Metalcastello is Caterpillar. Caterpillar depends on the off-highway vehicles. And this market is now in the bottom side of the cycle, okay? And especially because all these machinery are for the, let's say, big works and the public works or mining or oil and gas and all these kind of activities, okay? So we are now in the bottom side of the cycle. That is one of the reasons. Also, because they -- in -- as we -- our customer is Caterpillar and main market is USA, due to the elections, all the, let's say, public works activities is now stopped until the election happens in the beginning of November. So we are waiting to the market to come back again in 2021 -- probably in the second half of the 2021. That's the reason of the drop of the Metalcastello turnover.

Okay. Okay. Understood. Understood, sir. The other question in Europe, the electric vehicle car trend has been catching up much better than expected within passenger vehicles, how are we looking at it? Is it more -- the mix is more -- tilted towards more PHEVs and -- than BEVs, so we are relatively less impacted. How are you reading the situation, sir?

Yes. So in Europe, what we see regarding the electrification, which is important push from the carmakers and from the European government to increase the sales of these electric cars. But what we see is in the short term, the hybridization is the first step in this electrification process. Pure battery electric vehicles are -- the percentage of these vehicles is very low, and we don't expect a huge growth there. Mostly what we see is either internal combustion engine or hybrid cars to be sold in the next years, okay? So in this sense, we don't see an impact in our passenger cars forgings, at least, in the next 3, 4, 5 years, okay? So that's the horizon that we can expect to continue in the same levels or even growing in the next years. Then it's true that there can be a change in the model, but we think that this is a long-term change. And also, it's important to say that we are winning a lot of product for the hybrid vehicles because you know that the hybrid vehicle still has an internal combustion engine, so we don't see any major impact in the next years.

Okay. Okay. Understood, Ander. That was very helpful. Ander, the other question, you did talk about the breakeven point for MFE. I think I missed it. You mentioned EUR 5.5 million -- sorry, I might have missed it. If you can just reiterate that point, please?

The INR 5.5 billion of quarterly sales is the breakeven for full Europe, not only for MFE. It's all the -- for all European business in MCIE.

EUR 5.5 million, this is on a monthly basis, is it?

It's INR 5.5 billion.

Billion -- oh, INR. Okay. Okay. Sorry, sorry. Okay. Billion INR. Got it. Got it. Got it. Sir, one other question from India business per se, are we winning new orders away because of maybe import restrictions from China? Which segments are we seeing those incremental orders, if you can please provide some perspective on that?

No. Shyam, your question is with to respect, specifically, for China related thing?

No. Yes, sir. So I mean, are we winning anything because of import restrictions or maybe because of supply chain shifting away from China in that perspective? Are we getting...

Some, some, some. Like it could be the China thing will have a very small impact. So small businesses -- in small business wins, we are winning maybe to the tune of INR 2 crores to INR 5 crores per month, INR 2 crores to INR 3 crores per month, largely in 2 verticals: gears and magnetic products. So there is competition from China. You have to understand. Like, for example, in Forgings, I think India is very strong competitively in Forgings. So there is hardly any imports from China in Forgings. Foundry, the import from China is largely in the blocks and heads side of foundry. So again, that is an area where we are not -- we don't -- we are not present. We don't want to be there. So again, that's not an issue. Stampings, again, is a very local product. So there is really no import of Stampings product. So that leaves out these 2 verticals, gears and magnetics products, which are small verticals. And we are gaining a bit out of the China situation. It's not that we are not gaining. In fact, in our magnetic products business, we are competitive with our Chinese competitors. I think we compete with Chinese imports in the magnetic space. It's a small business where we have to remain. So we are gaining some. But in the areas that we operate in, I think the Chinese imports is much less significant. Even say in aluminum, there's not much of Chinese imports on the aluminum side, both for 4 wheelers and 2 wheelers. So wherever we are, we are gaining some, but small.

Understood, sir. Understood. And sir, just one question. In the 9 months CY '20, if you can give us some sense from an India perspective, how much would be the new businesses that started this year? I mean we had orders, which we were talking about last year as well. So if you can give some sense of how much would be the new businesses that started -- commenced commercial production this calendar year?

So in 9 months, CY '20, what is the proportion of new businesses in this year?

Correct.

Overall, we'll have to take a -- we'll have to see how much of it is coming from new businesses. We'll have to take a call, but it will be higher than 15%.

15%. Okay. Understood. That was helpful. Sir, sorry, one last question. From Europe, more from a housekeeping perspective, the other operating revenue in Europe is much higher than usual. First half CY '20, the other operating revenue was around INR 160 million average per quarter. This quarter, we seem to have INR 539 million, was there any government grant that was received in this quarter, which is a part of the other operating revenue?

So Shyam, let me comment here. The other operating revenue, actually, we moved -- other income is higher, but the other operating revenue needs to be corrected. I mean, it includes the INR 350 million which is part of -- so it should be reduced by INR 350 million there.

Okay. And so even the other income also seems to be higher. That was...

That is the Jeco land sale.

Okay. Okay. So the land sale income is added here and expenditure is before EBITDA. I mean, the restructuring cost is prior to EBITDA, is it? So sorry, sir, I missed. Yes. Is that...

See, the revenue is -- the sale price -- sale value is included in other income. And the expense is also above the EBITDA line. So the net income is part of the EBITDA.

Okay. Okay. And the operating revenue needs to be reduced by INR 350 million, other operating revenue.

Yes, yes, yes.

The next question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services.

Sir, just continuing on that question of other operating income. INR 350 million should be removed from other operating income, is that because of nonrecurring nature? Or what's the reason for that?

No, no, no. It is a mistake there, Jinesh. Actually, it is part of other income. Other operating income, we should reduce that. It got included in both places is what I am trying to say.

So this is from the investor presentation, JP was...

Yes. Yes. Yes.

So there was a clarification.

That clarification slide. Yes. That...

Yes. That is income -- other operating income slide, I think it has got mixed up there.

So it got included in both the places, other income and other operating income.

Okay. So other operating income should be close to about INR 180 million?

Yes. Yes. Correct.

Okay. And other income remains INR 379 million?

Yes. In that, INR 350 million is sales value of the Jeco land sales.

Okay. And profit is INR 162 million. Okay. Got it. Got it. Second question pertains to -- with respect to this opportunity on the import substitution, which we talked about, there was one question on that. So are we looking at areas which we currently -- or technologies, which we currently don't have or which is not currently in a focus area of parent, but could be big a opportunity. Are we open to such opportunities, say, like electronics or other segments, which can be large segments from Indian market perspective, but globally, parent is not focused on that?

No, no, Jinesh. We will stick to the perimeter in which CIE operates.

Okay. Okay. Right. And secondly, with respect to benefit of restructuring at MFE Germany, so what kind of reduction further we see in breakeven points?

Breakeven point reduction...

INR 5.5 billion revenue is post third quarter's reduction?

Yes. So Ander or Oroitz, see the question is, today, the breakeven point in Europe is INR 5.5 billion. How much further reduction do we envisage?

We could expect another INR 200 million, of reduction, yes, in the quarterly sales figure.

Yes. You can except another INR 200 million of reduction, third quarter sales. So we would target it from INR EUR 5.5 billion to INR 5.3 billion.

Okay. Got it. Got it. And lastly, with respect to the new orders which we are getting and targeting. So is this made up of new products and new customers largely? Or this will also include ramp-up at existing customers as well?

No, no. It will include ramp-up with existing customers also. It will include newer customers, less newer products because, as we say, products are what the customers asked us to make. It would include all 3. So in newer customers, largely, it will be newer customers because with existing customers, normally, what more they ask, some of it also goes away. So it normally balances out. So you will have newer customers. Largely, newer customers would be driving.

All right. Right. And lastly, on the export front, the numbers which we are talking of 20% of sales, would this include the exports with respect to shifting from Europe to India?

Yes, it would. No, that's the reason why we think it is very much achievable, Jinesh.

Right. Right. So but that would be coming from our existing European operations to India operations. So at consol level, it might only improve profitability, right? Not...

Some of it will come from MCIE Europe. Some of it will come from CIE Europe.

Okay. Okay. But if I -- so when you're saying CIE Europe effectively, the overlap of technology is currently only on Forging side, right?

Yes. Yes, there are a few others, so they input materials from them. They also do a lot of machining and a lot of other things that happen, so inputs for that and so on. So it won't be any direct conflict. It will be, for some of the input parts, that they may require input forging for whatever is being done in CIE Europe on the machining side. So that's [ my view ].

The next question is from the line of Preeti RS from UTI Mutual Funds.

It's a breakup question. I want to know what's the gross debt level? And what is the cash absorption that happened in the pandemic quarter for the fixed cost?

Preeti, can you repeat the 2 questions, please?

Yes, I asked what is the gross debt as of now, as of latest quarter? And what was the cost absorption that happened in the Q1 to absorb the fixed cost?

The cost absorption, when you say that, what exactly you have in mind?

I mean, the loss, the extra loss that we had to incur.

In Q2 C '20, you're saying?

Yes. Your Q2, right.

So in Q2, how much loss happened in Q2, is the question?

Yes.

Okay. JP?

Yes, I'll take it. I'll take it. So if you look at our June results ma'am, our consol loss stood at almost INR 600 million, okay? And now we've turned positive, and we are now about INR 350 million profits. So that's as far as the profit is concerned -- the loss part is concerned. On debt, we have -- okay, as we stand at the end of the quarter, we are about -- in terms of total debt -- net financial debt, we track net financial debt, ma'am, so I have that figure readily available. It is INR 16.1 billion, which includes -- this year, we had an accounting standard change. So INR 2.5 billion of Ind AS 16-related change. And currency has been -- the euro has been strengthening in the last 9 months. That impact is about INR 1 billion. So really, if you ask me, the debt has gone up by about INR 1.2 billion over December '19, which is largely because of the working capital increase or the free cash flow number for the period.

Okay. And in this, you're almost close to INR 600 crores to INR 700 crores is the ForEx debt. Is that right?

Sorry?

What part of it is the ForEx debt, the foreign debt, foreign denominator debt?

There is hardly any foreign debt, madam. In India, we don't take any foreign currency loans. There's some part of it in Aurangabad elections, but it's very insignificant. And in Europe, it's all in euro only. So there is no exchange risk there.

The -- JP, the question is out of that -- in net financial debt of INR 16 billion, how much is debt in India? How much is debt in Europe?

Yes. So Indian debt would be, on a net financial debt basis, it will be about INR 1 billion, I mean, not more than that, about INR 1 billion. Everything is Europe only.

The next question is from the line of Rajesh Ranganathan from Doric Capital.

In response to an earlier question, you had mentioned that you expect hybridization to be the main drive going ahead and not pure EVs. But let's -- just for the sake of argument, let's assume that we do shift to EVs in the future. What would be the impact on our sort of addressable market per car?

Rajesh, like this question, if you -- if 100% shift to EVs happen, that is the supposition. So what part of our revenues will be affected. So that part of the revenue, which is related to the powertrain, essentially, which is engines and part of the transmission, not entire part of transmission, but some part of transmission will change. So how much of our business is related to that, roughly 20% in India, roughly around 28% to 30% in Europe, this comes down to around 25%, if 100% EVs happen. So that is the kind -- so we are talking about things like crankshaft or engine gear. So those are the kind of things that we are talking about that, that will go away. Other things like driveline part, steering part or even like the parts that we supply for 2-wheelers, which are not related to engines will be there, step holders for example, in a motor bike. So all those will remain. So that 100% that you are talking about is 25%, to answer your question.

Okay. That is very clear. And second part of the question, again, I think somebody else sort of asked it earlier, but let's assume, if you look at the EV landscape in Europe, our market share in the EVs for the non-powertrain components. Is that similar to our EV of [ 200 ] ICE models? Or in a sense, is our order wins similar between -- within the OEM between the 2 types of models?

So as Ander pointed out, right now, we don't have too much of EVs even in Europe. So for example, we have very big business of crankshaft in Europe. So when pure battery electric vehicle stuff -- hybrids, anyway, have a crankshaft because hybrid has both the type of engines. It may have a smaller crankshaft, but it does have a crankshaft. Right now, whatever surge in EVs that we are seeing in Europe is driven more by hybrid rather than pure battery electric vehicles, where there will be nothing like a crankshaft. The entire power will be generated by batteries, whether it is lithium-ion or different kinds of batteries. In hybrid, we have both the engines.

What I mean is for your non-powertrain components, what is our model sort of wins currently in EV vehicles?

So look, in Europe, we have 3 kinds of businesses. One business is the truck forgings business. In the truck forgings business, we are not into engine parts at all, in the truck forging business. The kind of parts that we supply are things like I-beam, that big I-beam that we do, none of them is engine-related part in truck. Even though truck -- even in Europe, the electric trucks might take very, very long time, but we are not in the powertrain part of truck forgings at all. This is our German operation. Similarly in our gears business in Italy, we supply largely to the off-road market, customers like Caterpillar, C&S. I don't think these will be affected by EV at all. Amongst the 3 businesses in Europe, almost 60% has nothing to do with the electrification. So the one business that will be affected is the car forgings business, which is based out of Spain and Lithuania, which does basically 2 kinds of parts, crankshaft and CV joints. CV joints, again, which is more driveline for us, will not be affected by EVs. So what will be affected is crankshaft, which is, as I said, roughly, in Europe will end up somewhere around 25% to 30% of our business in Europe would be this particular area. And do we have order wins in the non-powertrain part? Yes. As I said, we have CV joints -- our CV joints and the related driveline parts that we supply. So we have that business.

And other question was related to your government grants. So how much was that in -- say, in the September quarter? And what will be the impact going ahead of that grant continuing or not continuing?

Okay. So the grant accounted for in this quarter only is about INR 12 million, okay? Last quarter, it was much bigger, it was about INR 122 million because it was a cumulative impact. If you see the entire grant is about INR 2.5 billion, which will come over -- that's the entire grant. But in consol, it will be around INR 1.9 billion because INR 600 million was already accounted for in the acquisition accounting. This INR 1.9 billion will get recycled into P&L over a period of 5 to 6 years going forward as we start -- I mean as the GST paid to the government accumulates. Right now, in the consol, we have -- I mean the claim that has been submitted to the government is only INR 1 billion.

So Rajesh, the question on this grant that we are talking about is the Maharashtra Subsidy Scheme that we are part of. Was your question related to this? Or was your question to government support during the pandemic in European plant?

That -- my question was related to the second part, the European pandemic support.

I'm sorry. I'm sorry, I thought you were talking about India.

So this -- what JP has answered is the subsidy part that we are getting in Aurangabad Electrics, which is the Maharashtra government subsidy when you make a particular investment. So that is very clear, and that is very set. And as JP would explain, that would be there. The government grants are not shown separately, that's part of the cost structure. I'll request Oroitz to answer on how much government support we got in April to June and how much in this quarter, if at all, July to September, in Europe.

The second quarter, as we had a big drop on sales, the government grant was around EUR 4 million in all our verticals in Europe, okay? So the impact -- or the support from the governments was important. In the third quarter, as the market came back, and let's say, the volumes came back, so we did not need so big support from the government, so one side. Also, it's -- second -- the third quarter in Europe is the holiday season, where we have the August holidays, 2, 3 weeks holidays. So the real impact of the government grant in the Q3 was less than EUR 1 million, okay? So it's not relevant.

Okay. And going ahead, do we expect this pandemic support to continue or it's over now?

We will use it in the next quarter, but not -- it will be also a small amount, okay? Not relevant. Something in Germany, and we will use also something in Italy in Metalcastello due to the low sales. But it will not be a big amount.

The next question is from the line of Shashank Kanodia from ICICIdirect.

Sir, just a couple of things from my end. Like you mentioned that the import substitution is a smaller opportunity in India...

Sorry, Mr. Shashank, we're not able to hear you clearly.

Hello, is it better now?

Are you on a speaker phone right now?

No, I'm not using a speaker. I'm calling from my phone.

Okay. No problem. You can go ahead.

Yes, sir. A couple of things from my end. So like you mentioned, the import substitution is smaller opportunity in India. Even on the European front, since [ 92% ] of our business is forging, so even there, import substitution or China forging strategy is a small opportunity?

Again, if I -- Shashank, if I've got your question right, you're asking how much scope for import substitution exists in Europe in the Forgings business, right? Is that the question that you are asking?

Yes.

So again, on the car forging side, which is like crankshaft and CV joint business, I think it is -- the competition is mostly within Europe. So it is like of the crankshaft business, the biggest competitor and the larger player than us is [indiscernible]. As far as the truck forgings business is concerned, the competition is less from China and more from countries like India, like in, Bharat Forge is a very big supplier to the German truck forgings market. From Turkey -- again, Turkey is emerging as a big competitor for the German truck forgings business and less contract. So the aspect of import substitution is not very relevant in the European contract.

Right. Great, sir. And sir, secondly, given that U.K. may go for a hard Brexit. And given your -- the location of your OEM as well as our plant, can you please help us understand, will hard Brexit have any impact to us in terms of working capital or incremental warehouses or in an inventory management system and stuff?

No, Shashank, is the question is, do we require to make investment in working capital for exports business? Is that the question you are asking?

No, sir. I'm basically asking for like U.K. is coming out of Europe -- European Union, right? So a few of the clients like JLR, [indiscernible] you might be supplying from outside of U.K. I really don't know where the locations are. So does it impact us in any way in terms of allocation of plants and your OEM location where they are situated?

No. We are not affected by Brexit at all. Like we had -- we have shut down our U.K. business long ago. In fact, the Brexit is not having any impact on us. Whether we can start supplying to JLR, I'll request Ander to throw some light on whether if that is a possibility of supplying to JLR in the U.K.

Okay. We don't see any impact, a negative impact on that, okay? We could have certain logistic difficulties in -- at the beginning, especially, but let's say that all our U.K. customers, I'm talking about Mahindra CIE, but also in CIE, they are working normally, and they are building a little bit higher stock, just to be sure that the logistics -- if there is any logistic blockage at the beginning of the Brexit. But we don't see a risk there. And let's say, all the logistic teams from our customers like JLR, they are working hard on that, and they are preparing all the paperwork, and they are preparing all the logistics routes to solve the situation. So we can expect certain difficulties because the change will probably create some troubles, but we are managing the situation.

Right. Great. Sir, just one last thing. In the prior con calls, you also mentioned about, I think of vendor consolidation, right? So if there is some opportunity in terms of any weak players getting out of the business and their share of business being acquired by us in the near term?

Shashank, I couldn't hear the last part of your question, but I -- let me paraphrase it and tell me whether I'm right. Essentially, you are saying, do we foresee any opportunities for industry consolidation and whether we can acquire companies during the period. Is this exact like...

Yes.

There are opportunities. But as I said, our key focus right now remains on getting our business back on track. And our first priority even if an OEM asks us to buy a company, we would request them to see if they can shift the orders rather than asking us to buy the company. So that would be our first priority. But yes, we keep looking at opportunities. And if something good emerges and something that which seems with our strategic priorities and the return on investment going forward, we will certainly look at.

[Operator Instructions] The next question is from the line of Kishore B, retail investor.

Am I audible?

Yes.

Yes.

Yes. My question is on the COVID impact, like since we could see the second...

Sorry to interrupt. Kishore, we are not able to hear you. Your voice is breaking.

Can you hear me now?

Yes. Please go ahead.

Yes. My question is related to the COVID situation. Since we could see the Europe is having second wave of cases, so are we prepared -- how are we prepared if there is any second wave across the world, including India?

Kishore, to answer your question, in India, we -- forget the second wave, we are going through the first wave, and it has affected us quite a lot, as I said in my opening remarks. I think we have had more than 250 cases in India. Many of our plants are in Pune. So we have gone through this difficulty. We have very set processes in place. In fact, most of the people, I would say 80% of the people who have been affected have actually come back to work. So all those protocols are in place. In fact, we have got some of those protocols audited by a third-party during May or sometime during May of that year. So we -- so in India, it is very much well set. Coming to Europe, yes, there is a second surge, but as I said, our plants, which are largely in -- away from the city are not so much affected at this point of time. But protocols are already in place in Europe, and they are strictly being followed. I guess, both Ander and Oroitz, they are in office today, and they are following similar protocols with masks on, sitting very wide from each other. So those things are being followed. But I'll request Ander to throw some light on how prepared are we in Europe for any second surge or whatever.

Yes, please.

Hello? [Technical Difficulty]

The next question is from the line of Jay Daniel from Entropy Advisors.

Yes. Sir, you had mentioned that the breakeven point at -- in Europe is INR 5.5 billion. What is a similar breakeven level in India for the current product mix that you have? Because I think you had mentioned that you -- the overall target was to bring down breakeven levels by 10 percentage points. So I just wanted to know where we stand on India?

JP, on India breakeven? Hello?

Yes. Yes. INR 3.5 billion. Yes, I think Oroitz has answered that.

How much is it, JP?

INR 3.5 billion.

Yes, INR 3.5 billion. And in fact, the 10% reduction was already achieved in the last quarter. Some of it because of excess manpower, cost et cetera in India, would have gone away because of the sudden surge in demand, but a large part of that will be retained. And this is what you are seeing. We have increased our EBITDA margin in India in spite of a decrease in revenue compared to Q3 of last year. So that is a reflection of that.

Okay. Okay. And will you be -- I mean, do you have any other target set in for bringing down the breakeven levels further?

Right now, I think yes, we will keep -- as I said, going forward, given that we see uncertainties in the market, we'll keep monitoring the breakeven levels if required. But right now, the priority is on the top line in India.

Thank you. I would now like to hand over the conference to the management for any closing remarks.

Hello? Ander, last words?

Okay. So -- okay, just as a summary, I would say that this quarter has -- let's show that our company is coming back to normality. We are, again, in the pre-COVID levels, very close to the -- our expected margin levels, so -- and we expect to continue improving in the next quarter. So overall, we are quite happy with how we performed and how we managed this huge crisis in the market. And now I think we can think again in the growth and in the margin improvement for the future. So just to say thank you to all of you for your questions and for the collaboration and participation in this call. And I hope to see you or to hear you again in the next call in December. Thank you very much.

Thank you. On behalf of ICICI Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.