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

Thanks, Mallika. Good day, everyone. Thanks for joining us today for the Mahindra CIE Automotive Earnings Call. The management is represented by Mr. Ander Arenaza Álvarez, the CEO; Mr. K. Jayaprakash, the CFO; Mr. Vikas Sinha; our Senior Vice President, Strategy; and Mr. Oroitz Lafuente, Business Controller. Now I hand over the call to the management for the opening remarks, and then we will have the Q&A. Over to you, sir.

Mr. Ander, sir, you are in the main call, sir.

Hello. Yes?

Ander, we are starting now.

Yes, yes, you want to go ahead?

I will present MCIE results for the Q4 C '20 and full year C '20. The year gone by has been extraordinary. It started as a continuation of the tough year that we had faced in 2019, but then the COVID-19 prices took everything out of gear. Q2 C '20 was the worst quarter that the industry has seen. The demand just collapsed due to the lockdown. At MCIE, crisis management groups, to handle the pandemic were constituted at each plant to review the situation and react as warranted. All our plants have been functioning normally since May of last year, with a focus on renewing and continuing operations in a safe and sustainable manner. We have striven to provide a safe working environment for our workforce. We at MCIE quickly initiated programs for cost reduction, cash protection and reduction in breakeven point, the results of which can be seen in our Q4 C '20 and CY '20 financial. Q3 C '20 onwards, the automobile demand in all segments revised faster than expected, and thankfully, Q4 C '20 has continued the similar trend. The MCIE team showed great resilience and ensured that the company was quickly on its way to normalcy and well-placed to exploit opportunities as market conditions became more favorable. We start with Page 5 of our presentation, where we have mentioned some key highlights for the year. Our parent company, CIE Automotive reinforced the stake in MCIE by increasing the share count from at 56.28% to 60.18% via open market transaction. We would also like to mention that in the last 2 years, we have added many customers, more than 25 big and small to MCIE's portfolio. Page 7 shows the updated legal structure. Pages 8 and 9 depict the sales splits by technology as well as geography. The end-use segments where MCIE operates and as the customers are also shown there for your benefit. The Q4 C '20 results for MCIE India are on Page 11. Sales and EBITDA improved both on year-on-year as well as a sequential basis. Q4 C '20 revenue grew by 17% over Q4 C '19, while EBITDA and EBT grew by 43% and 78%, respectively, over the same period last year. We would like to especially mention that we have achieved an EBITDA of 15.3% and EBIT of 10.6% and EBT of 10.6% in Q4 C '20. The margin improvements are largely due to the cost reduction, cash protection and reduction in breakeven point programs initiated at the height of the pandemic. On Page 12, we have the results for MCIE Europe in Q4 C '20. Sales in euro terms dropped by 3% compared to Q3 C '19. The EBITDA margin was at 12%, EBIT at 7% and EBT at 6.6%. Q4 C '20 margins have improved sequentially. That is as compared to Q3 C '20 and this despite a drop in sales. The margin is also affected due to the ongoing restructuring action, which impacted approximately 1% EBITDA margin in the quarter. On Page 13, we see the consolidated MCIE Q4 C '20 results, which is a combination of the results in India and Europe. After the huge drop of Q2 due to the virus impact, our company has recovered normal turnover and margin levels, and the EBITDA recovery plan is showing results. The EBITDA margin has improved to 13.7% as compared to 12.7% in Q4 C '19, and the EBIT margin is at 8.9% compared to 7.9% in similar quarter last year, and EBT margin of 8.6% as compared to 7.3% in Q4 C '19. A point to be noted about the Q4 C '20 results. In Q4 C '20, the share of India and the consolidated sales was 52%. The first time it has crossed 50%. The share of consolidated Q4 Q C '20 EBT contributed by MCIE India was higher at 54%, reflecting the margin improvements in India. This trend is expected to continue, with the Indian business slated to grow much faster than Europe. The full year C '20 results for MCIE India around Page 15. Sales dropped by 18% compared to C '19, EBITDA margin of 11.7%, EBIT of 5.7% and EBT of 4.8%, reflect the strong business recovery in Q3 and Q4 quarters and the internal efficiencies improvements. On Page 16, we have the full year results of the C '20 for MCIE Europe. There has been a 28% fall in sales vis-à-vis full year C '19. EBITDA margin has -- was at 7.6% and EBT at 3%, and EBT at 2%. As mentioned in earlier call actions taken to adapt to the new market reality resulted in restructuring costs and over by CY 2020. On Page 17, we have the C '20 consolidated results of MCIE, which are a combination of a disappointing first quarter, a loss second quarter and resurgent third and fourth quarters. In C '20, there was a 23% drop in sales, despite a tough year, we reacted with alacrity and strongly to the changing market conditions and put measures. Measures that have put us in a stronger position to continue growing and improving. The EBITDA margin for the year is 9.6%; EBIT, 4.3%; and EBT at 3.4%. On Page 20, you will see our abridged consolidated balance sheet. The return ratios for the full year CY '20 reflects the more than 20% drop in sales, but the effect of the measures that we have taken is shown by the prorated return ratio of Q4 C '20. If we just consider Q4 C '20, we achieved a RONA of about 10% and ROE of 9.1%. Our overall net debt has increased by about INR 1.2 billion to INR 12.75 billion, but this includes an increase of INR 2,608 million due to changes in Ind AS 16 accounting standards and INR 1,512 million increased due to exchange rate impact. The cash flows are shown on Page 21. Our cash generation has been strong that we generated an operating cash flow of 51% of the EBITDA. There was a CapEx of INR 2,761 million in C '20 on a consolidated basis, which was slightly higher than what we had talked about previously, but it was largely because of the more than expected resurging demand in India. On Page 24, we have laid out NPI strategy. We have laid out the differentiating principle business strategy, opportunities and risks. We believe that exports from India is a huge opportunity and that digitalization of operations can push up our plant efficiency. We are also keeping a keen eye on EV penetration across markets and reacting economy. On Page 26, we have chartered MCIE's stock performance as compared to relevant indices and market cap. The next few pages talk about the market statistics and forecasts from relevant sources, followed by the results submitted to SEBI in the prescribed format. In conclusion, let us assure you that we continue to focus on growth, customer satisfaction and leaner operation, with more productive routines to deliver better operating results. This is consistent with our aim of generating better returns on both equity and capital employed in the coming years. So with that, I thank you for your time. And now we proceed to the Q&A. Back to you, Michel.

[Operator Instructions] The first question is from the line of Bharat Sheth from Quest Investment Advisors.

Congratulations Ander and Vikas and team for a good set of numbers. Hello?

Yes, Bharat, go ahead.

So just taking -- I mean the first part on the India part, you said that almost we have touched, I mean INR 1,000 crores quarterly run rate in this quarter, and we expect to grow an EBITDA is at 15% plus. So how do we really look at CY '21? And what would be the concern in growing at this pace?

Yes. From my side, we expect to have a positive and strong calendar year 2021, okay. We -- what we know from the market is that we expect Indian market growing 23%, 24% this year compared to the 2020. That was clearly affected by the COVID. So we expect to see the market at the same level or even above 2019 market levels, okay. So in that sense, what we expect is our business to continue performing well. At least in the last months, we saw a fantastic performance of the automotive market in India. The Q4 was really, really strong thanks to the, let's say, good performance after the festive season. And this momentum is still there, okay? So until now, what we can see is we are quite optimistic for the Indian market evolution in 2021. And we expect to continue improving our company results and margins.

So taking -- I mean forward, I mean -- I mean, let's say, approximately INR 4,000 crores kind of run rate, so in this quarter, we have hit, I mean, 15% plus EBITDA margin. So do you think this margin has peaked out or still there is a room to improve the margin from here? Or how do we see the impact of the raw material prices increasing? So overall, if you can give some color on the margins front?

Yes. So yes, you properly mentioned that the raw materials are growing, the prices are going up. And that can happen in slight affect in our margins in the short term, then all the raw material prices are indexed with our customers, so we pass-through the price increases to the customers. So in the long term, we don't see a big negative effect, okay, apart from that mathematical effect that the raw material is a little bit higher, and so our turnover will be a little bit higher. But we think that this first target of 15% margin that we have for India, we already hit it. Now we expect to consolidate those margins. And in the future, we have our internal target to reach the CIE margins that, as you know, we are approximately at 17%, 18% in global CIE margins. So we expect to hit those in the future, okay. Probably, it will take time, but we expect to continue improving our internal efficiencies and to continue also with the volume effect that we expect to have and with the consolidation that we are expecting to have in certain businesses, I think we will be able to continue improving our margins in the future.

And coming to -- and Ander, on the Europe business, if you will compare, I mean, euro terms, in CY '18, we did, I mean, EUR 561 million kind of run rate annual, whereas as per -- I mean, the C '20 is roughly around EUR 350 million to EUR 360 million, so which is almost, say, 40% decline. So how do we see now Europe business and margin? Vikas said that in Q4, there was a 1% impact because of restructuring. So how do we see the margins?

Okay. In Europe, the situation is a little bit different than in India. As you know, we have 1 business with, let's say, lower performance than the other. Our German forgings were -- the margins are lower, so we accomplish kind of downsizing of the business to consolidate the more profitable component. And the result of this reduction is that the size of the business in Europe is a little bit smaller than previously. This kind of -- sign of this transaction is that our Indian business is now bigger than European one. I mean in the past, we were 60% in Europe and 40% in India. Right now, we are 52% in India and 48% in Europe, okay? So what we see is that the -- this German business will consolidate or at least we -- after the downsizing, we consolidated this business and both CIE automotive forges in Europe, and Metalcastello businesses are growing back again, okay? And the margins on these businesses are nice, are solid and are improving. So overall, we see kind of flat European business and a growing Indian business. That's the average of our evolution.

And Ander, I mean when do we expect, I mean, to reach the run rate of CY '18 when our revenue was around EUR 560 million in Europe business. And last thing, on the semiconductor, if you can, any impact of this shortage of global semiconductor on our business?

We don't see the amount -- let's say, the size of the business that we had in 2018 in the near-term in Europe, okay? We see the market is far lower than that. Those volumes that we had in Europe in 2018, especially the commercial vehicle cycle, it's still far to reach those figures. So probably in the next 2, 3 years, we will not see those figures. And coming back to the semiconductor issue, it's true that there is a big noise in the market due to the lack of semiconductors in the automotive industry. We saw certain impact, but very, very limited, okay? I think perhaps we saw 2%, 3%, 4% of impact due to this semiconductor issue. And as far as all our customers are saying as they consider that this is a temporary impact and they will recuperate all these volumes for the -- during the second half of the year, okay. So till now, we saw a very, very limited impact in Europe. We had certain impact in India in the last quarter, in 2020, but as you see -- as you saw, the impact is not relevant. And till now, at least, we are not worried because of the impact of this semiconductor issue because we think that this is a temporary subject that will be solved in the next months.

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

First, clarification on this restructuring cost, which indicated the 1 percentage point impact is in fourth quarter and in Europe, right?

Yes. That's right.

And this would be pertaining to -- restructuring costs will be pertaining to reduction in headcount or something else?

Yes, mainly the reduction in headcount, yes. There are -- we are applying social plans, we are providing for headcount reductions, thinking that the volumes in the future will be low in -- especially in our German forging plants. So those are the restructuring costs that we accomplished. Also, we had certain restructuring costs in our Italian plant in Metalcastello. But all this -- the plan is already finished, and we are already with definitive amount of headcount in those plants.

Got it. Got it. And second business -- second question pertains to the European business. What are the trends which we are seeing in German side so far and how the production schedules looking for next couple of months, especially considering the second wave in Europe?

Okay. It's true that the automotive market is -- especially due to the impact of the pandemic, the third wave of the COVID-19 pandemic is the sales on the market are approximately 25%, 23% below January 2020, but the production from our customers that the demand is still quite strong, okay? So we don't see this drop on the sales. And in the next months, what we see also in our forecasts from the customers is that the market continues quite strong and quite stable. So we think that there is an inventory correction probably going on in the market, and we think that the beginning of the year will be also in line with the last quarter and perhaps even a little bit stronger than Q4 2020.

Okay. Okay. So effectively, the forecast of IHS Global of about 15% growth in light vehicle sales, you fairly are comfortable with that kind of growth for CY '21?

Yes, yes. What we -- as you know, 2020 was a very complicated year, so taking 2020 as a reference is -- it's a complicated thing. So we prefer to compare against 2019. That was a standard year. And in Europe, what we will see is -- we will see a 10% drop compared to 2019, something like that, I mean, between 10% to 5% less than 2019. And in India, what we expect is to have the same or perhaps a little bit bigger figures than 2019.

Okay. Okay. Third question pertains to primarily your commentary on adding 25 customers between 2019 and '20. So question here is, by when do you see the full ramp-up with these customers? And what would be the contribution of these customers currently? And how do you see that going up in the next 2 to 3 years?

Jinesh, on -- as far as time taken, it takes about 18 to 24 months to start having an impact on the P&L, so that is what it will take. In terms of how much I will -- like we have talked about generic terms [ as yet ], but new sales in a year, we expect that to be now 25% of year's sales would come from new customers and products added, so -- which earlier used to be 15% in terms of internal targets. So that is the kind of difference that we are trying to target. Otherwise, let me not speculate on this size of this.

Yes, sorry. One more last question on the ROE side. On the console side, for the fourth quarter, we indicated about 9.1% ROEs. What is the target for ROEs over the next 3 years or so? And what would be the roadmap for retaining the same?

So in terms of ROE and RONA. RONA, which is more of an internal target for us. RONA, we are looking at reaching an RONA of 15% and reach it as quickly as possible. In terms of roadmap, I think Ander answered that. The focus is on growing the India business. We expect the India business to grow quite well, not just that the market is going well, as we said, we have added customers, so we expect it to grow beyond the market. So the share of India business, which in Q4 crossed 50% for the first time, that will keep on increasing. The margins in India, also Ander indicated, we do expect it over a period of time to expand towards the CIE margin. So this whole growth in India as well as the margin expansion in India will -- is the main driver behind this increase in RONA. Of course, we are also looking at CapEx intensity in India on how we can make do with less CapEx in terms of all the production efficiency programs that we are organizing. So in terms of road map, a large part of this expansion of RONA will be because of what is happening in the Indian business. As far as Europe is concerned Ander answered that we are trying to stabilize this business, maybe there will be very little growth on the European side that we'll try and consolidate the margin. So that would be the strategy, but the expansion in RONA will come mostly from the Indian business side.

[Operator Instructions] The next question is from the line of Sunil Kothari from Unique PMS.

Congratulations for good set of numbers. So general, my question is broad on understanding of looking at Indian government giving the support through PLI for manufacturing sector. We being a global player and very proud that Indian units also can manufacture -- offer global quality so any thought process in medium-term may not be in the near-term, but medium-term to increase manufacturing base in India and reduce our -- this German, maybe, forging business or some very low return giving units from the Europe? Is there any possibility? Any thought process like whenever since last 3, 4 years, we were increasing our exposure to India by acquisition also, like Aurangabad, this aluminum you previously, Bill Forge. So larger thought process on shifting production base from Europe to India, your thought process?

Thanks, Sunil. So I'll answer first your question around PLI. Of course, we are also encouraged by PLI even though the exact details of the scheme are not available. What we are assuming is whenever there's an export push companies like us, and we are very much -- we believe that we are very much on our journey to -- to being world-class, so therefore, we should be in a position to exploit that, but the details are not available as the PLI scheme is concerned. Now on your second question about shifting production from Europe to India, as we have indicated in the past, yes, we are considering that possibility. We are spreading Metalcastello to India, it already has happened. There are other programs with other CIE companies also that we have been exploring both forgings and gears. And we have also been exploring shift from our German forging business to India, depending on wherever it is feasible, and the customer is okay with it. So it's not that we are not -- when we talk about an export push, it does include some of these activities that we have talked about in the past.

So would you like to say numbers, Vikas, during last 3 years, how much we have shifted or how much was exports to Indian manufacturing unit? And now over the quantum, what type of progress or targets we are carrying for next 3 years? Any solid numbers, if you can assess?

No. Let us -- and I think, again, we have talked about it in the past. In response to Jinesh's question around how are we looking at new customers, where we have mentioned that our target is to have new sales to revenue every year of 25%. Similarly, we are looking at increasing the export business. Export business from India currently is roughly around 11% or 12% if you look at the entire Indian business. And we are seeking to increase that over the medium-term to 20%. So that is the kind of -- just like on the orders book we have -- we are on the target on exports, we have this kind of targets that on a growing base of Indian business and as Ander has indicated, the Indian business will grow, grow much faster than the market as well as Europe. On that business, we hope to increase our exports from the existing 11% to 12% to about 20% through a variety of measures, including a shift from some of Europe, or tie ups with some of the CIE companies in Europe, explore new customers in Europe, like, for example, Bill Forge and AEL. They are very strong European portfolio, which has developed as new customers there. So that is the -- when you say what is the target, this is the target, to actually increase from roughly 11%, 12% to 20% over a growing base in the next few years. When I say next few years, we are talking about 3, 4 years.

Sure. Great, great. Vikas, one more thing is we were very confident about aluminum segment entering, and we entered the Aurangabad. And it seems that aluminum casting business will be giving you very good growth potential. So any your thought process or any further clarity on the possibilities and future prospects of this segment?

Of the aluminum segment? At this stage...

Yes.

If you go back to the presentation that we have calculated at the time of the acquisition that is somewhere around March 2019 or like around Q1 of 2019, we had -- if you look at some of the things that we had talked about there in terms of exports, growing the size of the business growing. I think AEL is on track on delivering that. In fact, it is maybe the goals have shifted just by a year or so because of that. But otherwise, the same numbers, the same roadmap that we talked about in the, I think, January or February 2019 presentation, exactly, it has happened in a similar manner. So they have been doing very well, and we have talked about how they had increased the portfolio by looking at GDC exports in Europe. They have developed export customers in Europe. They were going very strong with the core customer in India. Of course, that cannot be neglected. One of the best OEMs that we serve, Bajaj. So it's an honor to be serving Bajaj. So they have done exactly as per that plan. So there has been no deviation from that plan, except maybe you can talk about 6 months here and there because of the COVID crisis. So they have been a good addition to us in that sense.

So, any major CapEx towards those segment? You feel that this can be a very major growing segment?

Which one?

Aluminum?

Yes, aluminum will be a strong growth segment. Therefore, I referred you to those numbers. So if you remember, I think we had talked about a significant growth plan as far as AEL was concerned in that presentation, and I think it is as per that, if I'm not wrong, from -- on an annualized basis, they were at INR 800 crores, and they were talking about a significant expansion by roughly 40% to 50% in -- on a 5-year basis. I think that's continues.

The next question is from the line of Nemish Shah from Emkay Investment.

Congratulations on good set of numbers. So in the recent union budget, there was an amendment with respect to depreciation on goodwill shall not be claimed and reduction going forward. So just wanted to understand what will be impact will it have on our tax outgo? And what will be our effective tax rate going forward?

JP, do you want to take it, this is Vikas.

Vikas, I'll take that?

Yes, of course, you are the only one who understands this anyways.

Okay. So you are right, there is a proposal to deny the depreciation on goodwill. So this will not have any impact on the P&L because we've been creating deferred tax liability for the reduction in current tax. So on the P&L, you will not see any difference. It will definitely have an impact on cash flow. We were saving a good amount not paying any current tax, but we will have to, going forward, pay current tax. But as far as the tax percentage is concerned, we shouldn't see any difference, and we should maintain around 25%, 26% of average at [ current ] level.

The next question is from the line of Nikhil Kale from Axis Capital.

So my first question was on the new customer additions that you've talked about in the India business. So while you highlighted the revenues that you're targeting from our sales to these new customers and new products, would you please provide some more color on what technologies or end user segments are these customers are largely in? Also, when you talk about new products, what kind of growth in content per vehicle are we looking at going forward over the next 2, 3 years, if you could provide some color on that?

Thanks, Nikhil. The first question in which segments we have added, we have added all segments, whether it is forgings, foundry, magnetics, composites, maybe not so much in stamping. Other than that, in every segment of India we have added, every segment of that. And that's the reason why we are confident about the fact that India can grow much faster than what it has grown in the past. As far as your second question is concerned around content per vehicle, of course, we have not calculated in that fashion. For example, in forgings, even though we are going beyond crankshafts and metals, we are introducing new products, say, for example, warm forging in Chakan that we are introducing. So I may not be able to answer on content per vehicle, but we are adding different kind of products in gears, for example, the gears are much more complicated than what they were. In magnetic products, we are adding all kinds of newer grades, like higher grades. If you see in magnetic, it is -- the grades matters, so we are moving up in terms of more complicated grades. In foundry, for example, we are adding only machined order. So going forward, our endeavor, of course, is to have more than 50% of new orders in foundry coming, which is both machines and cars, and not just cars, and we are creating a lot of capacity around machining and so on. So that is the kind of ways that we are going. Of course, on AEL, we have already explained in a previous question that AEL is focusing on GTC exports customers in Europe as well as on the core customer in India, which is doing very, very well. And therefore, we are expanding with them. Bill Forge we had already talked about earlier in terms of the kind of plans we had with exports and customers in India. In fact, Bill Forge and AEL, the good thing is, if you go back to our presentations that we had made at the time of the acquisition, most of the plans in terms of new orders that we talked about there has happened. And that is something that we would like to emphasize so whatever we had envisaged at that time has actually happened. So there is a strong order book there. So to answer your question, content per vehicle, frankly, we have not made that kind of calculation. But everywhere we are trying to move into what you would say better margin orders, whether it is machined castings or higher grade magnets and more complex gears or even in forging different kinds of product categories, so that's how we are doing things. Content per vehicle, I may not be able to answer you that question, but we can confidently say that we are moving towards more complex orders.

Okay. And secondly, on the Europe side, I just wanted to check, are we done with all the restructuring activities that we're looking at? Or is there still some -- are there some sort of activities we'll have to do, which can maybe made to some restructuring costs next year and this year as well in CY '21?

Okay. Regarding restructuring activity in Europe, we provided during Q4 and during our 2020 last quarters, we provided all the costs that we expect in the next 2 or 3 quarters, okay? So until now, we don't have any additional restructuring costs on mind, so we consider that at least in the next month, we will not have any additional restructuring cost.

Okay. So would it be fair to assume that considering that we've already hit a very good margin level even of Q4, if I look at the margins, very good margins as per se? So going forward, assuming that once the corona -- kind of next wave kind of dies down and the industry recovers over the next 2 to 3 years, assuming that we are not really ramping up the -- our [ FE ] business a lot, the margin should remain stable or maybe slightly improve going forward. The mix improves and even assuming that the top line grows at a stable low or mid single-digit rate.

Yes, what we expect is that the -- unfortunately, in Europe, the market will not boom in the next years. I mean the expectation is we will recuperate partially the drop of 2020. And in the next years, we will see a slight recuperation, a slight recovery in Europe, but it will take 2, 3 years to get back to the 2018, 2019 volumes, okay? So -- and this is regarding the volume. And also, you need to take it at that we have the -- our German forging downsizing activity, so the volumes will remain approximately flat. And coming back to the margins, what we expect this to keep or either to improve our margin. Despite this, the flat volumes, we expect to continue improving our margins thanks to our efficiency improvement activities and also to the different restructuring activities that we already did.

And lastly just what -- what is the kind of CapEx that we're looking at for this year?

JP, the CapEx for CY '21, any indication about same as 5% to 6% of sales or like?