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

Ladies and gentlemen, good day, and welcome to Mahindra CIE Q4 CY 2021 Earnings Conference Call hosted by ICICI Securities Limited. [Operator Instructions] Please note, that this conference is being recorded. I now hand the conference over to Mr. Basudeb Banerjee from ICICI Securities. Thank you, and over to you, Mr. Banerjee.

Thanks, Nirav. Good afternoon all. Thanks to management of Mahindra CIE for giving us the opportunity to host the call. We have with us Mr. Ander, ED and CEO of Mahindra CIE; Mr. Oroitz, the Chief Business Controller of Mahindra CIE; Mr. K. Jayaprakash, Chief Financial Officer; along with the strategy IR team led by Mr. Vikas Sinha and Swapnil Soudagar. So over to you, Vikas, for the call.

Yes. Thanks, Basudeb, and thanks to all for joining. Good afternoon and good morning to those who are joining in from other geographies. I welcome all of you on this call as well as Ander Arenaza, our CEO. I will present MCIE results for the Q4 C '21, the quarter 4 for calendar year '21. We follow a calendar year and full year C '21 results. We experienced a great deal of business volatility in 2021. The first quarter was an excellent one, continuing the upturn from the latter half of 2020. India then experienced a devastating second wave of the coronavirus pandemic in April and May, making Q2 C '21 a difficult quarter. The bad blood continued onto Q3 '21 as a semiconductor shortage plaguing the automotive industry fleet, both in India and Europe. The fourth quarter continued to be affected by semiconductor chip shortage and was strong into further chaos with the recurrence of the pandemic, especially in Europe. The year also saw a steep jump in input costs as steel, mineral, energy and shipping prices all experienced very large increases. We start with Page 5 of our presentation, where we have shown the updated legal structure. During this year, CIE has increased its stake in MCIE to 60.76 percentage, marginally up from 60.18% earlier. The quarter 4 C '21 results for MCIE India, the India segment are on Page 7. This quarter was affected by the sharp slowdown in the Tractor and Two Wheeler segment in India, which shrank significantly both on year-on-year and sequential basis. This slowdown was largely attributable to loss of rural income at the delta wave. The second coronavirus pandemic wave hit the interiors hard, and there was consequently a slowdown in government spending on rural projects as the government machinery focused on vaccinations. The Tractors segment is also a victim of high base effect, having enjoyed a boom in the pandemic period that greatly helped when other segments were not doing well. We expect Tractors and Two Wheelers to be sluggish in the next 2 quarters. With the chip crisis easing, the Light Vehicle segment saw a marked improvement, and this trend should continue. The Truck segment continues to recover gradually from a low base. Sales though improved both on year-on-year as well as sequential basis, but that was largely due to raw material inflation. In constant price terms, sales in India in Q4 C '21 was lower by 5% compared to Q4 C '20, and this represents a much better performance than the underlying market segments. Input cost inflation reduced margins by roughly 2% versus Q4 C '20. Onetime costs due to VRS at Stampings division, which we have announced, VRS scheme at Stampings division, further reduced margin by 1.2 percentage points in this quarter. But please bear in mind that this VRS will have the impact of lowering costs in the Stampings division going forward. So due to these factors, RM inflation and VRS, EBITDA margin of 12% in Q4 C '21 is lower both year-on-year versus Q4 C '20 as well as sequentially versus Q3 C '21. But if we take these 2 factors into account, we are actually holding on to the efficiency levels reached in the previous quarters even at slightly lower sales computed at constant RM prices. The sales are actually lower. But if you add back these 2 factors, then we are roughly in the same range from what we were doing earlier. So we turn to Page 8, where we have the results for MCIE in Europe for Q4 C '21. Europe, unfortunately, this quarter was very badly affected by drop in demand due to chip shortage as well as very steep increases in input costs, steel logistics and power. The extent of increase was extremely high. Sales dropped by 3% compared to Q4 C '20, but it translated into a 19% drop at constant RM prices. So that's the kind of drop in sales. The twin effects of a sharp drop in demand and steep increase in costs is seen on the EBITDA margins, which, at 9.1%, were lower on a year-on-year basis, sequential basis and even compared to the pre-pandemic Q4 C '19. In fact, we are negotiating hard to share some of the non-RM cost increases with our customers, like shipping, power, et cetera, while implementing efficiency measures in panel. So that's the mitigating strategy that we have. On Page 9, we see the consolidated MCIE Q4 C '21 results, which is a combination of the results in India and Europe. We have seen this as an unprecedented quarter, which was affected by both drop in demand and rise in input costs. Consolidated sales were INR 19.4 billion minus -- INR 19.4 billion, 4% higher than Q4 C '20; EBITDA was INR 2.08 billion, 18% lower year-on-year; EBIT INR 1.253 billion, 25% lower year-on-year; and EBT INR 1.13 billion, 30% lower year-on-year. So that's because of the Q4 -- the drop in demand and increase in input costs that we talked about. Now let's turn to full year. The full year C '21 results for MCIE India. Again, we are first talking India around sales level. Sales increased by 46% versus C '20. Even factoring RM inflation, this was higher growth in the underlying market. The EBITDA margin of 14.1%, EBIT margin of 9.7% and EBT margin of 9.1%, all are much higher than C '20. This reflects strong sales and margin recovery after the COVID impact of 2020. We would like to reiterate that these numbers include the onetime VRS at one of our divisions in Q4 C '20. The PAT percentage is further affected by a onetime deferred tax liability on Bill Forge in our previous quarter. On Page 12, we have the full year results of C '21 for MCIE Europe. There has been a 28% growth in sales vis-à-vis full year C '20. EBITDA margin in C '21 was 12.6%; EBIT, 8.4%; and EBT, 7.6%, all much higher than C '20. In fact, these margins are very close to the pre-pandemic margins achieved in C '19, even though the sales are much lower. C '21 sales in Europe were less by about INR 3 billion compared to C '19 without even taking into account the impact of high-end inflation. So even with such a sharp drop in revenues or sharp drop on the top line, I think we are holding on to the pre-pandemic margins in Europe. Despite volatile sales, C '21 shows a relevant improvement in operations, and that is largely due to the restructuring actions that were taken in C '20, and that had been discussed in my earlier result -- earlier calls. On Page 13, we have the C '21 consolidated results of MCIE, which are a combination of a good first quarter, a subdued second quarter, a resurgent third quarter and a very challenging fourth quarter. 2020 was severely affected by global lockdowns, and it would be more appropriate to compare the performance in 2019. In C '21, there was a 37% growth in sales over C '20 and 5% over C '19. C '21 sales of INR 79.5 billion is our best ever annual sales performance, though, as you know, it is partly RM inflation. Also, please note that this is the first time that India as a geography has achieved higher sales compared to Europe as a geography in terms of MCIE results. So for the first time, MCIE India sales are higher than MCIE Europe. Despite demand volatility due to the semiconductor crisis and rising cost pressure on RM Energy and Logistics, profitability is better compared to both C '20 and C '19. Compared to C '19, we have improved our EBITDA margin to 13.4% as against 13.2% in C '19. Every percentage was same at 9% and EBT percent was slightly higher at 8.4%, reasonably 8.3% in C '19. That percentage achieved was 4.9%, but this was negatively affected by a onetime deferred tax liability and Bill Forge goodwill that we have talked about earlier. In absolute terms, C '21 consolidated EBITDA is INR 10.6 billion; EBIT, INR 7.2 billion; and EBT, INR 6.65 billion. On Page 15, you will see our average consolidated balance sheet. The return ratios for C '21 reflect a return to pre-pandemic levels, our RONA of 11% and operational ROE at 10%. Our strategy to focus on creating leaner operations and productive routines is helping us deliver better operating results despite severe business conditions, and this is consistent with our aim of generating better returns on both equity and capital employed. And this is something that is a priority area for us, improving return ratios. Our overall net debt also decreased to end the year at INR 7.8 billion. The cash flows are shown on Page 16. Our cash generation has been strong, where we generated an operating cash flow of 67% of the EBITDA, which is even higher than what we target internally. The MCIE Board has recommended the payment of dividends. MCIE will pay a dividend of INR 2.5 per share, in line with the top limit of 25% of the net consolidated profit as stated in the dividend policy. This is our first dividend payout, and it gives us immense pleasure to announce it. This is something that we really look forward to. The actual payout is expected to happen in the month of May '22 after approval in the AGM scheduled in the last week of April. Slide 16 also shows that CapEx was INR 5.418 billion in C '21 on a consolidated basis, which was slightly higher than what we have mentioned previously in our calls. It was largely because of the stronger-than-expected order book in India, new plans for launch in India in the Forgings and aluminum verticals. The castings plant was upgraded and plans to increase capacity were put in place at the magnetics and gears vertical. So we have good order book situations in all these verticals. The key highlights on Slide 20 also mentioned these developments. Traditional powertrains that is petrol and diesel, we are talking about the EV situation. Now we'll first start with Europe. Traditional powertrains, petrol and diesel accounted for approximately 60% of the passenger car registrations in Europe in 2021 based on RCR data. RCR is the organization of European car manufacturers. And this traditional powertrain figure, petrol and diesel at 60% is down from roughly 75% share enjoyed in 2020. This proportion is expected to reduce further. Hybrid vehicles constituted roughly 20%. Plug-in hybrids and battery electric vehicles, 9% each of the European sales in 2021 -- car sales in 2021. The direction of change is heading in the direction of these nontraditional powertrains in Europe. In India, this change will not be as sharp as what is seen in Europe. It will be more gradual with the first segment to make the transition being 2- and 3- wheelers and buses. During the year, there was frenetic activity in the electric Two Wheelers segment as all of us are aware with many start-ups coming up and existing players also announcing grand future plans. On Slide 21, we have an update on EV adoption. It is noteworthy to mention that a significant chunk of orders that we have booked in C '21 were EV orders. We had announced earlier that Metalcastello, our Italian business, had received a large size order from a U.S.-based transmission supplier to EV OEMs. In Europe, we are capturing other projects in the EV space as well as conducting trials and successfully developing the aluminum forging capability. In India, the EV and hybrid order book has swelled to much higher levels than what we spoke in our last call. Now Q4 C '21 seeing many order wins. In India, we have gotten orders from leading 2-wheeler, 3-wheeler and 4-wheeler EV OEMs, both traditional as well as new entrants. So on that s;ide, we have focused a few of our products in the EV space we would like to highlight the diversity of parts shown. Slide 22 talks in brief about our overall strategy, which has remained unchanged from previous years. There is, however, a greater focus on digitization and automation to boost efficiencies. We also recognize that human resource management is becoming even more important in the post-pandemic world. We are rededicating ourselves to make sure that we deliver the employee value proposition that we have articulated. Slides 23, 24 and 25 updates on our revenue split segmental dependence and MCIE stock performance as compared to relevant indices and market cap. The next few pages talk about market statistics and forecasts from relevant sources, followed by the results submitted to SEBI in the prescribed format. So these are basically resources to help you get more acquainted with the company. To summarize, the last 2 years have shown that we operate in a world which is unpredictable. And thankfully, MCIE has responded very well to these challenges. Our effort is to ensure that all our clients continue the journey to be world class. We are confident that we can utilize future opportunities and face future challenges with agility in order to make the shareholders expectation of sustainable growth and profitability. Thank you very much. And with that, we can now proceed to Q&A.

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

I have a few questions. First, for the India business. Can you take some color on the order book, which we have won? What percentage of order is for fuel [ diagnostic ] products and for EV?

So order book, like we have mentioned in our slide that more than 20% this year, roughly, it would be -- actually, it is between 25% to 30% of the new orders generated in C '21 for EVs and hybrids over in India.

Okay. And any sense on the size of order book in terms of annual run rate of revenues?

Annual run rate because it will get operationalized at different stages, but overall, we have talked about the Metalcastello orders in our previous calls. And in India, I think the order book would be roughly in the range of about INR 6 billion in the EV and hybrid space. But this is the order book. How it pans out on a year-to-year basis, we have to see based on the startup -- how the SOP happens.

Right, right, right. So significantly in hybrid and new space, is that the annual potential of revenue from that in India?

[indiscernible]

Yes, yes, got it, got it. And secondly, in the [indiscernible], the new plant, which you have started for Bill Forging [indiscernible], are they focused on particular customers? Are there enough orders on hand for this one to ramp up capacities in CY '22? Or this will be more gradual ramp-up?

No, we have the relevant orders for these plants.

Okay. And that -- probably that EV orders, which you're referring to, are primary on the aluminum side, is that correct?

No, no, no, no. They are across the board. It is not just on aluminum there. As I said, of course, AEL being more 2-wheeler focused. So there is a lot of focus on EV and hybrid orders there. So also Bill Forge and in other areas, we have talked about -- if you see the photograph, you'll see it here. You will see a composite about [indiscernible] for 3-wheelers because we are very strong in the 3-wheeler EV space. you will see some stamping parts also. So it is all across.

The reason I'm asking is because considering Bill Forge and AEL [indiscernible] to the demand in [indiscernible] EV. Could this plant be a drag on India business profitability in the near term? Though in all scheme of things, it's relatively smaller. But can this be a drag from the near-term perspective?

Yes. 2-wheelers will be -- as you know, we have also talked about in our top 2-wheelers will be on the weaker side in the next coming quarters. But one, exports into 2-wheelers continued to be good, and AEL has a lot of deemed export orders that's also important. And our key OEM there is very export-oriented. Bajaj is almost 50% exports. So that is also helpful. And yes, these order books are there. There might be some drag. There's not -- it would be too early to say that any demand changes will have no effect. But as I said, we have -- these plants are backed up by the orders.

Got it, got it. Second question pertains to the European business. So we have talked about the aluminum forging viral run going on. So what kind of products are we looking at in the aluminum forging? Who are the targeted customers? Any flavor on what kind of capacity are we looking to put up and time line on commercializations for aluminum?

I'll ask Ander to do that. But I think in one of the previous calls we had talked about, these are -- Ander, we are talking about what kind of aluminum forging parts in Europe we are looking at?

Yes. Good afternoon, everybody. The kind of products that we are looking for in aluminum forging in Europe are more related to the suspension and to the chassis component in the cuts, okay? Instead of the production of the steel [ module ] product that we already have here in production, like [indiscernible] and this kind of product that we produce in our plants in Europe. In the future, we are looking for suspension parts, mainly knuckles, suspension arms and these kind of products for the chassis and suspension area of the car.

Okay, okay. And what kind of customers are we targeting this far? Any sense you can throw on that?

Okay. We are working very closely and developing with some different customers, the different projects. And I can say you that we have already had the first firm order for one of the customers. So we already had success on the, let's say, getting the new order from the customer. Although this first order, it's a small order, it's not a big chunk, but it's the first part that we will start producing in a couple of years, okay? So this process is going on, and we are already excited that we will get the bigger orders and further orders in the next future.

Okay. And what kind of capacity do you plan to put for aluminum forging?

Okay. We will -- we are planning to add additional pressures and also using some of our current machineries when we will have free capacity in the near future. So we will use also existing capacity. So we will combine new capacity plus the existing capacity.

Okay. Okay. Got it. And with respect to the European business, can you further indicate what kind of impact we saw of high energy prices in our forging business in the fourth quarter? And any sense on any further impact coming in first quarter of CY '22.

Okay. Yes, this quarter, especially since some payments are summer period. I mean, from August to September, the energy prices went up in Europe and also especially in Spain, in Italy, in France, we have this hike of the entity pages coming back from the gas price increase. You know that the electricity in Europe is generated in several ways, but the most important generation is the gas power. And so the gas price going up created this energy price increase. So we suffered that in the last quarter of the year. For the first quarter, we also have this impact. But in these terms that we are already working on and, let's say, all the suppliers -- automotive suppliers and producers in Europe are working and dealing with the customers to pass through this energy cost increases, okay? So with most of them, we are reaching an indexation agreements in order to pass through this specific and special cost increase that is out of our control.

Got it, got it. And with respect to the European order book, would you be able to indicate what kind of order book we have with respect to the annualized run rate of revenues on that side? And what EV part orders we have got there?

Okay. In Europe, we -- let's say, we usually set the internal target of having approximately 20% of our annual sales on new order book. So this is the target we have. This year, we also -- we already hit that figure. So let's say that our order book is really strong. And especially in 2021, we were very successful on the electric component getting new products. And approximately 70%, this is the figure that we have. Approximately 75% of our new orders were devoted for new energy vehicles, okay? So hybrid or electric vehicles. This 74%, as you can imagine, that is highly affected by the big orders that we got in Metalcastello for an American transmission company for electric vehicles. And -- but also in the forging side, we got [ civilians ] for the electric cars and this kind of products. And I think that the trend that we see in our new order portfolio, is that more and more, we are getting this electrification component in our portfolio. So the trend will continue, and we expect to have a smooth transition for the current production to the, let's say, new kind of vehicles that are coming in the future, okay? So hopefully, I think that -- probably this proves that the trend and the strategy that we are fulfilling in this moment are -- is appropriate. And let's say that the transition is becoming quite smooth. So we are, let's say, quite satisfied with assets.

The next question is from the line of Sunil Kothari from Unique Portfolio Management Service.

My question is regarding Europe. Just to understand, in calendar year '21, how much business we must have lost because of this faster transition to EV? Any thought process on factor, your thought process for next year or maybe 2 years down the line? Because I think it is surprising, at least for us also, that we are not expecting this much transition to EV as an organization. So what is your preparation and how strategy -- in terms of point of your strategy we are changing ourselves.

Yes. Thanks, Sunil. Ander just talked about what is happening on the EV side as far as MCIE Europe is concerned. He talked about that 20% of annual sales is the order book, and it is pretty much strong. Out of the order book in C '21, almost 75% of new orders were in the EV and hybrid space. So to that extent, we do expect a smooth transitioning to the new kind of vehicle. So in terms of how much was lost due to EV transition in 2021, that would -- like frankly, we have not quantified that. I think the focus was more on how much was lost due to chip shortage rather than on EV. But as Ander stressed in the earlier part, I think there will be a smooth transition to EV parts as we talked about. He also -- in a question even prior to that, he had talked about how we have got the first order in the aluminum forging space, and aluminum forgings are mostly suspension and chassis components. So we'll continue on this strategy. This, as you rightly said, yes, this transition has been accelerated post pandemic. I think we have seen this take off, and it has taken off much faster than what all of us had thought or anybody had thought earlier. And so the transition is also being made in a similar fashion.

And second question, Vikas, is on, say, basically, India is improving in terms of manufacturing Indian units and the way you are also investing in Indian manufacturing capability, which is proven to be beneficial as a group, minus MCIE. So any thought process on little steadier restructuring or maybe some tougher decision on German units or maybe reducing some plant in [indiscernible] and transferring to India? Any acceleration on those things? Because Europe is proving a tougher dividend in terms of passing on costs, in terms of reducing costs or maybe higher costs in terms of manpower. So any strategic change or thought process on moving from Europe to India in a faster manner?

No. As we pointed out, this is the first year when MCIE India has exceeded MCIE Europe in sales, and this trend is going to continue. As you see, the order book situation in India is strong. We are adding tremendous capacity in India also. So this trend will continue. As far as Germany is concerned, we have said that we did some restructuring actions in 2020. We are reaping the benefits of that in 2021. Plus, we have been restructuring the product portfolio there and shedding off all the loss-making parts. So these 2 decisions are tough in themselves. And also, these are not easy decisions to take, both restructuring and shedding parts. Some dealing with customers who have been with us for long, they are extremely tough decisions. But for decisions even tougher than this, I think we'll take a call. Right now, we think that whatever we are doing in Germany is, yes, working, but working slowly but definitely working. And therefore, we'll continue on this. Any further we think, we'll let you know. But at this stage, this is what we are doing. Ander, anything further to add?

Yes. I would say that -- let's say, that you can see in our CapEx strategy and our growth strategy that we are focusing all our growing CapEx in India rather than in Europe, okay? So our strategy is to build the capacity in India to continue growing in that market rather than investing in Europe. So approximately 90% of our growing CapEx last year was in India, 90%, okay? So that's the clear strategy to continue developing the business in India, growing in India and, let's say, keeping Europe more than stable. So the proposal to move production from Europe to India, we already did this activity and we transferred part of the production from Germany to CIE Forging in Chakan plant. We also moved some production from Metalcastello to our Gears division in Rajkot and Pune, and we are producing and exporting from India to Europe, those products, okay? We don't see value moving more fast because the reality is that our capacities in India are also limited and because we expect also in the end market to continue growing, okay? So that's why we are adding new capacity in India to continue and to cope with the growth of the demand that we expect in India in the next quarters, okay? So let's say that we need to balance the capacities in both sides, we need to balance the P&L in both sides, and that's what we are now trying to do. And we hope to do it successfully in the next quarters. And I hope that this growth trend that we all expect for calendar year '22, and the calendar year '23 that after COVID and after the chip [indiscernible], we all expect this demand to come. I think we will have -- we will show important growth, especially in India, okay? So that's the overall strategy.

[Operator Instructions] The next question is from [indiscernible] from [indiscernible] Agency.

Sir, I want to just ask, what's the disruption you are seeing in the commercial vehicle space on the overall basis? Can you throw some guidance on that?

Disruption in the commercial vehicle market in the world, is that the question?

Yes, yes.

Disruption in the commercial vehicle space, I think in India, commercial vehicles are coming back quite steadily. Of course, the base had fallen too low in the last 2 years. So -- but -- and I think commercial vehicle is now seeing steady growth going back. Of course, getting back to the peaks of C '18 will take some time. But calendar year '18 or F '19, that -- in India, that will take time. And I think the commercial vehicle market in Europe has also been doing pretty decently in the last year. Of course, Germany was a little worse than overall Europe, but nevertheless, it was also doing well. And I think even Germany will expect it to catch up in the second half of this year. Now in terms of disruption to what is happening in Europe as of now, that we'll have to wait and watch to see what exactly happens. But as of now, the commercial vehicle markets in both India and Europe are okay. Ander, anything to add?

And sir, 1 more question, like is there -- like if there's a significant -- any disruption in the commercial vehicle space. Can you throw some highlight on what percentage of the parts that will -- what percentage of the product portfolio that will be impacted by that?

Disruption in the commercial vehicle due to EVs, right?

And the percentage of our product portfolio that would be impacted due to do that?

Electric commercial vehicles. Frankly, we are not seeing that transition happening in the electric commercial vehicle space. So yes, some experiments are happening. You are aware of what Tesla is doing and there are some experiments also happening at Daimler. But nevertheless, as of now, they are still experimental. In terms of how much dependence do we have on commercial vehicles, it's there in the presentation. I think in the latter half, slides 22, 23 around -- 23, 24, 25. If you look at in Europe, you will see the dependence in India. In India, our dependence on commercial vehicles is much lesser. In Europe, it is slightly higher. In Europe, it is roughly 35% to 40%. In India, roughly about 5%. But we supply all kinds of parts in Europe, if you look at it, we don't supply too much of engine parts though, in the commercial vehicle market in Europe. I think a lot of the parts that we supply from our German operations are parts like high beams, spider joints, those kind of stuff that is more chassis and suspension parts rather than engine parts. So -- but we don't -- at this moment, we don't foresee too much disruption in the CV market due to electric CVs. But these technology things can change anytime. So it's not hard and fast. But as of now, we have not seen that disruption.

The next question is from the line of Nikhil Kale.

Firstly, just wanted to understand, I think you provided the growth for the quarter on a constant RM basis for both India and Europe. Can you also highlight similar numbers for the full year CY '21.

JP, basically, the question is what is the impact of RM on a full year basis.

Yes, for the full year, India is 23.4%, Europe 14% for full year.

Sorry can you repeat?

Sorry can you repeat please?

No. Sorry, I didn't get the first part. Could you just repeat what was the number for India?

For full year, India, around 30% range.

Okay. Okay. And just wanted to understand. I think you mentioned in the presentation that you've passed on the price increases and I mean that has had an optical impact on the EBITDA margins because we cannot pass on the margin. But I also wanted to check, has there also been some under recovery of the higher commodity prices? And if you could just quantify the impact, if that is the case?

Under recovery of steel prices, no.

Yes, yes. So all the entire hike for whatever prices -- price increase that you've seen in, say, Q4, that has been passed on?

So Ander, the question is, have we recovered all the steel price increases. I think we have. That's settled in the same quarter.

Okay. And given -- Yes.

So let's say, cost increases in the -- or the areas that we can divide the cost increases that we have in the Q4 and in the future also. One is steel specifically, let's say raw materials, and this is 100% passed through the customers. So we have indexation systems with all the customers. So this still is 100% passed through to the customers. And the other area of the cost increases, let's say, the energy plus inflation plus transport costs and so on, we are dealing with them with the customers to also pass through this cost to them, okay? And in this case, it's more complicated because there is no history of how to index all the costs, but we are working with them. And let's say the market is working with all of them. And some of the customers have already proposed to set new rules to pass through these special costs that are quite relevant in our P&L, okay? So those are the 2 ideas steel and raw materials, mainly aluminum and everything are 100% pass-through with the indexation systems. And the rest of the cost, we have did a one-to-one with the customers with a special agreements to pass through these costs.

Okay. And my next question was on the volume outlook. So what is the kind of volume outlook that you have for the key and new segments for you, both in India and Europe? Just wanted to understand what kind of growth are you budgeting and going forward for the next year, considering that we are obviously this year was kind of a recovery with the low base? And now we also have certain challenges from, say, the semiconductor shortages and all those things.

Like we are looking at the tractor market being steady in India. We are looking at low growth, maybe single digit -- low single-digit growth for 2-wheelers, for trucks and cars, we are looking at higher growth rates. Trucks definitely on a very low base. We are looking at good growth rates, as you can see. And passenger vehicles, depending upon how the chip shortage goes through closer to double digit, that kind of fully -- these are the forecasts. And there's nothing that what I'm telling you is not available in the public domain. I'm just using the forecast that we normally use CRISIL and IHS as our partners for looking at this. So these are the figures from there. In Europe, as I said, again, for cars that would be a good recovery, again, given the low base rate and trucks are doing well. So as I said, except for 2-wheelers and tractors in the near term. We also expect tractors to come back hopefully with a good monsoon. We have had the luxury of 4 successes on monsoons. So the law of averages can go against it. But if that does not happen, we do expect tractors also to start doing better towards the later end of the year. But nevertheless, we are expecting a decent market situation in the near term except for these 2 segments, tractors and 2-wheelers in India.

Yes. Okay. Yes. And just one last question from my side. If I just look at the Slide #24 in the presentation. The new segments for Europe. So you've called out non-auto and others in Europe contributing to around 15%. This was something which was not there last year. I think it might have been part of cars. So just wanted to clarify what are the products here? And for the last year, was it kind of included in an increase.

No, no. Last year, it might have been in others. So Nikhil, let me -- let us get back to you. Swapnil and I will get back to you with what -- with the details around these parts. Okay?

The next question is from the line of Sandeep Baid, Individual Investor.

Vikas, I had a more basic question, as we keep reading that electric vehicles have much lesser number of parts as compared to ICE engine. And therefore, I wanted to understand will the opportunity in the EV space for auto ancillary companies like yours will be much smaller than what we have on the licensing side? Or you think that at least in value terms, the opportunity will be similar or larger. That was my first question.

Sandeep, that's a difficult question to answer because we really don't know the answer to that question as yet completely because the entire ecosystem of the EV vehicles has not yet developed. Look, as far as hybrids are concerned, whether they are the normal hybrids or the plug-in hybrids, we have an advantage because both parts for both powertrains are required, even though the traditional powertrain in hybrids is much smaller, but still parts both are required. In pure battery electric vehicles, that question I think you are talking about is probably more applicable to the pure battery electric vehicles. I think let's see how this complete supply chain develops, then we'll be able to answer the question. Specifically, in some areas, for example, in magnetics that we know of, we do think there will be some reduction in the overall market availability. But in the gear side, even though the number of gears are coming down, the overall available market is probably a little higher because the gears used are much more precise, bigger and so on and so forth. So the answer to your question, as of now, we'll have to hold the answer for a while. We can come back. Yes, that may happen. But that is applicable only to pure battery electric vehicles.

Yes, that is applicable to pure battery vehicles.

So even in Europe, that is still 9%. Really can't answer that question, Sandeep. I think we'll have to wait for some more months before we can actually get back with that specific answer. As I said, 2 areas that we have examined magnetics and gears, we have got different answers.

Right. Vikas, we know what are the parts in battery electric vehicle. But what you're saying is that which part will be manufactured in-house by the OEM, which parts will be outsourced those things are not very clear, and therefore it may be difficult to hazard a guess today. Is that what you are saying?

Yes, which, of course, one can tear down a vehicle and see what parts are there. What will be made in-house, what will be outsourced, what will be imported, what is the exact tolerance levels required for the parts because, as I said in gears, for example, the number of gears are less, but the precision levels are higher. So those kind of things can happen. So then the value changes accordingly. So what -- the answer to your question is yes. One can do a tear down and see the parts. But let the ecosystem evolve, and then we'll have more correct answers to the questions that you are posing.

Okay. And second, you're looking beyond the electric vehicles as people have started talking about high-dose in powered vehicles. Have we applied our mind in that direction? And what is our initial feel in terms of impact of that on our business, positive or negative?

I'll give you a straight answer. We have not looked at hydrogen. Hydrogen vehicles as a real possibility as of now. What we do understand is that the basic architecture of our battery electric vehicle and our hydrogen electric vehicle is the same. So basically, the battery pack, which is lithium-based or lithium -- nickel based in the BEV will be replaced by the hydrogen fuel cell battery pack. So -- but the basic other architecture will remain the same. So to that extent, that may, from a parts manufacturer perspective, it may not represent that bigger change. But as I said, we have not really looked at it. All that I'm telling you is it's a critical answer, which may mean nothing. But yes, we have not examined the hydrogen question beyond this theoretical aspect.

Right. I guess one is preoccupied with the electric vehicle. Okay.

Yes. Yes.

Vikas, thanks for your answers. Just maybe if Ander has a feel on the size of the opportunity for our current business on the battery-operated vehicles that may be helpfully closer to the market? But -- or we can discuss it at a later date.

Ander, again, what is -- is the market size reducing due to electric vehicles?

Okay. I think the market will change completely, but it will take some years to change, okay? So there will be a smooth transition of 10 to 15 years to change completely. Our view is that we have the challenges, but we have also big opportunities in this transition. What we expect is one side, it's true that there are less components that is a reality. I mean the combustion engine has a transmission for the compression engine. There are a lot of much more components than in electric powertrain, I mean the electric motor plus the simple gearbox. But the amount and the quality and the added value of these components are much higher, okay? So we see big opportunities in the aluminum housings, both for the electric motor or for the battery box or for the electronics -- of the power electronics of the electric cars. So we are working there, and we already have new orders for Indian car makers for this. I mean, you saw in the presentation certain photos of the housing of the electric motor. So I see opportunities -- big opportunities there, okay. Then also in the -- all the transmissions, let's say, drums and gears that we are quoting, plus all the chassis and suspension component that will not change in this transition, okay? So my expectation also and the other message that I would like to give is that with this transition, there will be a consolidation of the supply base in the world, okay? And especially in Europe, where the transition probably will go faster than any other region in the world, okay? I don't expect big changes in India in the next 10 years because of the electrification will come, but probably more in the 2-wheeler than in the 4-wheeler and it will be quite a slow transition and Europe will be faster, okay? But in this transition, in this faster transition, what we expect is that there will be a consolidation and we are already seeing and perceiving this consolidation as small companies will disappear. Some of them will go bankrupt. So the consolidation will support to the big companies and profitable and efficient companies like us, okay? So that's the expectation we have. So we see this as a challenge plus as an big opportunity. So -- and the last figures that I mentioned before with the 74 of our new orders coming from the electrified vehicles, it shows that we are in the correct path, okay? So that's our expectation, and so we are optimistic in this transition.

The next question is from the line of Vipul Agrawal from Motilal Oswal.

My question on the CapEx. In CY '21, the CapEx was higher at around, say, 6.5% of the total sales. Do you expect CY '22 CapEx to fall back to 5% of levels?

Okay. This will depend on the market and the new order evolution, okay? Probably, we will reduce this CapEx in this calendar year '22 because this calendar year '21 was, let's say, leaded by big investments, the new plant in CIE, Hosur that we are -- the new plant with all the investments related to these new products. Also, we launched a new branch plus the purchase of the building and the land in Mexico, so that also increases the sales of our CapEx in the year. Additionally, we had the increase of the new plant that we launched in Aurangabad. So it is also a big investment there to continue growing and opening, let's say, at our aluminum activity to a bigger size injection machines that we already launched 2 big machines for the new products that we already got. So this was a very special year. And as you can see, let's say, that our growth strategy is there, okay? This year, probably we will not be so aggressive in the CapEx, but the 5% of our -- this is, let's say, the right figure that we look for in the long term, okay? So perhaps this year will be a little bit -- last year was a little bit higher. Something like 6.5% to 6.6%. This year will be around 5%. Perhaps a little bit more depending on new products that we can get to. So -- but yes, you are right, we should go a little bit lower in the CapEx in '22.

Another second question is on the margins. What would be your sustainable margins over next 2 years for India and EU business?

Sustainable margins over the -- Vipul will not make a forward-looking statement. But you know that in India, we were operating around 15% for the last 2 quarters. In Q3, we were up over 15%, and we were around that figure. So that is something we would definitely like to reclaim -- and as far as Europe is concerned, the maximum that we have done in the recent past, 13.5%, 14%. So that is currently an internal benchmark that we have to reach very quickly. Over the more medium to long term, you know that if you have -- if you look at the CIE website and the kind of targets that they have put for all of us, I think CIE expects an 18% EBITDA margin from its constituents. So our parent company. So these are the immediate short-term and medium-term benchmarks that we could be looking at. Something that we have done max in the past, both in India and Europe. That's the short-term benchmark and the long -- and the medium-term benchmark is obviously what CIE expects us to do. So these have the goal posts on which we are working.

My last question is on the PV demand in Europe side. So I was just -- it is referring to an article, where I was reading that PV sales is expected to be around -- growth is expected to be around 15% in European region, which would be on higher and that would be around say, this kind of growth will come after almost a gap of, say, 5 to 7 years. So how do you see that going forward? Like is it really the -- is it really going to happen in Europe? Or just the base impact is there?

No, no. That 15% is largely because of the base effect that you are talking about. Whatever figure there's, of course, this year, you are looking at a good figure because of the base effects, C '20, we had the pandemic. C '21, we had the chip crisis, which really impacted the European market. I think if I'm not wrong, Swapnil, correct me, but the C '21 European figure, market figure is lower than C '20. The passenger vehicle market figure is actually lower than C '20. So that is roughly market -- roughly about the same. So it's actually 4.4% lower if you look at it in our presentation, the less than 6 tonne, the light vehicle market in Europe in C '21 was actually 4% lower than C '20, which itself was a pandemic affected year. So you are seeing a correction because the chip shortage is coming back is getting less severe. So you will have big growth numbers this year. But we know that long-term growth in the European car market is directly correlated to the GDP figure in Europe. So whatever GDP figure Europe achieves, that is the kind of growth numbers we have seen in the past. So as and when this whole thing settles down, you will see the European car market mirroring the European GDP growth figure.

The next question is from the line of Bharat Sheth from Quest Investment Advisors.

So Ander you understand this how -- our growth perspective in a little better say, see, despite underlying market did not grew much in Q4 as well as overall calendar year '21. But we have grown on constant raw material price also much better than them. So that is earlier what you were saying that we capturing a higher market share. So in that scenario now, when we are looking CY '22 and CY '23, industry is -- say underlying industry is expected to grow much higher. So do we expect our growth rate better than that?

I would say, yes. Our expectation is that the market will grow in calendar year '22. Importantly, because we still see inventory based in the dealers. We also see certain constraints in the chip sourcing in our customers. So we expect all this to create or generate additional demand in the near future, okay? So we expect, let's say, development during the calendar year to starting for probably low Q1, improving in every quarter and ending with the second -- very strong second half of the year. That is my expectation. That's what all our customers are saying. So we expect to have this good market evolution. And on top of that, also, we expect to continue growing above the market, okay? So we have good expectations on the near future. And we think that both regions, India and Europe will perform above the market. That is our expectation up here.

So with respect to that, sir, you said that Q1 will be lower, I mean, softer. So it will be softer than the Q4? Or it will be softer than the last year calendar '21?

No. Yes. Q1, what I wanted to say is that the Q1 will still be -- will be better and better than the Q4. That's what we all expect and that's what we all will see. There is a certain recovery. But the recovery is lower because we still see certain chip shortage impact in certain customers, okay? So the chip shortage has not been yet sold. They were saying that for the Q1, Q2, they will solve the service probably will take a little bit longer. But overall, what we will see is a trend, a positive trend. So we will see the growth happening and improving quarter-by-quarter. That's my understanding of the market evolution.

Okay. And with respect to, I mean, with passing on the steel and aluminum price and the way we are in negotiation for energy and logistics costs, and some kind of operational benefit also available because of operating at higher capacity in full year '22. So how much that personal capacity, I mean, operating leverage will help us in improving the margin from Q4 level?

Yes. In the -- you are right, and that is exactly what we are expecting. So we have the expected growth that will support us in our margin program. This is improvement. Also, we continue with our internal efficiency improvement activities. So we are working hard and for every quarter, we see improvements in our operations. So with the 2 margin improvement actions we think that we will be able to improve our margins back to our previous margin as we have said on even improvement, okay, in the long term. So that's our set on the margin.

Okay. And last question, since the kind of order book that we have built up for EV. So when that will start reflecting in our revenue for which quarter, I mean, without quoting the -- I mean, amount of the revenue in India as well as in Europe?

We will see, okay, these products, you know that the electric vehicles, the introduction in the market is -- are very, very smooth and it's not like extended cars or internal combustion engines, okay? So what we expect is there will be a transition, we will start having this electrical vehicle sales in our portfolio. I would say that starting next year, starting in calendar year '23. And then they will go growing according to the market growth, okay? So all the businesses that we have got last year will have a couple of years of development, and then we will see how they evolve in the market.

Okay. And sir, do we also expect some kind of gross margin improvement from Q-o-Q, from Q4 to Q1 level? And then again, coming back to our normal gross margin?

Yes. Okay. Yes, we expect to improve our margins in the Q4, okay, in the Q1 2022. So last quarter, calendar year '21 was not good in terms of margins. I mean there was a reduction in the margin. So of course, we are working hard to recuperate at least the previous margin that we have. Yes, we can expect certain recovery is what we expect as Vikas said before. And also, we have our internal targets to improve those margins, of course.

Okay. Okay. And last question for JP. JP, what will be our tax rate for '22, effective tax rate, India and Europe?

We would stay at about 24%.

For company as a whole?

Yes. Company as a whole.

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

So just wanted to delve a bit deeper into some of the different divisions and the performance. So maybe if you could just talk about the MFE performance. Of course, the revenue and margin performance of CIE is driven. That would be I think.

Nikhil, obviously, we look at it -- look at more our unit of analysis is more India and Europe. So generically, we can say that we have done a lot of restructuring activities in 2020, as you are aware. And there has been an improvement as far as Germany operations is concerned because of those restructuring activities. Of course, then there was also the negative impact of power and logistics costs towards the end of the year, which is also due there. Chip shortage, there was some effect on the truck market, but not as much as the car market. So what we can tell you is that our position in C '21 in Germany has definitely improved vis-à-vis C '20 or even vis-a-vis C '19 if you compare on a pre-pandemic level. But as I said, normally, we look at India and Europe as the unit of analysis. So that's...

No. I mean, typically, we anyways published the subsidiary annual report, so just if you could just help me with the top line growth top line number for MFE in Europe on, as well that's fine.

The top line number in Germany, JP?

Give me a minute, sir. This margin is up about 6%, EBITDA margins. I can give this off-line.

Sir, I can take it offline, if it's not readily available, that's fine.

No. He has mentioned the number -- margin number, which is more relevant. So that number you have, you can clearly see an improvement.

Yes. Yes.

Yes. So we'll come back to you with this also. There are 2 questions that you have asked us. One is the non-auto parts in Europe as well as this sales number in -- we will come back to you on that.

Sure.

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

So I just had 1 question. So are the new orders that we are -- we've signed for the EV and the hybrid vehicles, both in India and Europe. So just wanted to understand the margin profile. Will that be better than the current products that we have for the traditional engines?

No, I think you -- you should assume it to be the same. Like as I said, whenever we take a new order, I think we follow similar rules, and there is no difference in rules between taking orders for a traditional engine or an EV engine. So that's the same profitability rules, same return on investment rule supply for both kinds of orders. So internally, we don't distinguish that.

I dropped out, I'm back. If you -- I don't know if that question was answered, EUR 180 million is the top line for MFE.

Okay. So 1 question is answered, Nikhil, that's EUR 180 million.

Yes. So -- can you repeat, sorry.

Mr. Shah, I just answered. We're talking about similar -- whether the margins are similar. So from an internal standpoint, we treat both RFQs same.

As there are no further questions. I now hand the conference over to Basudeb Banerjee for closing comments.

Thanks, Nirav. Thanks to Mahindra CIE management for this opportunity, and if there are no more questions, so let's wrap the call. Thanks for participating.

Okay. So I guess I wanted to thank you to all participants for the well directed and tailored questions. And I hope you all got the proper answers from us. After 2 complicated years -- in calendar year '20 with the COVID and the calendar year '21 with the chip shortage. We have demonstrated our capacity to manage the company in a dispute environment, maintaining our cash generation, amplifying the company for the future. We expect the equipment recovery ahead of us, especially during the second half of the calendar year '22 and during calendar year '23, okay. We will continue growing -- improving our internal efficiency and consolidating our company as one of the most reliable companies in the market. As always, I want to thank you to all Mahindra CIE team for the fantastic work. This difficult year and the commitment with our company. Thank you very much, everybody.

Yes. Thanks Ander. Thanks all for participating. Please have a good day. Thank you very much.

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