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

Ladies and gentlemen, good day, and welcome to the Mahindra CIE Q1 CY '22 Results Conference Call, hosted by ICICI Securities. [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, sir.

Thanks, Margaret. Good afternoon to all participants from India and Asia, and good morning to all participants from Europe. We are grateful to get the opportunity from Mahindra CIE management to host the call and I'll welcome the management represented by Mr. Ander Alvarez, CEO; Mr. K. Jayaprakash, CFO; Mr. Vikas Sinha, VP Strategy; Mr. Lafuente, Business Controller; and Swapnil Soudagar, DGM Strategy. So over to you, Vikas, for the initial comments and then [indiscernible].

Thanks, Basudeb. Good day, everyone. Good afternoon, and good morning to those who are joining from Europe. I welcome all of you as well as Ander Alvarez, our CEO. So we are going to talk about our results for Q1 C'22. We start with MCIE India results for Q1 C'22, quarter -- first quarter of calendar year '22, which is on Page 6. Sales is 15% higher on a year-on-year basis compared to Q1 C'21 on a year-on-year basis. However, this is mainly due to RM price increase. If you look at the table on the right that depicts market performance, you will notice that the light vehicles, tractors and 2-wheeler segments all experienced negative growth vis-a-vis Q1 C'21. MCIE India sales performance is thus better than the market even after taking into account the RM increase. But the table also presents signs of optimism. The performance of light vehicles and tractor segments is better than in the Q4 C'21. So sequentially, tractors and light vehicles are better, and we expect this trend to continue. MHCV quarterly data is not presented, but they are also improving steadily. Only 2-wheeler segment shows some cause for concern. Despite this uncertain market scenario, we are happy to report that in Q1 C'22, we have returned to our target level of 15% EBITDA in India. Sales in MCIE were INR 12,022 million with an EBITDA at 15.1%, EBIT at 11.2% and EBT at 11.0%. This is evidence that proactive measures like VRS in the Stampings business, which were taken in earlier quarters, are showing results. MCIE Europe results for Q1 C'22 are shown on Page 7. The sales here, again, have seen growth in absolute terms. But again, this is largely due to RM costs, which have been passed through without any margin. The EBITDA margins, however, continued to be affected by the higher energy cost, which had been further exacerbated by the Ukraine crisis. We have been discussing on passing on some of these increased costs to our customers. Thus, the EBITDA margin is at 10.2%, lower by 3.7% compared to Q1 C'21, but better by 1.1% than Q4 C'21. So clearly, this measure is helping. Q1 C'22 EBIT is at 7.0% and EBT at 6.5%. The forecast for the European automotive markets made between January this year and April now have seen a sharp decline. We use the estimates from IHS. So the IHS estimates for C'22 for the light vehicle segment were about 18.1 million units in January. But in the April forecast, they have downgraded this to 16.1 million vehicles. It is now expected that European light vehicles will grow by 3% to 4% in C'22 compared to double-digit estimates earlier. We will, therefore, continue to focus on internal improvements to tide over this. And now if we go to Page 8, we will see the consolidated results, which are a combination of the evolution in both India and Europe. MCIE achieved a sales for the quarter of INR 24,444 million with an EBITDA of INR 3,079 million, which is 12.6 percentage of sales and an EBT of INR 2,130 million, which is 8.7 percentage of sales. MCIE consolidated performance is better, both on a year-on-year and consolidated basis. And in fact, Q1 C'22 results are one of the best quarterly results that we have ever achieved in our history. Also, all other key projects that we had outlined in our year-end C21 results call, namely EV orders, digitization and automation, optimizing energy costs in Europe as well as in India through renewable power, they are all progressing well. So we can report good progress there. Therefore, we are focused on maintaining this good momentum in performance. And this, we are doing it in an uncertain and volatile market, and we hope to be successful. So thank you, and now we proceed to Q&A.

[Operator Instructions] The first question is from the line of Pratik Kothari from Unique PMS.

Vikas, in the presentation, you have mentioned that we have passed on the raw material sizes without any margin, but if you look at our -- and there's no volume growth if you compare it to, say, last year. But if you look at gross profit, we have seen some substantial growth from INR 1,200 crores last year to INR 1,400 crores now and even gross margin in percentage terms remain the same. So how do we look at this number then?

Okay. JP, would you want to take this? This is -- I think you were talking more in terms of our European business, right?

No, I'm looking at a consolidated basis, the one which was reported to CD. So if we pass on the raw material prices without any margin, then absolute gross profit should have remained the same, but that has also gone 15%, 17%.

Yes. So not -- so that -- a large part of the sales is accounted for by raw material prices, but not all of it is accounted for. A large part is accounted for. So there are a lot of efficiency improvements also. We talked about, say, for example, we had done VRS in India. So that is taking in effect now. Plus there have been other projects that have been going on, which we have been talking in general, we have been doing a lot of work on digitization, automation in India, that has been going on. So it is not that -- when we mentioned that comment, that was made more in terms of sales in Europe, where the expansion is quite substantial. Large part of it, maybe 2/3 out of it is coming out of RM growth. But the rest is coming out of a mixture of factors like improvements and product mix, different segments are growing differently all that. So it is not entirely due to raw material. That's the reason why you're seeing the increase in gross profits.

So in a normalized times, maybe a few quarters down the line when we are able to pass on raw material prices and margins, also given the improvement that we have done now, there should be some substantial jump in the numbers we are reporting. I mean there seems to be a massive improvement in our internal efficiency.

Yes. There will be. There will be an impact when the steel prices stabilize. Yes.

No, I don't know. Because I think, Mr. Kothari, I hope you have understood this properly. What we are seeing is when you have steel price increase, it is passed on and there's no margin improvement. But your point is valid that despite that, we have a gross value addition of almost INR 2 billion, if you compare year-on-year. yes. And your question is how did we achieve this INR 2 billion when volumes are not really growing. So we cannot say that the volumes are not growing because we had a 20% growth year-on-year, where -- and approximately, let's say, 10% to 12%, 12% would be the steel price impact. So we've had a volume growth in India and to some extent in Europe as well. So there is that contribution of -- I think if you're looking at INR 2 billion, we can look at half of it or a little more than half coming through this volume increase. The rest would be definitely improvements, both on productivity. There will be some mix impact because different businesses have different value additions. So when that mix changes, it impacts. And lastly, some price increases that we could have got. So it's a mix of [indiscernible] that the rest billion accounts for.

So is this incremental volume that we have seen of maybe 5-odd percent, is it in some very different segment, something very high value added? Or is it business as usual, the products that we used to do earlier?

Mostly -- like, for example, in India, for example, the 4-wheeler segment has done better than the 2-wheeler segment or the tractor segment. The 4-wheeler and truck segment has done better. So depending on both products. So there will be some impact related. So it's not as if something has changed suddenly. It is just that some segments have done a little better than the others. So that's about it.

Sir, notable one is, of course, Metalcastello in Italy, which is doing much better. So if I may just point out.

Yes.

Okay. Fair enough. And my last question on this other expenses, from INR 500-odd crores quarter-on-quarter, year-on-year, we are up to INR 700 crores. So what was defined...

Essentially, this has variable costs and most importantly the energy cost and the huge jump in energy in Europe played a significant role in this increase.

But your energy cost, I believe, was at least in the past used to be about INR 100, INR 110 crores a quarter.

It used to be...

Yes, about INR 400 crores, INR 450 crores a year, between INR 100 crores, INR 110 crores a quarter.

Yes. So in Europe, it has almost more than doubled. So that's one impact that is significant there.

Okay. So this is largely...

Volume-related because subcontracting and -- there are other variable costs which go and sit there, which are volume-linked.

and we are yet to pass on this prices.

We are yet to and some progress has been made, but I think there is more to be passed on, if it is possible, yes.

Normally, these costs are not passed on. But yes, because in Europe, this has been a very special case. That is like -- this exercises on...

Fair enough.

The next question is from the line of Noel Vaz from Asian Market Securities.

So I just had one query. So regarding energy cost -- yes. Okay. Yes. So typically, energy cost about 4.5% of sales. Now in CY'21, given the fact that in the fourth quarter, we have seen a spike in Europe, it's gone about 5% or 4% for CY'21. So I think -- so what kind of an increase can we expect in CY'22? Power rates have already remained quite elevated for now the first 4 months in Europe. So are we expecting to see some kind of a like reduction in the second half? Or what kind of movement can we expect to see on that front?

JP, what is the expected power cost in C'22 as a percentage of sales?

I think his question is in Europe, what do we expect going forward on the energy. I think Ander probably can answer that, how does the energy cost look for the rest of the year?

Okay. It's very complicated. Good afternoon, everybody. It's a very complicated question, but I will try to read you my view on that, okay? The energy costs were up in Europe since approximately summer last year. August, September, we already saw a certain increase on the gas prices and also the electricity prices, okay? This price -- energy price increases continued during the last quarter, and this affected us importantly, especially in Spain, in our spending plans. Then in the Q1, due to the work that we have in Ukraine, the energy prices peaked again, and we are now electricity approximately at EUR 200, EUR 250 per megawatt and the gas prices at the moment are approximately EUR 80 per megawatt. So we see these high prices will continue during -- if the war continues, okay? So our deal, our energy prices, will go down slowly during the next quarters. It will depend heavily on the evolution of the war in Ukraine. So that will be probably the key factor that will generate the rate reduction. But we are optimistic on that, and we think that during the year, the prices will go down with a normal situation. If you look at the future of the energy, they are already highlighting certain reduction for calendar year '23. And from '24 onwards, energy comes back to the normal prices. So generally speaking, I think that we can say that we had a benefit Q1, we will have a bad Q2 also, at the same level than the Q1 probably. And from that point, I think from Q3, Q4, we will see a certain reduction. Also, I think it's important to say that the different government in the European Union are taking measures to reduce and to control the price of the energy. So I think we will be benefited for that political actions, okay? So overall, we can say that we are now in the worst moment of the energy prices. Also, we are negotiating with the customers to pass through this energy cost increases to them. In the first quarter we settled certain agreements with them, not just a minor part of the customer. But we are in negotiations and let's say, all the automotive suppliers in the industry are dealing with the customers in this sense, okay. So we will see certain improvement in the next months, and we are positive -- we are optimistic that we will close agreement with all our customers in the next months. So that's the general view of the energy in Europe.

That resolves my query. That's all from my side.

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

A couple of questions from my side. Firstly, in India, we have seen a fairly strong growth as compared to the underlying industry. So what has been the driver of that growth? I think except for passenger vehicles and to certain extent, commercial vehicles, all the segments were relatively weak for our industry and for us. Can you throw light on what drove that 10% kind of growth?

So if you -- on a year-on-year basis, Jinesh, a lot of it will come from steel, steel price increase.

Yes, I'm excluding that 10% in benefit which JP talked about. So without that, it's another 10% additional growth, which is there. So [indiscernible].

Roughly, we were 15%, so it would be 5%. So yes. So what has happened is 4-wheeler has done relatively better this year, this quarter. Trucks, unfortunately, we don't have data for trucks we have not presented it to you. Trucks have also done well. So these segments in which I think we have -- even though trucks is small business for us, but one of our plants is quite dependent on them like foundry. So there, they have done that. And of course, we have been talking -- we have been adding capacity in India. So we had the order books. We have been talking about, if you look at in C'21, we had so much capacity expansion in India. In fact, our CapEx rate in C'21 was higher than normal, and that was largely because of the investments that we made in India. So those order books were there. And that is why we have been saying all along that our underlying growth will be a bit better than the underlying market. That is what is coming out in India.

And how has our exports revenue growing in the Indian business?

Exports is...

Jinesh, first, because just before the exporting, I think Mexico is also doing well, which is part of India segment. So that's one reason for it.

Yes. I think -- this is Ander here again. Regarding India and maybe gave also 1 of the queues, we include also our Mexican activity that is Bill Forge Mexico in India, basically the area of -- Bill Forge. So in Mexico, finally, we are, in this moment, telling that approximately $2.5 million per month, that is the rate that we are. So we are -- we have growth -- we have doubled the business in 1 year, okay? So there is important growth happening in Mexico. That's also the reason that why we, last year, invested in the expansion of the building and also the addition of new capacities in Mexico. So Mexico is doing really well. So that is one of the explanations. Also, as Vikas said, I mean all the verticals, especially in the 4-wheelers are doing well in India. And let's say that our sales could be much better if the 2-wheeler sector and the tractors sector recuperates, okay? And that's what -- why we are quite optimistic for the future because we will not only keep this sales trend, but also we should be able to improve once the 2-wheeler and the tractor sector recuperates, because we know that the 2-wheeler is approximately 20% below last year and tractor even more at 35% below, okay? So once these 2 sectors recuperate, I think we will see a big jump in IL, in Bill Forge, in our Magnets and our Gears divisions. So I think we can be optimistic from that point of view. And regarding Europe, in Europe, the market is also -- from the market point of view, we can say that the 4-wheeler market is weak in this moment. And despite this weakness, I think we -- our position is good. We are supported by the raw material increase, as Vikas mentioned, but also I think it's important to highlight that Metalcastello is doing really well, okay? Metalcastello is getting now historical record on sales, thanks to the good performance on the overall vehicle market in United States, okay? And Metalcastello is growing approximately at a 35% rate compared to the last year. So that's why one of the support to this good sales performance that we are having in Europe. And the rest of the business is Germany. And let's say, our CIE project in the State are maintaining a good sales trend and we also expect to improve the sales in the near future because the market wants the semiconductor shortage issue and the war in Ukraine are over, I think we will see important jump in our sales. So I think that we can be optimistic in different hub.

Okay. And any update on export revenues, how it has grown and how -- what percentage of sales now it takes from India?

Now it remains fairly in the same range of 12% to 15% because I think the domestic as well as export revenues are growing in tandem in India. So as a proportion, it is not growing, but it is growing along with the other revenues, domestic revenues.

Got it. And for the European business, can you talk about the euro constant currency growth and the downtime and energy cost pass-through?

So Ander, the question is, in Europe, if we change it into euro in euro terms and if we take away the impact of RM and energy price increase, what would be the growth?

At the moment, we are calculating in euro approximately could be the growth in Europe would be something like -- wait a moment, about 10% more or less could be, okay? That will be the growth in Europe -- in euro currently.

And this 10% is after removing RM and energy cost pass-through or this is including that?

Okay. Yes. Eliminating raw material and energy costs would be -- the growth would be approximately 10%. Yes.

Okay. Okay. Got it. Got it.

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

Just taking the previous discussion forward, you talked about the 10% kind of [ Y-o-Y ] growth at a constant currency and to move into RM and energy price. Will it be possible to maybe throw some more color on the different parts of the business? So for example, what would be the growth in the PV forging and also on the CV forging? I mean would it be fair to assume that PV forging and even the CV forgings will be becoming the marker share almost the entirety of the growth for Mahindra potential customers?

Nikhil, you were slightly unclear. Let me repeat the question for you, and then we'll take it to Ander. So did you say that you wanted to know that this 10% increase in European business, how much of it was coming from the different parts, CV forging, car forging, self-offload vehicles, right?

Yes. Yes, that's correct.

Yes. Ander, so he's saying this 10%, in constant euro terms, whether that grows from what part, Metalcastello obviously is the largest part, but what are the other -- are the others contributing to this growth or not?

Yes, they are contributing approximately the same because in German business is doing quite well and also passenger car business is doing well in terms of sales. So I would say that the -- the best performer was Metalcastello, because in Metalcastello, we have this growth and the raw material impact is not relevant in Metalcastello of approximately 30% and the rest is coming from Germany and from our passenger car forges in Spain. So I would say that more or less all the verticals are performing in a similar way, except Metalcastello that is doing better than the other.

Yes. So just taking that point forward, if we look at the production data, at least for the less than 6 tonne PV data that you have provided, that's down almost 20% Y-o-Y. So if we've seen kind of positive growth, just wanted to understand, is it the case that maybe OEMs have also built up inventory? And again, I reckon there would be also some benefit of some of the new orders. So if you could just maybe talk about the same?

So Ander, if -- again, Nikhil, I'm summarizing your question for you. So the question he's asking, in the car segment, there has been a drop in the market volume. So how have we grown? Is it because the OEMs are building up inventory or is there some other reason?

No, we are not building inventory. I mean, you're searching for CIE or for the carmakers?

For CIE.

No, no. I'm talking from carmaker's perspective. Is it that they are building up inventory of the other parts, whereas there are obviously some chip shortages that are happening. So they are maybe just building up -- making -- building up inventory for the other parts of the car.

I wouldn't say that they are building inventories in this moment. We know that, for example, in the many certain truck makers, they are building the trucks and they are not selling them because some electronic is missing and there could be certain, let's say, balance in the next quarter. But it's not relevant. I would say that most of the truck makers, what they are saying us is that the order book is fully booked in this moment. I mean they have more than 1 year of orders in the pipeline, and they expect us to continue producing at the maximum rate in the next months, okay? So the information that we are getting from the market is quite positive in ourselves, okay? So that's the reality. That's why we are quite optimistic on sales evolution in the next quarters.

The next question is from the line of Saket Kapoor from Kapoor & Company.

Sir, firstly, if we take this other income component in our stand-alone numbers, how should one read into the operational profit on a stand-alone basis? So this is a one-off item that has appeared for this quarter of, I think so INR 89 crores as we...

Yes, yes, that is -- sorry. This is Jayaprakash. If you're looking at this quarter's number of 937 includes INR 860 million of dividend received from AEL, which gets knocked off in consol. So in that sense, it is not relevant.

So sir, this component was not present for the last year's comparable number?

No, no, it was not. No, no. This is the first time AEL has declared dividend.

Okay. So then even on a likewise basis, when we look at the consol numbers, how comparable are the March number vis-a-vis the last year March?

So okay. So if we were to knock off at 860, we are -- we would be something like INR 50 million, INR 60 million, which is comparable with the previous quarter.

Sir, a small point. I'm just trying to compare March '21 and March '22. So March '21 did not have this other income component, correct?

No, no. So March, we had INR 27 million. If we were to exclude this quarter's dividend of INR 860 million, we would be around INR 60 million, right? So there's an increase from INR 27 million to INR 60 million if you remove the onetime impact.

Okay. Okay. So this is the impact on the consol number. So consol number would have been lower in case if you knock off this extent dividend part?

Yes, yes.

Okay. And what is the reason for this high dividend, sir? And what is the recurring -- will it be a recurring part? How has this dividend appeared for this quarter?

Mr. Kapoor, as I said, for consol, it will not make any difference because it's coming from subsidiary.

Right, sir. I only wanted to understand the nature of the dividend payout and how can we ascertain the continuity of the base in the 4Q '22?

This will now only -- I mean, even from a cash perspective, it doesn't have -- it is tax neutral. Do you have -- I mean, AEL had accumulated cash. So that's how it has come. Going forward, there will be dividends probably, but I mean, we will assess it year-to-year.

And sir, the reduction in the finance cost, which we have seen on a quarter-on-quarter basis from INR 126 crores for the December quarter on a consol level to INR 84 crores, INR 85 crores, is this a sustainable number? And what factors are attributed to this significant reduction in the finance cost?

Okay. So it is not crores, it is million. So it has come down from INR 12.6 crores to INR 8.5 crores, okay? So this reduction, there are some onetime elements to it. There is a ForEx gain, which has gone there of about $20 million. And the interest subvention was announced by the government in India in this quarter with a retrospective effect. So there is a onetime impact there. I think I would rather leave it at the earlier quarter number for future direction.

I didn't get the last point, sir. Come again?

We had an interest subvention announced by the government, which announcement came in this quarter but had a retrospective effect from 1st October of 2021. So there are onetime impact. Therefore, if your question is whether it is sustainable, I would rather go by the last quarter number going forward.

Last quarter number. Okay. And sir, for the energy cost part, as the CEO has mentioned, do we have any hedging mechanism wherein we are hedging our forward energy cost in some way or the other?

We don't have it. But I think, Ander, he's hoping if we are taking on the contract.

No, we don't have any hedging system for the energy, okay? What we are doing now is we are negotiating with the customers, and we are looking for certain indexes to index the energy price to the feed price, okay? That's what we are trying to do and let's say, most of the customers, they are negotiating with -- not only with us, let's say, with all the suppliers. And probably in the next month, we will see the certain agreements, and we will be able to offset part of the pain that we are having now in our accounts, okay. You saw that our EBITDA margins in Europe were 10% to 10.2%, that is far below that we had previous year. And the main reason of this drop in margins is coming from this energy that we are still negotiating with the customer. So we don't have any hedging system, but we will -- we think that we will reach an agreement with the customers in the near months.

Right, sir. Okay. Sir, last point and I'll come in the queue. On the utilization levels front, sir, taking into account the order booking from the OEM part. What are the likely utilization levels for plant across our geographies? And what have been for this quarter on an average? And what are we expecting in the coming foreseeable future?

Yes. So the question is, what is the utilization level of plants in India and in Europe. Of course, in India, we have been adding capacity. So therefore, that clearly is an indication that we are running close to utilization. So that is the question. What is the utilization levels in India and Europe?

In India, it's true that this is different in the different verticals that we have different situation. But most of the businesses are running close to 100%. That's why we are adding this capacity and probably we will have additional capacity of 20%, 25% in the next month once all the capacity expansions are in place. So India is in the moment at the high saturation, I would say. And in Europe, we can be in the moment at 70%, 75% of capacity utilization, okay? So we still have capacity available to grow. But we don't see the growth coming until the war in Ukraine is over, okay? So that, let's say, we will be able to keep the trend and the growth probably will come once the war and the geopolitical frictions are over in Europe.

Thank you for all the elaboration.

The next question is from the line of [ Deepak Poddar ] from Sapphire Capital.

I just wanted to understand now, in your opening remarks -- Sir, I was just looking any kind of outlook that you can share for CY'22 in terms of growth on margins?

No, no, we don't make any forward-looking statements. But as you have heard Ander speak, I think we are pretty much optimistic both in India and Europe, of course a little bit more optimistic in India because the situation in Europe is a little bit unstable. But nevertheless, I think we hope to improve from here.

Hope to improve. So this 12.5% kind of EBITDA margin on the consol level, so that one can assume as a base going forward as you look to improve?

Let us not go there in terms of forward-looking statements. Please also realize that there is cyclicality in our business. There is -- in Q3, you will have -- in August, you'll have the holidays in Europe and then we'll have the festive season in India. So those things factored in. As I said, we -- like we keep -- we hope to keep improving from here. Let me not talk about what is the base rate and how much it can become. What we will say is that we want to be as close as possible to 15% EBITDA in the near term. That is the kind of the number that we are working with. And we hope to be higher than market growth. So these are the 2 things that we definitely are working with. And as I said, we are optimistic. You heard our CEO in the...

So just to clarify, the 15% you are saying like for the India business or for the -- as a whole?

It is as a whole. But as I said, of course, in India, things are a little bit, I must say easier, given that the market situation is less volatile here. But we want to do it on an overall basis. Of course, Europe right now is at 10.6%. So it is a little further away. But what we are talking about is in terms of consolidated, that is something that we would like to do.

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

Congratulations on sawing an excellent performance in challenging time and your team. Sir, another question is now in India, we have performed much better despite 2-wheeler is not doing well. So -- and as also, you said some of the CapEx as well as new products online has also helped us. So have we gained some kind of a market share in other PV and CV as well as tractor? Or you want 2-wheeler also, if one has to look at from that perspective?

I was just going to mention that, yes, we are improving our market share, and it's clear that we are affected negatively by the 2-wheeler sector drop. And if the 2-wheeler sector recuperates and the tractor sector recuperates, that's our expectation in the next quarters. We will see further growth in our companies, okay? But coming back to the 4-wheeler evolution, just contemplating on that sector, yes, we think that we are growing our market share and certain divisions, certain verticals like forging or like foundry, it's something we are growing our market share, and we are recuperating the market share that we had before. So I think that in that sense, that explains our growth trend in India.

Some line, I mean, in Europe, if we remove Metalcastello which has performed much better. So in the remaining part of the business also, have we gained some market share or it is same where we were earlier?

I think in the rest of the business, we are again in the same position that we were earlier. We don't see market share growth, except in Metalcastello, where our position with our American customers is very strong, and as they are performing well, we are also growing importantly. But in the rest of the businesses in commercial vehicle forgings and passenger car forging, we keep the same position. No, there is no big change in that.

And a question on now coming to this Metalcastello. In your earlier comment, we said that we will be expecting now this year to go, what was the level, we have picked out in FY -- CY '18 or '19 of INR 19 million. So what is current rate of Metalcastello per month? And how do we see going ahead?

Okay. In Metalcastello, we have this year the historical sales in all the years that we know Metalcastello. We were at peak of approximately EUR 70 million in 2018. This year, we will hit probably EUR 80 million, okay? So there will be an important growth. And unfortunately, we cannot sell more because our capacity is fully completely booked in Metalcastello, okay? So we will be at 100% load in Metalcastello this year. And we are also adding certain additional capacity, but that will take some time. And -- but we are quite optimistic on that sense.

And is it a fair understanding, Jayaprakash, that because of Metalcastello, we have been able to improve Q-o-Q margin in the Europe business. And once we get some kind of a pass-through of the energy cost, so there is a further room to improve?

Europe?

Yes. Yes. I think Ander said that, right?

Energy costs across.

And with Metalcastello, which is highest contributing margin business, because where the large part is our, I mean, job was kind of machining kind of a thing. So overall, Europe margin will further improve, correct? Is that fair understanding?

Yes. Metalcastello help.

Okay. And can you share, I mean -- Yes. Go ahead. Please go ahead.

You mentioned properly. I mean we are negatively affected in Europe in this moment by the energy and the inflation costs, okay? Those are the 2 impacts that are affecting us. And also, it's important to say that the raw material price increase without margin is also affecting to the margin, okay? It's affecting between 1% to 2% on our margin, get for the raw material increase that has been passed through 100% to the customers. So those are the main impacts in our accounts. And it's true that we should be able to continue improving if we are able to pass through the energy cost to the customers.

Okay. And any new order win in the Metalcastello do we have in this current year or is what order book we have will be able to help us grow, I mean, even next year?

Not new big businesses. I mean, just [ some are ] more internal new orders. But not big ones to be highlighted in this moment. In this moment, what we are now recuperating in the Metalcastello plan for the future, where, as you know, we are 100% of our capacity utilization. So if we want to continue growing, we need to add additional capacity, okay? That's the situation where we are having in Metalcastello in this moment.

Ander, earlier, I mean, we moved some part of the order to India, and is it possible that with getting more order, we can move those part of the order to India in case of this capacity constraint is not really been resolved?

Yes. The situation in the gear business in India, because you know that Metalcastello is in gear for the user, and we have also the Gear division in India. The Gear division in India has been also in the last year at 100% of the capacity utilization, okay? We were fully booked. This last month, we are a little bit better because of the drop of the 2-wheeler. But once the 2-wheeler recuperates, we will be, again, let's say, at 100% of the capacity utilization in India. That's why we are expanding our activity in Rajkot where we opened a new plant, and we are now preparing that plant to continue growing. And also, we are expanding our capacity in our Pune plant, where we will continue adding capacity to continue our growth trend, okay? So it's a good point that you mentioned, to use the capacity in India, but the point is that in India also, we are fully booked in the Gear division, okay? So the expectations are very good in both regions, and that's why we continue our growth and capacity expansion strategy in both regions.

Okay. Last question, Ander. On this FTF retail agreement that India is negotiating with the euro, happening of that, I mean, will it benefit Indian subsidiary?

We'll have to study that. We have not looked at that, how the free trade agreement, if at all it happens, when it happens, will affect us. Please allow us to have a look at that and then we'll come back to you.

Okay. And on the CapEx guidance for the current year?

JP? 5% to 6% of sales. But JP?

Yes, yes. I think it's 5% to 6%. Yes.

[Operator Instructions] The next question is from Nikhil Kale from Axis Capital.

Yes. Sorry, just one follow-up from my side. On the RM price increase that you have talked about, just wanted to understand, is there also a component for -- within that, is there a component for previous quarters? Or is this pertaining to just this quarter?

Normally, all the RM -- the steel price and aluminum price increases are settled within the quarter. Ander, can we confirm that there was no steel or aluminum settlement from earlier quarters in this quarter?

No, no. I think you properly answered, Vikas. I think all the raw material increase in this quarter is coming from this quarter. There is no settlement. There's perhaps -- there is small corrections in certain customers, but not relevant at all.

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

My question pertains to European operations -- so for European operations, can you indicate what was the impact of unabsorbed or the energy cost which was passed through in 1Q? And what further impact do you expect in the coming quarter?

Jinesh, you'll have to come again. Impact of unabsorbed?

The energy cost, which has not yet been passed on to the customer.

So the question is, what proportion of energy costs have been absorbed and what needs to be passed through, right?

Right. Right. And impact in this quarter because of energy cost on your margins?

Okay. So Ander and Oroitz, so the question is, have we -- what proportion of our energy cost we have been able to pass on, the increase, say, like maybe all customers or 50% or whatever that number; and two, what was the impact of unabsorbed -- the energy costs that we were not able to pass through in quarter 1? What was the impact on the margin? whether it is 0.2, 0.5 or whatever.

Yes. I think we passed through approximately 1/3 of the real cost increase, okay? That can be the value, between 25%, 30%. That's less than 1/3, okay? That's what we have been able to pass through the customers. So of course, we are negotiating with them and probably we will recuperate part of this loss in the next quarters, okay? That's the expectation. So -- and the margin that we lost -- we lost due to this energy increase, we can consider approximately 2%, 3% in Europe due to this energy impact, yes.

Got it.

3% that can be the impact that we lost due to the energy in the quarter, yes.

Right, right, right. Okay. And second question is on the India business. So on the clean price side, we have been seeing inflation even in 1Q, do you expect further inflation based on where spot prices are continuing in second quarter as well? Or you are seeing some stability in your procurement prices now?

Jinesh, I think the steel prices are still in an inflationary mode.

Okay. Okay.

We expect an increase in India, not in Europe where the steel price has already increased. And we think that the price will be stable in the next months and quarters. But in India, there is some pressure to continue growing from the second quarter onwards, okay? So we will see probably that an additional inflation in raw materials in the next quarters.

And any idea what could be?

No, it is yet not decided.

Sure.

But it will be double digit.

It's difficult to say.

It will be double digit, okay.

Because when we negotiated, sometimes not by the customers, and they are still negotiating. So we are not aware of the amount that could be. But probably will be a certain increase in the -- by the next quarter, we will be able to see it in our sales.

Got it. Got it. And last question on the Mexico business. So it has seen a very strong evolution over the last couple of years. Now with monthly run rate at $2.5 million of revenue, do you see further growth in this business based on the capacity and the order book which we have or the peak revenues would be about $2.5 million per month?

Yes. In this moment, we are at the peak of our revenues regarding the original plan that we have for this company when we set up our peak was at the current situation. So it took a couple of years more than what we expected, but we are already there. But hopefully, we got additional customers. So we are adding capacity, and we have a new press ready to be installed, but we are in the setup mode in this moment in Mexico. And yes, we expect to continue growing the business in the next quarters, okay? So we have already -- the order book is already confirmed from the customers, and we expect to continue growing in Mexico in the next years here.

Okay. So based on order book, should we expect revenues to further double from here and next 2 to 3 years?

Sorry, I didn't catch you properly. Vikas, can you help me?

Based on the order books and the capacity expansion over the next 3 years, should this monthly run rate of $2.5 million further double?

Yes. Could be. That will be the best case, but the expectation would be to -- if we are now at $2.5 million, probably having the company selling at $4 million per month could be rationable, even $5 million if we got new orders, okay? But with the current orders, we will be not doubling the business, but growing 50%, 60%.

Got it. Got it. Great.

The next question is from the line of Basudeb Banerjee from ICICI Securities.

A couple of questions. One, sir, in last quarter con call, you mentioned that there has been a certain surge in EV 2-wheeler related order book in India from select OEM. I missed out. So any further development on that -- this quarter?

No. It is continuing along those lines. So there is nothing very specific to report. But yes, booking EV orders is now an integral part of our working. So it is continued.

And any new customer addition in the 2-wheeler EV space as such?

Not to report in this quarter.

Okay. And second question would be very much repetitive. So I'm sorry to ask it again. if you can again mention how much was the steel inflation Y-o-Y in Europe business? And how much was the pass on for that?

Yes. JP or Oroitz, in Europe, how much was steel inflation, and that was one part of the revenues was still inflation.

So the 12% is the price impact on the growth now. We mentioned that. Out of the 20%...

Out of 20%, 10% was because of inflation and cost commodity inflation for you was how much overall?

No, I didn't get that commodity...

Cost of steel per tonne for you, sourcing cost, that's how much, sir?

Oroitz, you will know that number, what is the steel price increase? I mean, it would be around 25%.

It has been around 10%.

Year-on-Year.

In the last [indiscernible].

Okay. And you're saying that still under recoveries are there. So there is some scope for under recoveries to continue to result in further price hike requirements. Other than...

Not on steel. Only pass-through.

And the power costs you are saying you are planning to pass-through in the coming quarters?

Yes. Steel is pass-through, power is still under negotiation.

The next question is from the line of Rajkumar, an individual investor.

Congrats for a good set of numbers. So I have just one question. Sir, given that many of the auto ancillary units are not doing well because of the significant steel price increases and the other inflationary thing, I just want to know what is your view on -- will there be any further consolidation that's going to happen, particularly in India? And also if Mahindra CIE looking at any M&A opportunities mainly?

Thanks, Rajkumarji. Of course, given the more very volatile situation, the kind of scenario that you're thinking can happen. But as we have mentioned in the past, looking for M&A opportunities, is part of our business strategy. But we are going to do an M&A only to fill strategic gaps. As you can very clearly see, we have enough order book, enough opportunities to grow in India. You heard how strongly we are growing in Mexico. Even in Europe, you saw how strongly Metalcastello is growing, plus when the war situation eases out, then the European light vehicle markets also, we expect to rebound. So there are -- there is enough growth opportunities in our existing businesses. So any M&A that we will do, we'll do it very selectively, and we'll do it to fill up any strategic gaps or any specific capability, any specific customers that we want to onboard. So right now, we have our hands full dealing with the situation that we talked about in terms of growth. But we keep looking for it. At this moment, we have nothing specific to report on the M&A side.

As there are no further questions from the participants, I now hand the conference over to the management for closing comments.

Yes. Thank you, and I'll hand you over to Ander for his closing remarks.

Okay. So thank you, Vikas. Yes, I want to thank you, all of you, for your participation and for your interesting questions and your interest in our company. And I hope we answered the questions properly, and accurately. And yes, my message is that despite the difficult market and geopolitical environment that we are leaning in this moment, I think our company proved once again its resiliency and good management. So we were able to recuperate part of our margins that we lost last year, and we expect to continue this trend in the near future, okay? And as always, I want to say thank you to all my CIE -- Mahindra CIE team, that they are doing a good job with a good dedication, commitment in very difficult times. So I'm sure that we will continue improving our results in the future. So thank you very much, everybody.

Yes. Thank you very much. Have a good day, guys.

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