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

Ladies and gentlemen, good day, and welcome to Mahindra CIE Limited Q3 CY 2022 Post 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 to Mahindra CIE management for giving us the opportunity to host the call. We have with us Mr. Ander Alvarez, CEO of Mahindra CIE; Mr. K. Jayaprakash, CFO; Mr. Vikas Sinha, Senior Vice President, Strategy; Mr. Oroitz Lafuente, Business Controller; and Swapnil Soudagar, DGM Strategy. So over to you, Vikas, for your initial comments, and we'll take the call ahead [ accordingly ].

Yes. Thanks, Basudeb. Good evening, everyone, and good afternoon to those who are joining from Europe. I welcome you all on this call as also our CEO, Ander. Thank you for attending the call despite a relatively late starting time, especially for Asian investors. Sorry for the quick turnaround between results and call. We won't make this a practice. We start with an overview of the legal structure of MCIE. We would like to point out that during this quarter, CIE has bought out some of M&M stake in MCIE. And consequently, CIE's stake has gone up from 63.44% to 65.71% while that of M&M has come down to 9.25% as against 11.43% earlier. This move, again, reiterates CIE management's strong belief in the growth opportunities available in the Indian market and the fact that they look towards MCIE to continue outpacing the market. Let us now move on to Q3 C22 results for MCIE, which is on Page 7 of our investor presentation. Q3 C 2022 sales for India were at INR 14,294 million, which represents a 34% growth compared to Q3 C '21 and a 12% growth versus -- sequentially versus Q2 C '22. Like the last few quarters, the revenue growth rates are higher than the underlying market growth rates. MCIE India EBITDA margin in Q3 C '22 is 15% despite the adverse impact of commodity prices, RM prices has also an increase in the cost of energy in Maharashtra, where many of our plants are located. EBIT was at 11.4%, which is better than both year-on-year 10.8% and sequentially 11.1%. In India, the month of September has seen good sales across all segments, especially 4-wheelers, and we largely expect this trend to continue. The festival sales are also going well. However, historically, due to the cyclicality in the tractor demand, we could see a slight slowdown after the festive period in this segment. Sorry. On Page 8, we have the Q3 C '22 results for MCIE Europe. Sales were at INR 11,632 million, plus 28% versus Q3 C '21 and a little lower versus Q2 C '22. But we have to remember that roughly 3/4 of August is closed in Europe. So about 20 days is not there in this quarter. And of course, in this quarter, there were headwinds on RM prices and unprecedented energy cost rise and of course, the effect of the usual August holidays that we talked about. And also, we would like to mention that in this quarter, there was a negative exchange rate translation impact of about 11%. So on a EUR basis, we have grown by 39% year-on-year. The sales drop compared to Q2 C '22 was 9%, which is explained by all the factors that I talked about. The EBITDA margin in MCIE Europe in Q3 C '22 was 10%. This margin is lower sequentially than Q2 C '22. Of course, some of it is attributable to the seasonal drop in sales explained above and also the energy price increase. We are confident that just like the energy impact in Q1 C '22, we will be partially able to get some of these increases to our customers in the coming quarters. On the demand side, even though the customer schedules have not decreased, it is very uncertain as to what impact energy prices will have in Q4 C '22 due to the Ukraine war situation. And now if we go to Page 9, we will see the consolidated Q3 C '22 results, which are a combination of the India and Europe results. Q3 C '22 consolidated sales were INR 25,927 million, plus 31% versus Q3 C '21 and plus 1% versus Q2 C '22. This quarter represents one of the highest ever quarterly sales that we have had. And the other aspect that we would like to point out that now India is much higher than the 50% mark that we are talking about in the total consolidated sales in this quarter. Consolidated EBITDA margin in Q3 C '22 was 12.8%. Consolidated EBIT margin was 9.4%, and this consolidated EBIT margin is almost close to the 9.7% that we achieved in Q3 C '21 and 9.8% in Q2 C '22, in spite of all that is happening in Europe. Consolidated EBT in Q3 C' 22 was INR 2,272 million at 8.8%, which is higher in absolute terms than the INR 1,790 million at 9% that we achieved in Q3 C '21. In fact, if you see, profits in absolute terms are increasing, Q3, C '22 consolidated EBT is 27% higher than the corresponding quarter last year, in spite of the margin changes. On Page 11, we have the 9-month C '22 results for MCIE India. Sales were INR 39,109 million; EBITDA, 15%; EBIT 11.2%. Page 12, we have 9-month C '22 MCIE Europe results. Sales were INR 36,871 million. Again, India is much higher than Europe. EBITDA at 10.6% and EBIT at 7.5%. Consolidated 9-month sales was INR 75 -- almost INR 76 billion. EBITDA at 12.9% and EBIT at 9.4% EBT. So we have a solid company performance, despite the complicated scenario in Europe. We believe geographical diversification and an empowered management at local levels is helping us deliver these results. These two factors are some of the key features of CIE's strategic philosophy, and we'll continue to work along these loans. So with that, I'll close my remarks. We wish everyone on the call a very happy Diwali and a prosperous New Year in advance. May the festival spirit uplift our industry. And let's now proceed to Q&A.

[Operator Instructions] We have our first question from the line of Jinesh Gandhi from Motilal Oswal Financial Services Limited.

Firstly, can you talk about the impact of energy prices in Europe in this quarter and what we expect in the coming quarter?

Okay. Ander?

Good afternoon, everybody. This is Ander Arenaza speaking. Okay. The energy prices during the third quarter this year were the highest energy prices we have ever seen, okay, even higher than the worst moment when the war in Ukraine started in end of February, beginning of March, okay? At that time, the energy, electricity price, for example, went up to something like EUR 300 per megawatt in March 2022. And in July, August, we have been hitting EUR 400 per megawatt, okay? That has been the huge peak that we have been suffering in all the European countries. Different in each country, but average would be like that, okay? Even in Germany, we were touching EUR 700 per megawatt in certain days. This situation, of course, is not sustainable. And hopefully, the trend has been going down, and we have seen a pull-off of the energy prices during September and October, up to this EUR 250, EUR 300 per megawatt, where we are now, okay? We have been dealing with all the customers to pass through. I mean, we have reached agreements with all of them to pass through partially this impact, and that's how we are trying to manage this situation. Of course, there is a delay in the application of these agreements. So we will see a certain -- you saw a certain impact on the Q3 margins, and we expect to recuperate, at least partially, in the next quarters. But that is the impact in the -- of the energy prices in Europe in all the industry. And I would say, in all economy, has been really, really terrible.

Okay. But can you quantify impact in 3Q for the European operations? How much margins were impacted just because of the energy cost inflation?

We have had -- okay, depending on each of the technologies, we have a different impact. But generally, we can -- you can consider that the energy impact in certain products where we have the heat treatments, plus the hitting of the forging operation and -- could go up to more than 10% on this -- on the prices. This is the peak that we can have in certain products. But the real impact in our P&L after negotiating and after passing through can be approximately 1% to 2% on the results, on the markets.

Okay. Okay. Got it. And do you also foresee a risk on continuity of operations because of availability of power or energy in fourth quarter? Or that is definitely not concerned -- cost is the only concern?

Okay. In this moment, we don't see that risk or we -- let's say that we are producing normally, we have availability of electricity and gas in all our operations in this moment. There's no signal of shortage of energy in our businesses. But it is true that there are some rumors and some comments in the -- in Europe, especially in the Northern Europe, I mean Germany -- Germany and Romania, let's say, all the Central Europe, where it could happen that there is a lack of gas available, so that the industry could be affected, okay? So -- but in this moment, we don't see that. From the order point of view and I think from the demand point of view from our customers, we are now quite satisfied because the demand is still strong. They keep fulfilling our order book. And the order book is really strong in this moment. So let's see what's going on with the gas situation and with the negotiations with the gas suppliers, mainly from Russia or from the States and also from the Middle East. And we are waiting for the outcome of those agreements, okay? My view is that probably there will be a certain slowdown on the economy until the final solution is reached. But in this moment, as I mentioned, our -- all our operations are running smoothly with no problems. But, okay, the risk and the uncertainty is there.

Got it. Got it. And you talked about the agreements have been reached for passing on this cost inflation. So would it be to a similar magnitude like in the recent past, where between 60% to 70% of cost inflation was passed through and balance was [ job ] by us? Is the magnitude of past similar at this time as well?

Yes. The magnitude is similar to those you mentioned, yes. In that range, that is the average in the market. Yes.

Got it. And last question before I fall back in queue, is on the European demand side. So on one side, your OEM customers are indicating very strong demand. And on the other side of the outlook for light vehicle production, which we have given from IHS that talks of decline in CY '22 as well as a sub-3% CAGR over the next 3, 4 years. So clearly, there is a [ negativity ] between these two. What is your sense with respect to what kind of a group can we expect in Europe, going forward? I mean I presume the chip-related issues are largely behind us, at least from 3Q onwards. So how do you see growth, going forward?

Okay. The reality is that -- okay, for me, it's a very complex question to answer because the word that I used more frequently in the Board that we finished some hours ago, is that the uncertainty, okay? The real uncertainty that we have. On one hand, we see the -- our customers. They are continuing pushing us to produce and to, let's say, to launch the raw material orders because they will need the products, they will need the parts in the next months. And our order books, our [ PBIs ] are full and the demand is really strong. On the other hand, we also see that there is a market signs that, okay, there could be an energy shortage, so that could affect the industry. So there is a risk of that could happen. So that's where we are now trying to navigate, okay, in this uncertainty. My view -- my personal view is that the automotive industry in Europe in the last 3 years has been completely depressed, I mean, especially the European after the COVID when we were at approximately 15 million cars in Europe in the COVID year, in 2020. The following year due to the semiconductors, we were also at 15 million cars. In this year, 2022, because of the war, because of the energy, whatever, we are again at 15 million cars. So we are in a depressed mode in this moment, okay? So I think we can only go up and I will -- I expect to have a recovery, as IHS said in the last report, of 7%, 8% of growth for 2023. So my expectation is that hopefully, the market will go up and will recuperate in the next years, yes.

We have our next question from the line of Nikhil Kale from Axis Capital.

Congratulations on a good set of numbers. Can you help us, I think in the previous quarters, you had talked about constant RM growth -- revenue growth at constant RM. So can you just help us with the numbers for this quarter?

Yes. Okay. In India, we had the raw material growth coming from the raw material with 6% approximately. And in Europe, 15%, okay? That's the figures that we had.

There's a [ difference ] in RM impact? Positive impact?

That's right. Those are positive impacts because of the higher raw material price. Year-on-year.

And that [ currency change ] impact also and -- of 11% for Europe.

Yes. And that's also additional impact, 11% difference. And we have 11% negative due to the currency in Europe, yes.

But yes, very clearly, you are seeing really strong outperformance versus the industry. So just if you could just provide color, I mean, which segments are you seeing, especially in Europe, is it -- I mean, what would be the revenues of Metalcastello? I think there, we are running at full capacity. So maybe just some color on the PV forgings and [indiscernible] also in the Truck [indiscernible]?

Yes. Metalcastello is working at full rate in this moment. As we mentioned in the previous call, Metalcastello is doing really well and most of our Metalcastello production goes to the U.S. The U.S. market is still pushing very, very hard and we are working 24 hours, 7 days, okay? So -- and we are adding capacity to fulfill the demand. So in that sense, yes, in Europe, one of the winners is our Metalcastello company evolution. Regarding the passenger car forging, yes, also, the trend is also very strong, and we are selling at a very high rate in this summer time. You know that usually, in the summer, we have the summer holidays when our customers are [ topped ] about 3 weeks completely. And this year, we have seen -- we were expecting probably a higher drop. But in fact, the demand was really strong. And you can see in the figures that we were about, in EUR, 39% above last year in Q3, okay? So, yes, the evolution is really, really strong. Part of this 39% of growth is coming from the raw material, as I stated before, approximately 15%. But we can consider that passenger car is doing also really well. And the commercial vehicle sector also grew and also show certain good performance. Probably it's more cyclical, and we expect certain decline in the next quarters, we could foresee that. But overall, I think the market continues quite strong.

Okay. But just coming to the CV forgings part, I think you're seeing really strong growth. But at the same time, we've been talking about scaling down that business over a medium to longer term. So how do both these things now kind of play out in your plans?

Yes. The point of this business, you know that the CV forgings in Europe is -- has the less profitable business that Mahindra CIE has worldwide. This business is poor profitability, is affected also negatively in really high inflation scenario and also with high raw material plus energy price increases. So the evolution of this business is more and more difficult, okay? So that's why we rather prefer to slow down rather than growing and having additional difficulty. So our strategy there is to -- we continue trying to improve the business and trying to get the maximum efficiency, on one hand. On the other hand, of course, we need -- we have no chance than passing through the cost increases to the customers. In this business, we cannot [ achieve ] 60% or 70% of [indiscernible] because then we would be in a negative point. So we need to be -- we have no chance and be more aggressive to pass through these cost increases, okay? So that is the reality of this business. So in the future, we will decide -- we will have to decide what will be the strategic growth for this business.

For the time being, can we just assume maybe growth will be in line with how the CV industry in Europe kind of pans on, will continue to grow at similar levels?

Growth in Germany?

Yes.

Will it be in line with CV industry growth?

No, probably what we will see in Germany will be lower growth than the market growth, okay? We will probably reduce certain products where we are not profitable. So we will see a certain reduction in the turnover.

[Operator Instructions] We have our next question from the line of Abdullah [ Salmani ] from [ Metaverse ] Equity Funds.

Actually, my question is related to war only. I mean, in the aftermath of the Ukraine war in China, how will your business strategy change prior to war and post?

How has the Ukraine war changed our business strategy?

Okay. In fact, we have not changed strongly our strategy because CIE's strategy has been always be local-to-local [ supply ], okay? We prefer to produce in America what we sell in America, produce in Europe what we sell in Europe and produce in Asia what we sell in Asia, okay? That's the strategy. So we keep this strategy. Now, also because of the environmental requirements and more stringent targets that we have, we are also trying to avoid unnecessary logistic cost and emissions. So in that sense, this local-to-local strategy is reinforced. Considering that we are a global company, and we have our -- let's say, we are positioned in all the automotive markets around the world, I think this is the proper approach. And that's exactly what we are now perceiving from our customers. Our customers, they are now more and more looking for this strategy that I think is more sustainable and avoid logistic costs, currency exchange costs or risks, emissions and also geopolitical tensions that, okay, time to time happen. And we know that this can disrupt and/or break the supply chains around the world, okay? So I think that is the strategy. So we will reinforce our presence in India to grow in locally and to produce locally what we sell here. And also, we will keep the European business and the Mexican business and the American business there, in order to supply locally to all the markets. That's the strategy. There is no big changes in our view because we have had this strategy from the beginning.

We have our next question from the line of Bharat Sheth from Quest Investment Advisors Private Limited.

Thank you very much for opportunity and a good set of -- congratulation on good set of number in the whole CIE. Ander, earlier, we had moved some of our -- I mean one order from Metalcastello to India around 5 million. So how that has gone successfully? And are we seeing some of these U.S. business order to Metalcastello to transfer into Indian manufacturing? So what is the strategy over there?

Yes. Yes. We have transferred part of the production from Metalcastello to India. And due to many different reasons, okay? First reason is that the final customer was located in India. So it makes sense as I told before, the local-to-local approach, I think it makes sense to produce those parts in India. And secondly, also because of the lack of capacity and the, let's say, the bottleneck that we have in Metalcastello Italy. So that also make pressure to us to move this production to India. So we have done this, the transfer, the transfer was successful. And we are producing in India with normality to the final customer. So also, it's important to say that we have had -- during these years, we have done the technology transfer from Italy to India. And now we are producing really complex parts in India, and we have now the knowledge. We have the machinery to produce the same kind of products that we produce in Italy, we can produce them also in India. So this process is ongoing, and it's ongoing successfully. So both -- the Gears division in both regions is doing fantastically.

So in future, do we expect, I mean, to get more [ Gear ] business because the way -- I mean capacity constraint, we are facing in Metalcastello to transferring into India? And is that -- how big is the opportunity?

Okay. In this moment, also in India, we have, let's say, certain bottlenecks because of the capacity constraints. Not exactly in this moment because the tractor business is now quite low, and we produce a lot of gears in India for the tractor business. But once the tractor business come up, that will come for sure. Our capacities in India are also limited. So our plan is to continue investing and growing in India, and we have our plans to expand our Gear division in India. And also, we have plans to build new plants to continue our growth trend and take the opportunities that we have in the market in this moment, okay? So not necessarily transferring from Metalcastello. Some of the products could be transferred from Italy to India, if it makes sense. But the real -- the current market in India is giving us enough opportunities to continue our growth in India without the need of transferring production from Italy.

And second question now, [indiscernible] Italy. So Europe and India, how we are -- I mean, the things are playing out? And second thing, what we have been listening at some of the people, I mean power train manufacturers are reducing [ crankshaft ] capacity, or [ transferring ] to other products. So -- but [ ICE ] business, so how do we see gaining a market share in the [ ICE ] business over time?

Okay. In Metalcastello, as we have already explained in previous calls, we got new businesses from electric vehicles, very large business that we have now, let's say, increased. I mean, we have been nominated for additional electric vehicle products. So we see the trend, clearly. And the new orders are now more and more coming from the EVs and the hybrid vehicles. So in that sense, in Metalcastello, the transition will be absolutely natural because the market is pushing us to those -- to that kind of components. And coming back to the internal, let's say, the rest of the forging, I mean our crankshaft business is not affected yet. I mean we are not affected until now because there is a -- due to the mix of product that we have with a mix of customers, plus the market evolution, we don't see the reduction. But what we are now preparing ourselves is that in 4 or 5 years, we will probably see a decline on the demand of these kind of products, and we will prepare ourselves to change our product portfolio to others, as we mentioned also before, from chassis component and also aluminum forgings and all other kind of products that we are developing in this moment.

So I believe that in Europe, we had started or we were to start about on aluminum forging [ factory ]. Where we are at this moment?

Okay. We have had our first orders in the aluminum forgings, and we continue developing the technology plus the products, and we are working on it. I mean there is no additional information that I can disclose, but we continue working on it.

Okay. On India business, any addition of new clients or any addition of the new business in Q3 vis-a-vis earlier quarter? And how those new customers, which have been added over last 12 months, is performing?

Any new big orders -- no. But in terms of new capacity additions, I think capacity additions are ongoing in almost every vertical that as we have reiterated in the past. You have Magnetics, where there is an expansion program, which will substantially increase capacity. We have a new plant at Gears. A new plant is being set up at AEL. All these are ongoing programs. You have CIE Hosur, where most of the infrastructure has been set up. And first order, we have started to generate revenue from that place, and it is now in the process of being ramped up. You had the [ warm ] forging plant, which has been partially set up at Chakan. We will put in more machines there. So this is -- the capacity addition is an ongoing process. In terms of order book, if there are any significant new orders, at this time, we don't have that, maybe we will talk about it in the year-end call. But we let you know about the order book or the new orders generated in this year during that period.

So Vikas, my question was related to more on the new client acquisitions or increasing the [ content ] per vehicle from the existing plan? So if you can give a little more color on that side also.

No, in terms of increasing our share or having more business from our existing clients, that's going on. Whether it is Mahindra, as you know, Mahindra is going through a lot of new model launches. So we are there in all of the new model launches as also the model launches next year in the EV space. Same case, as far as Maruti is concerned, and also, we have a very strong situation developing in Tata Motors also. So that is in the 4-wheeler segment. In the 2-wheeler segment, we have talked about how CIE Hosur, we have had new orders. CIE Hosur has the [ new ] setup for new orders that we have got, I think, from PSA and Royal Enfield. So that is there. So we have -- like, for example, Ander talked about how he is bullish about the tractor segment, which will have an impact on our plants at Rajkot and Zaheerabad. We are receiving from the new model launches by [indiscernible] tractor segment. A lot of them are slated in the coming few years, not necessarily in the next few quarters. But they have a strong pipeline of their -- there, and we will be presenting all of them. So to that extent, we are quite comfortable in this [ area ].

[Operator Instructions] We have our next question from the line of [ Enrique ] from [ Bestinver ] Securities.

I have [ very general ] questions. The first one is regarding the [indiscernible] difficulty -- strengths that you have in India. Do you foresee the need to accelerate the CapEx allocation in India next year? Or with the ramp-up of the current investment, this will be enough to supply the market?

Okay. It's true that we have in certain businesses, in certain verticals, we are limited and we cannot continue growing if we don't invest. But our investment plan is solid and it's done from, let's say, several years ago, okay. Even in the COVID year, 2020, last year, 2021 and this year, we are investing heavily to, let's say, prepare ourselves to cope with the demand that we foresee from the market, okay? So this year, we are investing and this -- I can give you the figure, that's close to, till now, INR 4 billion on CapEx. Most of it is located in India, and we are adding capacity, and we are adding plants in almost all the verticals, okay? So we continue our capacity expansion trend and -- because we needed to continue growing in the market. So we expect that during this year, we will have an important CapEx in India. Next year, we will have again because we think that the Indian market will continue growing. And also, regarding the mix of customers that we have, we see that, okay, we are growing a lot with Mahindra as it is normal. I think Mahindra is doing really well, and with the products -- with the new products they are launching, they are having a big success, and I think that will be a good opportunity for us to continue growing. Also with Tata, also with Maruti, I think that we are well located to continue our growth strategy, okay? So to your question, yes, we have had limitations, but we are now launching additional CapEx, aligned with our customers, to fulfill with the demand, okay? So our strategy is to continue our customers as much as we can.

Thank you. And the other two questions are regarding profitability in Europe. First one should be Q4. You mentioned that there has been some delays in the pass-through of energy inflation to some clients. So my question is, taking into consideration the spending pass-through and the limited visibility that we have on market demand, should we expect a profitability improvement in Q4, taking into account our spending pass-through in Europe?

Okay. If the situation of the energy market is stabilized and the demand continues as it is now, yes, we should have this recovery, okay? Because we will be able to recuperate what we lost in the previous quarter. The point is that we don't know what will happen with the market in the next quarter, and we don't know what will happen with the energy, okay? So that's why I cannot say total yes or a very solid yes to your question because it will depend on how the energy market plus the demand behaves. But in normality, yes. This -- if you recall from the previous quarters, in the Q1, we were negatively affected because of the start of the war in Ukraine and in February, March, the energy went up and we had difficulties. So we lost certain margins. In the Q2, we recuperate, now in the Q3 when -- as the energy is picking up again, we go down again. So that's the scenario we are suffering, very, very complex scenario. And yes, it's really, really tough situation to manage with this uncertainty. But yes, I agree that in a normality, we should be able to recuperate part of the margins that we have lost in this quarter.