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

Ladies and gentlemen, good day, and welcome to Mahindra CIE Q1 CY '23 Earnings 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, Mr. Banerjee.

Thanks, Nirav, and thanks to the senior management of Mahindra CIE Automotive Limited for giving us the opportunity to host the call. The management is represented by Mr. Ander Alvarez, CEO; Mr. K. Jayaprakash, CFO; Mr. Vikas Sinha, Senior VP, Strategy; Mr. Oroitz Lafuente, Business Controller; and Mr. Swapnil Soudagar, DGM Strategy. So without wasting any time, I would like to hand over the call to the senior management of Mahindra CIE to take over. Thanks.

Yes, thanks, Basudeb. Good afternoon, everyone, and good morning to those who are joining from Europe. I welcome all of you, as also Ander, our CEO. We are going to talk about the MCIE results from January to March 2023, quarter 1 of calendar year '23, Q1 C '23. At the outset, we would like to bring to your attention that during this quarter, M&M has reduced its shareholding in MCIE from 9.25% to 3.19%. We would also like to update on the name change. We have applied to the registrar of companies for changing our name from Mahindra CIE Automotive Limited to CIE Automotive India Limited. The approval is expected in the coming weeks. We now start with MCIE India results for Q1 C '23, which are on Page 6. Sales grew to INR 13,541 million from INR 12,022 million in Q1 C 22, which represents a 13% growth year-on-year. In this quarter, our EBITDA was INR 2,267 million; EBIT, INR 1,718 million; and EBT 1,639 million in MCIE India. Net sales in MCIE India grew 13% year-on-year EBITDA 25% EBIT 28% and EBT 24%. The EBITDA margin for India in Q1 C '23 was 16.7% compared to 15.1% in Q1 C '22 and an operational EBITDA margin of 15.7% in Q4 C '22. Please note that in Q4 C '22, there was a onetime impact of EBITDA of INR 378 million. That is on profit of land sales due to which the reported EBITDA margin in Q4 C '22 for MCIE India vertical was 18.5%. Now the India business has grown on the backdrop of a mixed market scenario. The light vehicles market has grown at 9.5% year-on-year in this quarter, but the 2-wheeler market has fallen. We would also like to point out that Q1 seasonally is normally a good quarter, it being the last quarter of the financial year. Now we move to MCIE Europe results for Q1 C '23, which are on Page 7. Sales grew to INR 9,666 million from INR 7,533 million in Q1 C '22, which represents a 28% growth year-on-year. This increase in sales has helped by a 6.6% gain in ForEx and a 17% growth in the light vehicle market year-on-year in this quarter. Please note that the forecast for the subsequent quarters in the light vehicle market show a much lower growth rate on account of rising interest rates and uncertainties in the economy. The Q1 C '23 EBITDA in Europe was INR 1,699 million; EBIT, INR 1,423 million; and EBT INR 1,265 million. Net sales grew 28% year-on-year. EBITDA, 55%. EBIT, 67%. And EBT, 52% in Europe. EBITDA margin in Europe in Q1 C '23 was 17.6% compared to 14.5% in Q1 C '22 and 14.6% in Q4 C '22. This improvement in margins was a combination of higher sales and lower energy costs. 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 in Europe. In Q1 C '23, MCIE on a consolidated basis achieved sales of INR 23,206 million and EBITDA of INR 3,966 million, which is a margin of 17.5%; an EBIT of INR 3,141 million, which is at a margin of 13.5%; and a EBT of INR 2,904 and an EBIT margin of 12.5%. These margins are the highest margins we have achieved in MCI history, and this aligns our results with CIE ratios globally. In closing, we would like to say that we continue to focus on internal improvements and building a stronger company, and which means we will strive to take advantage of all the opportunities that come our way. With that, we can proceed with Q&A.

[Operator Instructions] The first question is from the line of Nikhil Rungta from Nippon India and Mutual Fund.

Sir, Congratulations on a great set of numbers. Just one thing from my side. In Europe, we have posted very strong margin during the quarter. You indicated it because of higher sales and lower energy cost. In what time or see how many quarters do you think we continue to get a benefit of the lower energy cost?

This is Ander Arenaza speaking. In Europe, you know that during the last years, we have had a huge impact on the energy prices, especially when the war in Ukraine started, okay? There was a huge peak on energy prices, both electricity and gas. During -- part -- completely -- part of the year, we suffered a lot on this because the process of passing through to the customers was difficult and was delayed. And hopefully, by the beginning of the year, the energy prices have gone down. Importantly, we are now at about, we can say, an average of around EUR 100, EUR 120 per megawatt. So the impact of -- on this energy cost in our margin is coming to normality, okay? Considering that we have already negotiated with the customer the passthrough processes, we have now recovered certain normality in our margins. So this is one of the main reasons to increase our margins in Europe. Also, the -- as Vikas explained in the presentation, the turnover, I mean, the volumes helped us also because the market performed really well in the first quarter. And what we see right now is that we can have certain -- uncertainties on the volumes, but it seems that the energy prices continue in the range that we have seen now, okay? This is something that we cannot predict. But if the energy continues in the current range, both electricity and gas, because the gas is even below EUR 50 per megawatt, when last year we hit EUR 180 in second quarter, so now we are at EUR 50 per megawatt, that is something reasonable. I think we'll be able give current margins in the next quarters, okay? So everything will depend on geopolitical movements, what's going on with the war in Ukraine, what will be the balance on the energy prices between the different countries, that will affect, of course, to the energy prices. But our expectation is that the energy prices will continue more or less stable at these figures. And if that is the case, we will be able to keep on with the current margins.

Okay. And sir, just to continue on this particular question. See if there is a status quo on the geopolitical scenario, then we -- can we assume that this 17% to 18% margin in MCIE Europe, we'll be in a position to sustain that say over medium to long term as well?

Yes, yes. I would say that considering this scenario on volume, let's say the volumes are fulfilled, I mean the market continues running as it is now, we should be in the range of market.

Got it. And sir, last question from my side. On MCI India, I don't have anything to comment, continue to perform strongly. Just one thing on our discontinued operations during the quarter, we reported profit of approximately INR 60-odd crores, INR 70-odd crores sir during the quarter. So, do you think you would be in a position to get back basically the goodwill of any impact goodwill which we would have -- which we would have written off in the past quarter. Because given the book value of that discontinued operation now and the profit -- quarterly profitability which is reporting, do you think you would be in a position to get higher value, significantly higher value than that?

Okay. It is, let's say, evolution of the -- our German Forgings. We have had some one-offs that improving our accounts in the last quarter. So especially in this last quarter, we have -- we received the payment of several customers that paid us the energy increase pass-throughs from the previous quarters, okay? Because there are -- in certain customers, we have delays in the application of the energy increases. So in this quarter, we recuperated this impact. Also we received the subsidy from the German government on energy. So -- and additionally, we have also one-off coming from, let's say, incident costs that we passed through to our supplier. I mean, we had quality issue coming from a supplier and we were able to pass through this quality issue 100% to the supplier. So these things made this really high results in the first quarter. And what we see is that our selling process of the company continues, as we explained in the last call. There is no any new information to share. I mean, we continue -- the process is moving on. We have several interested parties and we are working with them. We have prepared and exchanged several information with them. So we continue with the process of the sale of the company. So let's say that we are optimistic that we will be able -- in the next quarters, we will be able to successfully close this operation.

Perfect. And sir, what would be our capacity expansion plan in metalcastello given that your working at a high capacity utilization there and we are getting good traction from big customers, both from Europe as well as from U.S.

In metalcastello, we -- in the last years, we have been adding capacity. We have been adding new machinery, the state-of-the art machinery with several power clean machines, and these are best-in-class machineries that we are now using to produce gears in Metalcastello. The fact is that we have been also picking up -- up to EUR 75 million, EUR 78 million to cover in Metalcastello. That is the highest to cover that we have ever had in the company. Also, the reality is that in the next quarter, we are monitoring the American market because you know that approximately 70% of our sales in Metalcastello are shipped to U.S.A., and we see a certain decline in the demand in U.S.A. for the next quarter. So really because of the interest rate increase, it seems that the economy will cool off a little bit. So -- the -- However, we continue investing in the critical and most important machines. And we have launched also a couple of machines in the recent days. So we adapt our capacity in Metalcastello but we do it slowly. And let's say, with firm steps because we are not sure that the expansion in the U.S.A. Will continue in the next quarter. So let's see, we will wait until we see that the market is really booming, but we have certain doubts in the comment.

Sir, the line for the participant dropped, we move to the next participant. The next question is from the line of Nitin Arora from Axis Mutual Fund.

The first question was if you can talk about on the overseas TV forging business. I mean, with respect to the electric -- rather the customer acquisition on the electric side, if you can touch base on that part.

Ander, in CIE forgings on our acquisition of our EV business.

Okay. So we continue very active in the EV business, let's say, new project acquisition. We are working with several customers in -- and of course, we have already got new business for electric vehicle to -- let say, for battery pack in -- for a truck manufacturer. I cannot disclose the name of this truck manufacturer. But this is a reality. So yes, we are step by step getting new more and more businesses for electric vehicles and we are planning the transition, as commented. It is complicated because the transition, how the transition will happen is not clear yet. It seems that in the next 4, 5 years, there will be a jump for electric vehicles. Until now, we are working with all the carmakers and with all the truck manufacturers on this transition. And we are very active on that, okay? You know that we are working for the, let's say, different components in the electric cars, especially in the battery pack that they are using also still forging components. And we are working on the chassis component that they are using forged aluminum components. So we already got 2, 3 new businesses. Now the fourth one with the truck battery pack component. So the transition is there. I mean, we have -- overall, we can say that approximately 1/3 of all our new businesses are coming from electric vehicles. So that's more or less the percentage that we have in average, but -- and this percentage will continue growing for sure in the next years. But now that's the information I can share with you.

That's helpful. Just going forward, let's say, on the same aspect of increasing the EV penetration in revenue and then in order book for you and given our debt has come down a lot, and I'm assuming next 2 years can be good in terms of your free cash flow. So does acquisition also comes into the picture where you can grow faster by acquiring something in the electric side, let's say, lightweighting component companies? Or if you can -- if you have something strategy there in mind.

Okay. We are quite active also in that field, okay? Of course, we are interested in acquiring this kind of company. Not so easy because the amount of companies working in this field are not many. I mean, yes, 2, 3 or 3, I would say. And okay, not all of them are ready to talk to us, okay? But our -- in principle, our strategy, my answer would be, yes, we are interested in doing something in that field. Also, we are -- especially in the Indian market, we are also very active looking for different options to continue our inorganic growth trend, okay? The organic growth trend is moving -- is being executed properly, but the inorganic growth should come also. So we are trying to grow in both ADS. As we already mentioned, we would like to grow 50% organic, 50% inorganic. That would be our strategy to grow faster than the market.

The next question is from the line of Prashant Kutty from Sundaram Mutual Fund.

If you look at the European market, you seem to have grown much ahead of expectations, also much ahead of probably the industry growth as well. While you narrated about the EV part of it, are there any -- is there higher share of business are actually also coming from the existing customers? Any new customers have kind of gotten added into this pack? And just addition to that, what's the outlook now when you look at your business? Because I presume you used to always give a relatively lower outlook in terms of Europe business. Does the -- is the outlook changing as far as the Europe business growth is concerned?

Okay. The growth of our European business is coming from mainly the increase of the market. Also, we had an increase in market share in certain customers. And you know that in our mix of customers, some of them are performing better than the others, okay? So we were lucky this time and our mix of customers did much better than the competitors, okay? So that's the main reason of having this outperformance on over the market in this Q1, okay? And regarding the future expectation for Europe, I would say that I'm not very optimistic regarding the -- continuing the growth. My view is probably we will see a certain stabilization and certain normalization of the market. That's what we see in our forecast and in sharing that April will be a little bit weaker, and then in May and June there is a recuperation. So let's say that we will see European flat or slightly -- a slight growth in Europe in the next quarters.

Sure. Second point is that you spoke about the margin side of it that obviously a large part of the benefits, I think you highlighted is that has been coming from energy cost reversing and you passing on to the customer. How much of it is actually driven by efficiency? Because like you said, we're working a lot of internal efficiencies and you actually want to kind of mirror CIE margins. So how much of it you should actually expect it to be sustainable in the future? And like in the past, the CIE margins at between the range of 18 plus numbers. Do we feel that we can kind of reach that faster than expected?

Yes. Okay. These margins that we already got in the first quarter, we think not only that they are sustainable, we think that we should continue improving them, okay, in the next quarter, that we have room for improvement, especially in India, where we are negatively affected by the 2-wheeler business drop. Once they will come back or going back, we will be able to improve our margins. That is also important thing. And in Europe, what we seeing is that we have been, let's say, working very hard. Regarding your question of how much is coming from the internal efficiency, I would say that approximately 1/3 of this is coming from energy, 1/3 is coming from internal efficiency and 1/3 is coming from higher volume impact, okay? So the dilution of the fixed cost as to the higher volumes and bigger operations. So my view or at least my target is to not only keep this margin but to continue improving them. Because as you saw that we are already at 17% EBITDA in the consolidated basis. But CIE target is 19%, okay? So I have still a lot of job to do in order to reach this 19%. So that's our task, to make it a profitable business and sustainable business for the future.

And last point over here. When you spoke about India, you said that you're largely impacted by 2-wheelers. Is there any other impact which is there? Or actually, the India margins probably not being as maybe as per your expectations? Is there any other element which needs to be worked on? Because over there, like you said, the gap is far higher on the India business.

I think India business is performing really well. The main impacts that we have is this -- we have 3 businesses affected by the 2-wheelers, mainly aluminum IL. We have a big forge in Bangalore that is affected also by the 2-wheeler. And the Magnet business that we have here in Pune, it's also affected. So this through -- these 3 businesses are negatively affected by the 2-wheeler business performance. Then, of course, once the market comes, we all expect that there will be a recovery. We don't know when, but we expect that this will happen. So we will see this recovery that -- and the improvement of these 3 businesses will give us the additional support to continue improving our margins.

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

Sir, just a clarification. So when you talk about M&A, which is largely for India, right? Or are you looking to acquire in Europe as well?

Okay. No, just for M&A, what we are planning is mainly in India. Our target is clearly to focus on India. It's the same that all our even organic growth in CapEx is also focused on India.

Secondly, for the European business for the energy costs, the current quarter energy costs which you accounted for is EUR 100 to EUR 120 per megawatt. And in coming quarters, if the price is stable then it will be at EUR 50 per megawatt. Is that understanding correct?

I didn't catch the figures. Sorry, can you repeat them?

1Q was at EUR 100 to EUR 120 per megawatt and currently it's about EUR 50 per megawatt, which...

No, no. Okay. We need to make a differentiation between the electricity and the gas, okay? In electricity, electricity is the previous we were at around EUR 300 per megawatt last year in the third and beginning of the fourth quarter. And then now we are at EUR 120 -- between EUR 100 and EUR 120 per megawatt. That is the reality in electricity, okay? And regarding the gas, the gas in the worst moments of the peak, we were at EUR 180 per megawatt. That was also the third quarter in last year. And right now we are about EUR 50 per megawatt. And in the last month is quite stable. So and the futures of the gases are also indicating that next year will be at around EUR 50 per barrel. So that's the evolution of both electricity and gas.

Okay. Okay. So at the current spot price is driven then there would not be any material benefit coming to our margins in coming quarters?

No. No. I think now if the electricity and gas remains stable, we will remain also in the same level, stable. And no -- not impact, no negative, not positive impact in our accounts in the future.

Got it. Got it. And third clarification was on MSP sales process. So you indicated we expect it to complete in the next 1 or 2 quarters. Is that correct?

Yes. Yes. We continue the process. The process is quite active and, let's say, that the market has shown deep interest on the company, so we continue working hard and our interest is to do it as soon as possible, okay? So we expect that 1 or 2 quarters -- in 1 or 2 quarters, we will be able to give some feedback to the market. And of course, and start the year. Right? our target is to close the operation before the end of the year.

Got it. Got it. And on the EV exposure for our European operations, in the past year you talked about 20% to 25% of revenues coming from IC engines. Now with [MSE] exit, would that number still be same? Or it would be on the higher side?

I didn't catch. Vikas, can you take the question? I didn't understand.

Yes, Jinesh, it will be higher because when we used to talk about dependence in Europe on IC engine parts, obviously, a large part of our truck forgings business was not in engines, it was largely in CIE Forgings Germany was not in -- not on the engine side. So obviously, now the proportion of engine parts in our current portfolio in Europe is higher.

And that would be at roughly about 40% to 50%?

We'll have to do the calculations to see what is our crank shaft dependence. But yes, It will be around 25%.

Okay. Got it. And in terms of the EV components which we are getting in the European operations, you indicated that the battery pack cells for the series is on steel forgings. Is that understanding correct?

Yes.

So particularly about steel forging and element forging is just finding acceptance on the component side and not just aluminum forging.

In this case, it is development done with the final customer, with the OEM. And the best solution due to certain mechanical requirements of the component work the iron forge -- sorry, steel forge components, okay, for the truck market. In this case, we are talking about big batteries for Class 8 trucks.

Got it. Okay. And lastly, this is question on the consolidated interest cost we've seen a susbstantial increase on Q-o-Q basis. Is it largely due to mark-to-market of European operations in terms of balance sheet or there's something else in that?

The initiatives, actual interest cost increase in Europe. Until December, we have said [ties] but from January, the rates are at 3% plus the working capital.

And this number is what it should sustain given where interest rates are.

Yes.

The next question is from the line of Priya Ranjan from HDFC Asset Management.

Two questions. One is on the European side. So now the gas cost has normalized. So you have gotten the passthrough of all the gases for the higher cost. Do we also have to pass through for the production in gas cost because now it's normalized. So we have to certainly I mean, reduce our pricing for the gas component. And secondly, you've also talked about there is some subsidy, et cetera, we have got from the German -- I mean, the German government on the -- for the gas pricing, et cetera. So is there any impact from that in the numbers?

Okay. Yes, regarding the energy pass-throughs, of course, if the energy the gas goes up, we have an agreement to apply those increases with the customers. If the prices go down, of course, we reduce the prices to our customers. So it's a pass-through system. So it is working in both directions. Okay? So that's the first comment. And second comment on the German activity. In Germany, last year, there was a big increase on energy prices and the government took certain subsidies or decided to apply certain subsidies to the company. And these subsidies came with certain delay and after paperwork and certain [bureaucracy]. And we have got this -- the impact is approximately EUR 1 million from -- Indian money in the first quarter '23, okay? So this is a one shot, that is it will not be repeated. I mean there is no further impact in each of cities expected, okay? Everything will depend on energy evolution and, of course, government decision on subsidizing or not the industries.

Understood. And so the current year for the current quarter pricing was based on the $50 pricing. I mean, if it's $50 per megawatt or EUR 50 per megawatt price.

Yes.

Okay. And coming back to India. So just on the -- if the 2-wheeler industry doesn't recover and remains where it is, like, say, 15 million, 16 million industry, so how soon or how easy we can repurpose our capacities to drive for, say, to newer segments like passenger car or truck market or LCV? Is it easy to do that? Or we have to do substantial CapEx?

Okay. We are quite active on new projects, and we are launching all the new projects that we were -- we hired last year. So let's say that there are a lot of projects in the pipeline in this moment, okay? Rather than thinking of getting new businesses that you know that they need time of these new projects will take at least 1.5 years, even 2 years, depending on the product, so we have to, let's say, look for the short term. I think that our expectations are more in the projects that as we have already launched in the pipeline, and we are waiting for the ramp-ups of our customers. So I think that will be the proper approach to increase our sales. And regarding the existing lines that are with lower load mainly because of the 2-wheeler market evolution, we are waiting until this market recovers, okay? So we are not planning to refurbish the lines and eliminate this capacity because we strongly believe that this market will come back again, okay, perhaps in 3 months or perhaps in 6 months. But we are now patiently waiting for this market to recover because we don't think that these low volumes will continue for long.

And in terms of the CapEx, organic CapEx in, say, Europe, if we get some aluminum forging business, so are we ready to invest in CapEx in Europe as well or we are more inclined towards CapEx in India?

No. For the aluminum, we will invest CapEx in Europe also, okay? Yes, for this strategic EV component forging -- aluminum forgings, we will invest and we will prepare a state of the art lines in order to compete in the market properly. okay? Those are probably the only project, investment projects that we will have in Europe. And the rest of the investment, let's say that 80% of the CapEx in our company will be in India for the different verticals where we expect to continue growing in the next years.

Our next question is from the line of Nishit Jalan from Axis Capital.

Congratulations on good set of numbers. I have two questions. One more of a clarification. So in Europe, what you mentioned is there is a one-off benefit of subsidy which was about EUR 1 million which came in Q1 which may not come going ahead. Are there any other one-off benefits that you got, let's say, price hikes from any of the customers pertaining to previous quarters which may not sustain going ahead? Just wanted to understand if there are one-off benefits beyond the EUR 1 [billion] subsidy from German government? And second question is on India business. If you can highlight any new order wins or any new breakthroughs with existing customers or new customers that you have done in the last 6 months, either on the passenger vehicle, 2-wheeler or the commercial vehicle side, that would be very helpful.

No, let's say that the subsidies or the subsidies that we got in Germany is -- was one-off. In the current -- the rest of the accounts, we don't expect to have additional one-offs in the future. So we -- if the energy prices remain stable, we will see this -- the same level of margins in the future. So we expect stability there, okay? There is no additional impact expected right now. And regarding the businesses, the new businesses, I mean, we are very active in the new project allocation, and we have been awarded for several businesses recently. And yes, we have got new businesses. I mean, yesterday, I was informed we got one [ full rail ] business from a customer. I mean I cannot disclose the customer, but this is a very important customer here in India that has already awarded us new business. So let's say that we continue developing all the verticals in the standard way, and the amount of new projects that we are getting are in line with our budget. So let's say that we are optimistic in this sense. I cannot disclose the details because you know that certain customers, they don't like to use their names or the product names in this kind of calls because they prefer to keep certain, let's say, low level on this, but the evolution of our company is solid. The new order allocation, it's also very interesting in the first quarter. And we continue with the same -- at the same path that we had last year. so that's the evolution that we are having in this moment.

Okay. Just one follow-up here. I know you cannot mention the name of the product and customer. But is there anything like an order book or let's say you have 1 orders with X revenue potential annually, that is still not translating into revenues and will come in the future. So basically, what I'm trying to gather is, how much faster can you grow compared to the industry production? So just wanted to -- whatever numbers you can share, that would be helpful. And then additional part here is there are a couple of domestic passenger vehicle OEMs also which are launching EV models and they are your customers for different products. So are you getting any or have you got any orders for EV components in India also from your -- from some of your existing customers who are planning to launch EV SUVs in the next couple of years?

Yes. We have got several components for the EVs even for -- especially from Mahindra and from Tata, okay. Both of them, we have been very active. But we have been awarded with several projects for electric vehicles, okay? So yes, we are active on that. So that process is going on, okay? Yes. As summary last year, last calendar year, we got EUR 10 million per year of additional orders in, let's say, in the complete year, okay? So -- and this year, we expect to get additional -- this -- the same figure or just in that range. So we will continue adding more projects. Of course while -- from the moment that we are nominated until the start of production and going to the, let's say, at the peak volume, it takes usually 2 to 3 years. So there is a declaration -- there is a delay in the launch of these products. But as we have been -- we have been getting new businesses during all these years, we will continue our growth path, of course, providing our customers are successful with all these programs, okay? Also, and this is important to say, that we are starting now also a certain electric vehicle components production in India to deliver to Europe. And the SOP will be in the next couple of months. So this will also give us an additional jump on sales. And also our percentage in electric vehicles will continue growing. So there is an evolution. I think probably all the companies in our market are perceiving this change in the portfolios and slowly slowly the -- electrification is entering into our order books and probably we will see this transition happening in the next year. What is not clear yet is the speed of this transition, okay? Because probably in certain regions, the speed of the transition will be much faster than other regions like India, where we can expect a lower transition. But the transition will be there for sure.

Just to add to what Anders said, we have discussed in the past also that in India we are dealing with 2-wheeler OEMs, about 2-wheeler EV OEMs, 5 or 6. Ander has talked about the main 4-wheeler EV OEMs. And we are also very active in the 3-wheeler EV space. There again, Mahindra is a very big customer of ours in the 3-wheeler EV market. So we have a comprehensive outreach to EV OEMs. Every year, we keep accruing orders in the EV space. And to your question on the overall order book, of course, we don't talk about an order book number because that is based on the kind of volumes that will come in the future. What we normally tell you is that 25% of our sales in a year we target getting from new orders which we have got in the previous years. And the other thing that we have spoken about in the past is we want to beat overall market performance. If you look at the weighted average market performance, we want to beat that by 5% to 10% on a regular basis. So that's how we look at the scenario from -- on the sales perspective, okay?

Vikash, maybe I'll come back to you separately for more details. But thank you for the response both Ander and Vikas on the question.

Thank you. The next question is from the line of Nikhil Kale from Invesco.

Congrats on very good set of numbers. Just on the subsidy part that you mentioned that's in Germany, so I would presume that it has been part of the discontinued operations, right? So the reported Euros EBITDA is completely clean with no subsidies and retrospective kind of cost or compensation to customers. Is that understanding correct?

Yes, it is correct. Yes, it is a discontinued operation. It is in the profit, not in the EBITDA.

Got it. Got it. Got it. And the second question was related to -- I mean, we're hearing a lot about employee cost inflation in Europe in this year. And probably OEMs would be reluctant to kind of compensate you for that. So how are you looking at that? If you could just throw some color on that?

Okay. Yes, you know that usually the inflation in Europe in the last 8, 10 years was very, very low. Even in certain years, we have been with deflation or very close to 0. Unfortunately, in the last 2 years, we have had a huge inflation. In 2021, we -- in Spain, we had an inflation of 6.4%. In 2022, we had an inflation of 5.4%. That is the impact. So yes, the salary increases, the salary that we have now achieved with our unions are, of course, considering these increases, okay? So we are negotiating with the customers to pass through the inflation, at least partially with them. Of course, the discussions are there. And okay, it is becoming hard to get these pass-throughs, especially regarding the inflation, not with the energy, the energy, they already assume that needs to be passed through and this is affected, also raw materials are affected, but inflation is more difficult. So we are approaching in 2 ways. One is a bit partial recovery from the customer and a certain, at least, partial offset with internal efficiency improvement, okay? That's the approach. What we have set as a target is that no -- any loss, any sense of margin loss due to this, okay? We need to be able either with the compensation plus the internal efficiency to compensate 100% of the inflation impact in our P&L.

The next question is from the line of Nikhil Rungta from Nippon India Mutual Fund.

We indicated that we will continue to look for inorganic opportunities as well. So, just wanted to check what would be the cut of ROCE which we would be looking at in our incremental acquisitions?

Nikhil, this is difficult. You know that our M&A activity is focused on India. In India, we have the valuations what they are. So what we normally look for is in 3 to 5 years time, the marginal return from any acquisition should go back to 15% So that's the simple way of looking at it, if you look at it. Whatever price we buy today in 3 to 5 years' time, that should be adding -- that business should be at a marginal [RONA] of 15%. That's all.

Okay. Okay. And sir, just one more clarification like the stake which is left with M&M. I mean, I said that last year CIE already reached to a cutoff range of 5% until September itself. So Incrementally, if M&M comes out with their remaining stake, the CIE definitely might participate in the same, right?

As MCIE, we are not -- like we can't answer that question. But CIE has increased stake in MCIE in the past. So they will constructively look at the scenarios. But that is not something that is on the table as of now.

The next question is from the line of Sunil Kothari from Unique portfolio.

Very hearty congratulation to team. Vikas, my question is to you regarding this Indian growth, which we achieved roughly 13%. So normally, your objective is to grow 5% to 10%, or maybe nearer to 10% than the industry. If you can -- little bit give detail about how industry separately has grown like which segment? 6 ton or less that 6 ton, [MSC] tractor, 2-wheeler and where we are in this objective.

Of course, this quarter if you look at, the [ less than 6 tonner] grew by about 9.5% on a year-to-year basis. 2-wheelers, which is our next biggest degroup, it reduced by minus 3%. Trucks reduced by 8.8%. And tractors showed a healthy growth of roughly about plus almost over 30% on a year-on-year basis because Q1 last year was quite low in the tractor business. So weighted average would be somewhere in the range of 8% to 9%. So you have -- and we were at 13%. A little bit of that was due to Bajaj, because Bajaj and Maruti, both of them were much lower than the market growth. So I think Bajaj degrew by much larger than the [ cost effective]. I think Maruti was also lesser -- much lesser than the 9.5% growth because of these two -- because they have almost a 25% weightage in our India business. I think you are seeing a bit of a SKU as far as given the outperformance is concerned. So that is the reason that it could have been better if you ask us any way.

And Vikas, recently after the Bajaj electro regions and gone, they are giving some indication of bottoming out process of domestic demand and maybe interest also. Do you feel or would you like to comment on 2-wheeler demand scenario locally or with the exports?

Boss has already commented. He said that 3 to 6 months, we do expect the 2-wheeler market to be better. And that is correct. If you look at the retail data which FADA puts out, you are seeing an increase on month-on-month. And also you see the inventory return that we give out, that data is also coming down. So both these factors, like we think that at least there is momentum on the retail side. Of course, whether it will recover to previous highs is a different question. That may not happen. But last 3 months, retail data is quite like optimistic. So January, February, March, all 3 have shown growth. So we think, as Ander pointed out, we do think that the 2-wheeler market will be better for sure going forward.

Vikas basically, CIE is now benchmarking every best performers or invest from this performance in terms of profitability and growth. So that's why I think our expectation is a little bit more than what you may be or you are doing, but I'm sure you'll be doing better and better.

Sunil, just to add on that, as we have been pointing out, we will keep on focusing on improving our operations, bringing it as much in line with the CIE global performance requirements. Market will go up and down, but our focus remains on becoming more and more competitive. So in one quarter or the other, as we keep on saying, you will see, depending on the customer's portfolio, just like in India, we pointed out that our customer portfolio did not help us as much in Q1. But the reverse is happening in Europe, as Ander pointed out. Our customer portfolio is actually helping us gain sales growth in Europe in Q1. So because of the diversification, it is helping us. So in India, the portfolio did not do as well, but in Europe, it did better. So that will always be there. But the fact is we will keep focusing on becoming more competitive, becoming more and more aligned with CIE performance requirements globally. And as we keep repeating, if that happens, growth will follow.

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

Ander and the team. Congratulations. Vikas, you and JP also. My question for one first is on the India business. Now as you say that this 2-wheeler is expected to really do delays next full year '23, '24 they left '22 and '23. That is one. Second tractor is expected to some kind of a slowdown. So in that then the ground as well as for the export from India is expected to start already improve for EV products. So how do we see India business growth for the current year as well as next couple of years? And what kind of CapEx that we are planning?

Bharat, as we -- as Ander pointed out, 80% of our organic growth CapEx is aimed at India. And he has pointed out in earlier calls and in earlier meetings also is that this CapEx is across verticals in India. It's not as if it is concentrated in 1 or 2 verticals. It is across the board. So all verticals are growing in India. To answer your question, how should you look at growth in India? I think we maintain whatever we have said before, that whatever be the weighted average market growth, we will grow higher than that, 5% to 10% closer to hit on the higher side rather than on the lower side. So that remains our objective. The reason why we are saying that is, as again, Ander pointed out previously on this call itself, there are a lot of capacities that will come on board. When the question was on RV shifting capacity 2-wheeler capacities as well, the answer was that a lot of new projects are expected to come ramp up in the coming few quarters and that should help our growth profile. So there is absolutely from a perspective of India growth, there is no change in whatever we have been saying.

Second question is if Ander is there, how do we see exports from India? What you stated that will start from next couple of months for the EV-related products. So what -- if you can give some kind of a color, more detail, which kind of a product are we looking to export from India and for the EV business in Europe and what could be the potential?

Yes. We are now starting the export of certain forge and pre-machine steel components, okay, for electric vehicle applications in Europe. And this trend will continue. And we will -- let's say, I think we will see important growth in that range. Some years ago, we decided to increase our export rate that was at about 13% -- 12% to 13% in our company. And we wanted to increase this export rate to 25% as the target, okay? Unfortunately, during the last 2 years, especially because of this, let's say, turbulences in the geopolitical area in the world, we show that the transport cost or all the trades and everything were going up of in terms of cost dramatically, also lack of ships to deliver the materials. So let's say, everybody and all the carmakers and the OEMs, they were really, really frightened, so they decided to go to the local to local strategies or at least to protect themselves better than in the past, okay? So right now, when the -- all the logistics issues have been already solved and then certain instability, okay? We don't know what will happen, especially with the Ukrainian war situation. But it seems that the situation is more stabilized and the logistics cost has come down again to a normal figure. So it seems that the exports will continue -- will continue growing from India or China or Korea to Europe and the States, okay. Then there is a second important factor in this that we are already internally debating because we have more and more pressure to calculate the CO2 footprint of our products, okay? And with this CO2 footprint reduction requirement, the long deliveries from overseas probably will be reduced or at least will be minimized in the future. So now we are trying to adapt to this newer scenario. We will see what are the requirements from our customers. And as a company, we are -- as we are located in the different regions, we are proposing to go local for local as a main strategy. So the export will continue growing, but it will not be a main strategy mainly because of the 2 reasons I gave you, okay? So we see that the export rates will continue growing at -- we need to see what's going on in the market and with the geopolitical scenarios.

And last question, with your permission. In India business we reported 16.7%, and you say that still there is a room. So what is our aspiration for India business margin? If you can give a little more color from a 2-, 3-year perspective.

So we have this target to align our margins in India to CIE global margins, okay? CIE global margins are around 18% and with a target to continue improving to 19%, okay? So I would say that in the short term, our target would be to be at 18%, that is the short term. In the midterm, we should achieve CIE target, too.

The next question is from the line of Mahesh from LIC Mutual Fund.

My questions have been answered. Thank you so much.

Thank you very much. Ladies and gentlemen, we will take that as the last question. I will now hand the conference over to the management for closing comments.

As usual, I would like to say thank you to all the participants for the well directed and well prepared questions. We hope that we properly answered and logically answered all to all the questions. If anything is needed, you can contact either Vikas or Swapnil to continue with further details. And as always, also, I would like to say thank you to the Mahindra CIE team for their fantastic job and commitment during all this quarter. So I hope to see you in the next quarter with similar results or even better. Thank you very much.

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