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

Ladies and gentlemen, good day, and welcome to the CIE Automotive India Limited Q2 CY '23 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. A very good morning, good afternoon to all the participants and thanks to the management of CIE Automotive India Limited for giving us the opportunity to host the call. We have with us today in the call, management represented by Mr. Ander Alvarez, CEO; Mr. K. Jayaprakash, Chief Financial Officer; Mr. Vikas Sinha, Senior VP Strategy; Mr. Oroitz Lafuente, Business Controller; and Swapnil Soudagar, DGM Strategy. So over to the management for the initial comments. Thanks.

Yes. Thanks, Basudeb. This is Vikas. I welcome all of you on this call as also Ander Arenaza, our CEO. I will present CIE India results for Q2 C '23 and H1 C '23. Straight off the bat, let us apprise you of some of the key developments that we highlighted in the last 2 quarters. After the exit of Mahindra & Mahindra from the company's shareholding, the name of the company has changed to CIE Automotive India Limited in this quarter after all regulatory approvals were received. We had also held our German truck forgings company for sale, and the project is progressing well, and we should be able to share further details soon. Let us now examine the Q2 C '23 and H1 C '23 results of CIE Automotive India Limited, formerly known as Mahindra CIE. And in this presentation, we refer to them as -- to the company as CAIL. The Q2 C '23 results for the India operations of CAIL are on Page 7. The markets behaved as per expectations of seasonality in Q2, which we had talked about in the last results call. The weighted average market growth across segments was flat compared to the same quarter last year and marginally down compared to the previous quarter sequentially. Some good news was in the gradual recovery of Two Wheeler production, which grew 12% sequentially. The Two Wheeler retail sales data reported by FADA, the Dealers Association, also shows gradually recovering sales month-on-month. Going forward, the relatively patchy progress of the monsoons could affect growth in Two Wheeler and tractor's market, but we do expect growth in the Four Wheeler segment to continue on the back of new model launches. Now sales of the India operations, that is sales of the India operations of CAIL at INR 13.4 billion was 5% higher versus same quarter last year and higher than the market growth, too, as we pointed out earlier, but marginally lower vis-a-vis Q3 '23. The India operations continue to become more efficient and achieved an EBITDA margin of 16.8% in Q2 C '23 versus 14.9% in Q2 C '22 and 16.7% in Q1 C '23. The Indian operations continued their journey to match the global standards of the CIE Group. On Page 8, we have the results for the European operations of CAIL in Q2 C '23. These financials don't include the German Forgings business CFG, which are held for sale. Sales of INR 8.6 billion in Q2 C '23 are 6% higher year-on-year versus Q2 C '22 but lower than Q1 C '23 sequentially. This flattening in the growth trajectory in our European operations is partly due to the slowdown in Metalcastello, something that we have always expected and spoken about. EBITDA margin in Q2 C '23 was healthy 19.2% versus 15.3% in the same quarter of last year and 17.6% in the last quarter sequentially. These margins are higher than normal due to the stock generation to cover the summer holidays coming up in August. The Q1 C '23 operational margins are being maintained on a run rate basis. On Page 9, we see the consolidated CAIL Q2 C '23 results. Consolidated sales were INR 22 billion, 5% higher than Q2 C '22. EBITDA, INR 3.9% (sic) [ INR 3.9 billion ], 24% higher year-on-year. EBIT INR 3.1 billion, which is 27% higher year-on-year. And EBT INR 2.8 billion, which is 18% higher year-on-year. The first half H1 C '23 results for our Indian operations are on Page 11. Sales increased by 9% versus H1 C '22 to INR 27 billion. This was higher growth in the underlying market. The four-wheeler and tractors market grew in high single digits on a half yearly basis while trucks and Two Wheelers declined marginally, with uneven market performance across segments is expected to continue. The EBITDA margin of 16.8%, EBIT margin of 12.8%, EBT margin of [ 11.9% ] and PAT margin of 9% are all much higher than H1 C '22, which reflects good all-round performance, and we expect this momentum to sustain. On Page 12, we have H1 C '23 results for our European operations. These are without the German Forging operations, CFG held for sale. With sales of INR 18.2 billion, there has been a 17% growth vis-a-vis H1 C '22, slightly higher than the underlying market growth. EBITDA margin in H1 C '23 was 18.3%, EBIT margin 15.2% and EBT margin 13.4%, all much higher than H1 C '22, largely on account of stabilization in energy costs and operational improvements. H1 C '22 (sic) [ H1 C '23 ] PAT is INR 3.4 billion and includes INR 1.5 billion of profit from discontinued operations, that is CFG. This profit includes a onetime impact of approximately INR 1.1 billion of insurance collection due to 2021 floodings in Europe. Overall, in Europe, we expect the market to have slow growth and are, therefore, focused on maintaining our profitability. On Page 13, we have the H1 C '23 consolidated results of CAIL. Sales was INR 45.2 billion, which is a growth of 12% versus H1 C '22. The EBITDA margin was 17.4% versus 15% in H1 C '22. EBIT 13.7% versus 11.4% previous year, EBT 12.7% versus 11.3% previous year and PAT 12.8% versus 8.7% previous year. Overall, we have had strong performance both in terms of growth and margin on half yearly basis, delivering a double-digit EBT on continuous operations. On Page 15, you will see our enriched consolidated balance sheet, which shows the healthy state of CAIL. Return ratios have crossed 20%. Return on net assets have increased to 21.7% and return on equity to 20.7%. Return on equity on continuing operations growth should be noted as 15.5%. The cash flows are shown on Page 16. The company generated operating cash flows to the extent of 70% of consolidated EBITDA, which is good performance. Growth CapEx for the first half of the year was INR 1.7 billion largely focused on projects in India. Overall CapEx for H1 C '23 was 5.4% of sales, which is in line with our norms. Cash outflow due to dividends was INR 948 million. Before we end, a word on EV order portfolio. Electrification of powertrains has seen rapid adoption in Europe with a market share of greater than 10% and it's picking up in India as well, especially in two and three wheelers. At our Spanish car forging plants. We have had orders for steel forgings used in battery packs and aluminum forging parts for chassis. We have orders from a couple of U.S. OEMs for EV transmission parts at our Italian plant. These orders should compensate for any potential drop in revenues due to EV penetration in the medium term. On the other hand, in India, EVs represents an opportunity, and our annual report features the extensive EV-specific part portfolio that we are developing in the Indian market. To end, we are confident that we can utilize future opportunities and face future challenges with agility in order to meet the shareholders' expectations of sustainability -- of sustainable growth and profitability. With that, we proceed to Q&A. So Basudeb, back to you.

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

Sir, a couple of questions from my side. First is on the EBITDA margin side in Europe, you have reported 19.2% and you have highlighted that, on operating basis, we are at 17.6% basically, we have continued the 1Q thing. So in 3Q as well, do you think we'll be in a position to maintain the 17.5%, 18% number? Or how we should look at this?

On an operational basis, yes. There might be some variations due to the stock because that's the holiday. Q2 has almost 3 weeks of holiday. So the stocks have been built up in this quarter. So to that extent, there will be some variation. But on an operating basis, yes, the margins will remain the same.

And just to continue on Europe side, if you can just throw some light on the Metalcastello division, you already highlighted 1 liner on that. But if you can just elaborate on that.

so you are looking for -- Metalcastello is a very high-performing plant, but you are looking at the volume trajectory. Is that what you have in mind?

Yes. Yes.

Yes. Okay.

What we saw in the last months in Metalcastello is that you know that we are producing in Metalcastello, a lot of gears and components for the highway, off-highway vehicles, especially for our main customer, Caterpillar in the U.S.A. What we see in the American market is that due to the interest rate increase and, let's say, the strategies of the Reserve Bank of U.S. to control the inflation, there is a certain decline in the economy in the last months, okay? So we saw a certain reduction in the orders. We think that this is a temporary effect, but in this last quarter and probably in the next quarter or perhaps 2 quarters, we will see this market to decline a little bit. Then we still think that in the medium term, we will see the recovery again, and we will come back to normal figures in definitely 6 months [indiscernible].

Okay. Okay. Sir, last question from my side. If you can just elaborate a bit on our discontinued operation? I mean evenly the operations are discontinued, the numbers being thrown by that operations are quite significant. Is it just because of the insurance claim during the quarter? Or is it something else?

No, performance at CFG, why is it so good in the first half, it's mainly due to the exceptional item of the insurance that we have received during Q2, has been a driver obviously performance.

The insurance is the main driver, Nikhil.

Okay. Okay. Perfect.

Mostly onetime. Let's not get very excited [ about the book of this ].

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

The first question is on the revenue side but especially on the domestic side of the business. While you've actually highlighted over a longer period of time that you would want to kind of grow much ahead of the industry growth rate, I think you even tabled a number of about 8% to 10% higher than the industry growth rate. We seem to have seen a slight bit of deviation in this particular quarter. Just wanted to highlight anything specific to highlight, and more so because in the passenger vehicles, we thought that passenger vehicles, especially the higher-end where our -- where our process and products are used more. We actually haven't seen ample amount of growth coming over there. So I just want to ask, is there anything to highlight over here?

No. As far as the India growth is concerned, in Q2, of course, as I said, there were differential performance across segments. And there was differential performance across, customers also. So that has had an impact -- a little bit of that, but there is also impact on certain product mix changes. For example, there is more of the new Scorpio now in the product portfolio, which has had an impact. But to your original point on the India revenue side, yes, we will -- we are focused on growing higher than the market. And we have said, quarter-to-quarter, there might be deviations. But in the medium term, that is what we are planning to do. In fact, we have highlighted that our customer base has increased quite a bit -- quite significantly in the last 3, 4 years. A lot of those customers are in the ramp-up mode. We are investing heavily in India. Even in this half year, you see the growth CapEx, which is almost 90% in India is substantial. And most of this CapEx is backed up by commitments from our customers. So we -- from the point of view of what we are trying to do on the revenue side in India, nothing has changed. But these hiccups here and there, one quarter to another will remain. But that focus of growing 5% to 10% higher than the market, weighted average market growth in India is there. I think it is backed up by the CapEx and the order commitments that we have.

Sure. But generally, you're talking about again from a growth perspective, especially on the passenger vehicle side of it, if you look at it, the growth is obviously, like you said, under divergent, so the larger -- the UVs actually have done much better, and I presume that we would have probably got a higher share on account of that. So that's the reason for asking is that is there any deviation from that perspective? Or is it just a timing effect and probably it will probably normalize as quarters go by.

I don't think there is, because the growth is on the higher-end vehicles or anything like that. Yes, customers have grown differentially, within the customers, different platforms have grown so you will have variations in product mix because of that. I don't think there is anything to worry about, let me put it this way.

Understood. Understood. Sure. And on the international operations, I think to what the earlier participant was asking, at an overall revenue still seem to be growing better in general, if I look at it, I think, I just want to ask, and this is also on the back of a relatively higher base over the last couple of years. I just want to know if this growth is expected to sustain? Are we expecting acceleration? You did highlight about that there is a bit of slowdown in the Metalcastello operations. But in general, at an overall level, are we -- in general, we believe that probably this number of high single-digit number or a mid-single number seems to be a reasonable target.

Yes. We mentioned about the Metalcastello's evaluation mainly because of the U.S. market slowdown. So we will expect that this trend will continue, at least a couple of quarters, then we also expect to have a revamp later. So let's say that we are [ tilting ] because in Metalcastello, we have also some new customers for the electric vehicles, and we will start the production in the next quarter. So in that sense, we will see the recovery. Then regarding the rest of the business, you know that the European market is kind of flat. I mean there is no growth expectations in next year according to the forecast from IHS. So, what we expected to continue our trend and to continue, let's say, in a good shape, until now, what we see is that our order book and the orders are well fulfilled. And we don't see any reason to review the volumes in the next quarters, okay? So we expect to be at the same level of the market or even a little bit above the market in the next quarters. So we are also optimistic on that.

Sure. Sure. And lastly, one last point is what is the proportionate overall level exposure to EV at this point of time at an overall company level?

Okay. The exposure is low because you know that our percentage in, let's say, the percentage of the electric vehicles in India are really, really low. I would say that it is not even 1%. We are selling certain companies for the EV and especially to the three-wheelers in that sense in both in composites or magnets and gears division, we are selling components for the EVs. The percentage in all Indian activity could be 1% approximately. I mean, it's not relevant. And in Europe, also, the percentage is low because we are now adding the new products, and we expect that all these products will be produced and industrialized in the next year. So right now, the percentage I cannot give you the exact number, but it can be something like 3%, 4%, 5% okay?

Our next question is from the line of Jeetendra Khatri from Tata Mutual Fund.

Sir, I wanted to know for your 2 quarters, first half. Your revenue composition by vehicle segment and also by product segment, your gear, stamping components, et cetera.

No. Vehicle segment is more or less the same as we indicated at the end of C '22 results. As far as around gears, et cetera, we will report that at the end of the year in our annual report in our investor presentation. So more or less, the growth is similar across. Frankly, we have always been saying whether it is margins or it is growth. Let's assume more or less we try and have similar performance across segments. So -- but the segment-wise is more or less the same as what we have reported at the end of C '22, roughly about 49% in India for four-wheelers, roughly about 23% for the two-wheelers, 20% for tractors and 8% for trucks, roughly. That's the breakup in India.

Okay. And what would be the share of EV in revenues in Europe and India?

No, that is what Ander just said in Europe currently. At the current, we are not talking about the future. Currently, it could be 3% to 5% in Europe and anywhere between 1% to 3% in India.

Our next question is from the line of Vimal Gohil from Alchemy Capital Management.

Sorry, I just want half more on the growth that you've seen in the India business. You mentioned that there are some -- there is a mix change plus there are some customer level changes as well. If you could just probably give us some more detail there. Is it that some of your top customers, we have seen slower growth and some of the newer customers that you've added, which are still ramping up are -- have probably grown faster, which led to slower growth? If you can give us some more details there.

That -- it is not as complicated as that. Very simple thing, M&M has done very well. But within M&M, we have the newer models of M&M doing better. On the newer models of M&M.-- the older models of M&M also had stampings. The external parts outsourced as far as stampings is concerned. On the newer models, you have less of that. So that is one aspect. The second aspect is, of course, within the two-wheeler market, Bajaj has underperformed a little bit, and we expect Bajaj to recover almost onwards as their exports get back on track. Bajaj exports almost 50%. So these are 1 or 2 things that are happening. Of course, our newer customers are doing well. So it is basically, as I said, within the market, some customers doing better or worse. And within the customers, some platforms doing better or worse.

And you can confirm that you haven't lost any share in any of the platforms?

Normally you don't lose shares Q1 to Q2. That's normally does not happen, any loss of share will be reflected over a period of time. It's really not between Q1 and Q2, you will see that kind of change.

We have not lost any market share in this period.

And sir, the next two questions would be, if you could just give us CapEx for '24 -- sorry, '23. And on the Galfor deal, do we expect some resolution by the end of this year? Yes, that would be my 2 follow-ups.

So CapEx, we have indicated in H1, our overall CapEx growth plus maintenance is roughly in the range of 5.4%. So we always maintain 5 to 6 percentage of sales would be our CapEx. So that is the thing that will continue for this year on. So the full year also, you will see a very similar number anywhere between 5% to 6%. As far as your second question, not Galfor, it is the CIE forge Germany deal, CFG deal that we are talking about. Yes, it is progressing well, and it should happen pretty sooner than later. Let us put it this way.

Our next question is from the line of Rishi Vora from Kotak Securities.

First on the Europe side, you highlighted that in the Europe business, you have won orders for EV -- from EV OEMs. Can you just highlight like what would be the quantum of that? And by when should we see the ramp-up of EV revenues happening for the OEMs.

No, what we have referred to was at Metalcastello, I think Ander has talked about in maybe results in the Q3 results call, I think. We had talked about 2 orders on transmission parts for Metalcastello, which overall would amount to say somewhere between EUR 25 million to EUR 30 million per annum, but that will be at the peak. So all of it will not come at the same time. And when it will start, as Ander has indicated, maybe in the next few quarters, I think -- but more likely, we will start seeing the impact next calendar year on the Metalcastello revenues, and of course -- yes. That is...

Nothing on the [ two-wheel ] forging business on the EV side?

No, no. That is the other two things that we are talking about, steel forgings and aluminum forgings. Aluminum forgings, yes, orders have begun, but in a very small way. We are talking about 3% to 5% sales that is part of it coming from aluminum forgings and also some steel forging parts in the battery system. I'll ask Ander to elaborate on, since you talked about previous forgings.

We are getting or we have already got several orders from German car-makers for EVs, okay? We are talking about differential grounds for EV applications, let's say, a very important business. And also, as Vikas mentioned, we are going to produce forged battery plates for truck manufacturer also in Germany, okay? So yes, these kind of products, and we are now getting from the market, and we are industrializing and during next calendar year, during next exercises, we will see this products to ramp up and to increase our share of electric vehicles. In the previous calls last year or even during the last call, we mentioned that approximately more than 1/3 of our new orders are now coming from EVs, okay? So we will see this percentage of the EVs growing up slowly, slowly during the next quarters.

Understood. And on a Q-o-Q basis, how much would be the decline of Metalcastello business revenues?

About 15% Yes.

15%. And yes, just last one, a follow-up on Europe business. You highlighted that we would see some wage revisions in the coming quarters. So where are we on that? And when should we expect that coming through?

Can you come again?

The wage revisions in Europe.

Wage revisions in Europe, when are they happening. Wage, wage cost.

Salary. Okay. It depends on the country, okay? In Europe the wage revision in Spain, for example, are done from 1st of January, so which revision has been already done, okay? So we already applied [indiscernible]. And for example, in Germany, there are -- okay, we had last year certain revision according to the [indiscernible] Metal agreement. And in August or September, there is an additional increase already [ at it ], so we will see in the next couple of months, we will see the salary increase again.

Our next question is from the line of Nikhil Kale from Invesco.

Just wanted to understand, there would be some impact of RM deflation as well, right? So would it be possible to highlight the growth in India and Europe on kind of constant RM basis, on Y-o-Y by numbers?

On the RM side, I think we'll have to look at that. But at least in India, it is not having a major impact. In Europe, it will have some impact.

There is not any relevant impact on the evolution.

Yes. So I think in India, RM is now no longer that big of a factor. Of course, there is some impact will happen if it moves up and down, but it's not a major thing.

Got it. And I think on the slide, which talks about your cash flows, as you mentioned, that the excess cash is sitting in CFG, right, through intercompany loans. So just wanted to understand that arrangement why that has been done?

What we are doing there is as we are [ retiring ] the companies for the sale, we are taking out all the excess of cash that these companies have in a day and it will not require from a day-to-day operation. So we are bringing that cash back to the holding company and leaving the German operational plants only with the required amount of cash to operate on that. So all the excess, we are taking it back to the holding company.

Sorry, the voice was not, clear. Vikas, can you just help me understand.

Yes, JP, will you please explain? In terms of like the company will be sold on a debt-free, cash free basis. So any extra cash that we have generated so far has been transferred in the company loan to the holding company.

Okay. So when that sale kind of happens, you'll be hitting on that cash back.

No. No, the cash. Yes, JP explain please.

So Nikhil, the money that is cash, which was there in German operations, we have left only cash that is required to run the operations, all the surplus money that has been received is paid to the holding company, that is Galfor. And it's earning interest at the rate of over 4% plus. [indiscernible]

Our next question is from the line of at from Navin Matta from Mahindra Manulife.

Just one question for the discontinued operations. Just to get a color of how the underlying performance has been. Can you give a sense of how was the revenue and EBITDA for the first half or the third quarter [indiscernible]?

CFG first half performance.

Overall, the performance of the German operation has been quite good. We have the above expectation sales, mainly because of the strong performance of the truck market in Europe in the first half of the year. So from the sales point of view, we were -- we perform really well. And regarding the operational point of view, also the margins, the recurring margins are really, really nice and even above our expectations. Of course, we have this exceptional item because we recovered the money from the insurance. I mean, from the floods that happened in Germany 2 years ago. But overall, let's say in the recurrence, we can say that the performance of the company is really balanced and performing well.

Any quantification, if you can share some light, that will help, what would be the top line and the EBITDA?

Yes. We can be between 9% to 10% EBITDA margins in a recurrent -- in this moment. And also, the important thing of -- let's say, one of the main reasons is that we have long-term contract at least with our customers. We have our main customer within that. So we see certain stability also for these activities in the near years -- next years.

Okay. So...