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

No, no. These orders have not gone away. It is just that those introductions are just taking more time. That's all.

Understood, Vikas. And sir, Metalcastello are large -- we have a very large exposure to off-highway vehicles. Is that understanding correct? And which is why we're experiencing deep cyclicality?

Yes, that's right. Metalcastello...

The revival should be sharp, right, because if the slowdown has been so -- has been bad, so the revival should be equally sharp. Is that -- has it played out similarly in history? And can that be expected in the future as well?

Yes. We expect that yes, we will see the revamping of this business in the next months, okay? Probably not immediately, not in the Q4, not in the Q1, but mid next year, we will see this, this recovery for sure. And as I told you before, we will have, additionally, all the entrance of the electric programs that we have got for U.S. for another customer. So with these two effects, we will see that our sales in Metalcastello will come back to the normality, and we will see growth again, okay? But yes, we need to -- as we are now in the bottom side of the cycle, we need to suffer this drop in the next 1, 2, 3 quarters. That's our expectation. But we are optimistic, and we have everything prepared to go up and to ramp up again soon.

Just one follow-up there. The INR 28 million to INR 30 million order is -- are with passenger vehicles in the -- is in the passenger vehicle vertical for Metalcastello?

Yes, that's right. For Metalcastello, yes; for the U.S. market, light trucks -- EV light trucks, yes.

The next question is in the line of Harini from Sundaram Alternates.

So just one clarification. So always our goal was to grow in, I mean as far the market grows, we at least tend to or have a target of growing more than 5%, 6% higher than the industry growth line for the markets where we cater either in India or in Europe. At least from the past 2 quarters, we've been seeing a bit of slowdown on that front. So how do you see it coming forward in the next 1, 2 years? Do you see that expectation to be coming back in place?

Yes. Now that is what we have said. Some of our ramp-up has been delayed. But yes, you're right. Our aim in India is to grow 5% plus higher than the weighted average market. We have different segments in which we operate. You have to take a weighted average. Yes, in the medium term, if you're asking a question over 2 to 3 years, yes, that is our intent. It is also our intent in Europe, as Ander just mentioned, that Europe, the market is flattening. But even there, we want to grow higher than the market through all these new orders that we are looking at. So in -- over a 2-year period, whatever we have said in the past holds, this quarter, as I said, it's a specific case of ramp-up not having happened. So it is -- let me put it simply. This quarter is not representative of what we are planning to do when it comes to growth numbers in India.

Understood, sir. Understood, sir. And other portion, if you could just give out -- so generally, we have the new customer orders contributing to around 25% of the growth. So do we -- are we in the same track, going forward? How is the thing on the new customer additions? Are we somewhere on track in that?

Is the question, ma'am, is that are we making new customer additions, is that the question?

Yes, sir.

So just to put things in perspective, I think in India, we have almost 50 customers with more than sales of 10 million per annum, okay? So out of this, almost half would have been added in the last 2 to 3 years. So customer addition is an important part of our strategy. So it includes increasing our buying from -- our selling to our existing customers, trying to grow our middle customers and adding new customers, all 3 aspects we are looking at, and we will continue to look at. And that is what I'm saying. We now have 50 customers in India with more than 10 million sales per annum. Okay?

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

Vikas, again on India growth -- sorry, multiple questions have been asked. But again, in the first 9 months, we have grown at 6% -- industry, volumes have grown at 6%. But on a sales basis, industry has grown at 15%, 20%. I mean be it Mahindra, Bajaj, Ashok Leyland and Tata, our major customers, the major OEMs, which have reported numbers and what is expected. So I understand that new platforms are taking time to ramp up and this is incremental growth, which needs to come in it. But for existing models and for existing products and existing industry, which itself is growing at say 15% in this 9 months, Maruti has grown 25% in the first 9 months, sorry is expected to grow at 25% first 9 months; there, our growth is only, say, 6% on a sales basis. How do we reconcile this number?

I don't think -- like if you look at the production numbers, those are not -- the weighted average production growth for YTD 9 months is about 4%, if you look at it. So that's -- and we had a very good Q1. If you remember, Q2 and Q3, we have been -- like Q2 was around 5% for us, where the weighted average market growth was 1%, so there are different numbers that are reported. But if you look at the production numbers of various OEMs, then you can clearly see the weighted average growth for YTD 9 months is roughly around 4%. So that...

Then, we are comparing industry volume growth to our sales number, which is...

You have to also take into account the steel impact, which is not there. We did mention steel impact in this quarter was about 3%. So if you take that steel impact, 6 plus 3, roughly 9% versus a weighted average market growth of 4%. So -- but like steel is -- you have to keep it aside because at the end of the day, growth is what it is. And to your specific question on different OEMs, different OEMs have done differently. Mahindra Auto continues to do exceedingly well, there's no doubt about that. Mahindra tractors on a YTD basis may not -- may be a little lower than on a YTD basis. Maruti and Bajaj, again, may be similar. Bajaj might be a little lower. If you look at the production numbers, you have to understand, Bajaj is 50% exports. So that is the situation. So we do track the market. And this is our reading. On a weighted average basis, about 4%, we have grown 6% without the steel impact. Steel impact has been substantial this year. But as we have said in the past, that is something which is part and parcel of the business. And so this is -- when you talk about the YTD results, this is how we look at our results. And going forward, things will be better.

Correct. Point taken. But my only limited point was steel also impacts the OEMs [ when they sell ], right? So OEMs are growing at 15% on a sales basis and our growth is say 6%.

No. We look at numbers, their production numbers, not like -- their sales numbers, we don't track. We look at their production numbers. And what we are talking about when we compare the market, we compare the production numbers. For us, that is what is important. Whether how they pass on the sales, et cetera, we have not looked into that. We have not analyzed that for the OEMs. But whenever we talk about the market, we talk about production numbers, not even sales, domestic sales. Production numbers includes domestic sales and exports, and you know the effect of inventory, et cetera, that they have. So that is how we look at the market.

And second, on margins, first of all, a commendable job. I mean [indiscernible] we have come all the way to [ 17 ] Our aspirations are even higher. So given we are a process engineering company, it's commendable what we have done over [Audio Gap] hearty congratulations on that. Just a question on that. I mean, given we are not a product company and a process engineering company, so I mean, how is it that our customers' OEMs -- we also will be looking at the numbers, the margins that you report. I mean, how do they allow us to make this kind of margins? And given our attempt to keep margins has set a high level in -- despite one of the best in the industry. In terms of competition, et cetera, does that not hamper us, given the margins that we are achieving?

No. Our customers are our partners. So we are not in competition with our customers. So as long as we meet their requirements and based on our efficiency level, that is to us. So when Ander speaks about margins, he talks about efficiencies. But that does not mean we will not meet the requirements of the customers, whatever they are. So as long as we meet the requirements, it's okay. And if they ask us for price reductions, et cetera, that, of course, we'll have to work that out. That's a constant dialogue. Our customers are our partners. They are not in competition with us. As I said earlier, they optimize their margins, we optimize our margins. Our focus, when it comes to margin improvement in India, remains efficiencies. In fact, you had asked the question in the last call, when Ander has given a long answer on what we are doing to improve margins. If you go back to that answer, it has nothing to do with pricing. It has nothing to do with customer requirements. They're all internal. If you recall, it was automation. It was production per person, input/output ratios, layouts. These were the things that we talked about last time. And that is the focus for us. So therefore, whenever we talk about efficiency improvement in India, there's a long way to go on the engineering aspects itself. After that, of course, whatever the customers ask us, we will try and meet the requirements as far as possible. They are our partners, they are not our competitors. Okay?

Correct. So are these efforts that we make internally for improvement efficiency [ presently ], largely is for us to keep and not that we have to share it with the customer?

No. [ They have the ] different [ arrangements ] there. Customers might require -- they may have their own requirements. All that I'm saying is our margin improvements in India, we do think that from engineering aspects, we still have room to improve. How much we share with our customers, what we share with our customers is a different issue. All that we are saying is we do see a lot of prospects for improvement on the engineering side in India, still. That's what where we are at this moment.

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

So just one thing. If I'm not wrong, I think, Vikas, you have mentioned around 6% growth have an impact of, say, 9% of adverse impact of commodity. So for the YTD basis, is it fair to assume that the volume growth was 15%, is this what you wanted to say?

No, no, no. The weighted average volume growth of the market was 4% on a YTD basis in India.

Yes, that I understood. But for you because you had a 9% adverse impact of commodity or steel price, so your volume growth was 15%?

Not 9%, 3%. 3% of decrease.

So 3% for this Q3 for YTD?

For YTD, we have to work it out, we'll have to work it out, but you take this as representative. That is what we were talking about.

Okay. So the volume growth probably will be 3-plus whatever YTD?

Yes, yes. No, no. So it's not that we don't have growth. Yes, the steel -- normally when the market is growing very high, the steel impact does not matter as much. But right now, because of tractor growth and two-wheeler growth, which is a little -- like Bajaj, Mahindra tractors, even Maruti is, on a YTD basis, 00. So when you see this, then that still starts having an impact. But having said this, that's part and parcel of our business. We cannot like keep talking about it. So it is what it is. But yes, when our ramp-up happens elsewhere, I think you will see better growth numbers.

Understood. Understood. And any thoughts on the 2 technologies, which we have been talking in the past, particularly on the aluminum forging side as well as the plastic in India? I mean, any thoughts on that? I mean, when can we start? Because aluminum, I think because of the electrification in Europe, we might have to put some plant or some arrangements. Whatever changes, it might have to do within the plant. So how soon or how fast we are in that process?

Aluminum forging is in Europe. That's what we are doing. We have already started to do it in a small way. There are chassis parts, big parts that we have in Europe. And where we have said same machines being used, but the process is slightly different. You have -- you need to do heat treatment. Aluminum is a soft metal, so some process parameters would be different. So in Europe, we have already started doing it. In India, right now, the need for aluminum forging is limited. Whenever it happens, we can do it. As I said, we are doing it at Galfor, so we can bring the know-how to India on the process side, not a problem at all. As far as plastic is concerned, I think we have always said that we'll go the M&A route for plastics. We already have composites, which is doing very well, by the way. Composites, when we talk about EVs in India, we normally don't talk about three-wheeler EVs. But three-wheeler EVs in India is a success story. It's a very big success story, especially Mahindra's three-wheeler EVs. It's -- that division of Mahindra is doing very well. And we are big suppliers to them. And our composites division is doing well. So that will hopefully continue to do well. On the plastics side, otherwise, we will do through an M&A, it's what we have always said, the inorganic route. Now -- and that depends on opportunities. Right now, we have nothing in the pipeline. But yes, we keep looking for it.

Understood. And lastly, on this -- the strike in Europe -- I mean, the U.S., so any impact or potential impact in the 4Q numbers, I mean, because of the strikes at various OEMs in Europe -- U.S.?

So till now the impact of the American workers strike in Ford, in Atlantis and in General Motors is very limited, okay? I'm talking about, first, CIE. Impact for CIE was very limited in September and probably, we can have in those customers and the impact of 10% till now in October, okay? So it's not relevant. And coming back to CIE India, we have only a certain impact on our forging activity in Mexico, where we supply to GM through Tier 1. And we are seeing certain minor impacts there. So till now the impact of this strike is not relevant. Okay, we will see what's going on in the next weeks. But till now, the situation is completely under control.

The next question is from the line of Jigar Shah from Svan Investments.

I am Vishal Srivastava here from Svan Investments. I have a few questions. Most of my questions, I got answered. I have a few questions regarding European operations. Just wanted to know, is there any trigger left in the margin improvement in the European operations from here on in CY '24 and '25? And if yes, where this improvement will come from? Will it come from the mix of new orders, which you have already bagged the kind of product mix improvement or value-addition improvement through that? Can you throw some light on that, please?

Okay. The margins in our European operations were negatively affected last year during 2021 and 2022. We were negatively affected because of the energy price increase and the steel price increase. And also, we have the third reason that is the big inflation that we have been suffering. And during 2023, we have been able to [ first ] the reduction of the energy prices. I mean, the energy -- electricity prices have gone down to a stable level, at around EUR 100 per megawatt. That's where we are now. So this reduction in costs has allowed us to recuperate certain margins. Also, we have negotiated with the customers all the steel and energy update systems. I mean, so we -- most of our customers have accepted that these cost drivers need to be indexed. So that has been done. So we have recuperated the margins that we lost. And finally, we have the inflation, where we are negotiating with the customers. And -- okay, that is a much more difficult issue to discuss. But overall, what we have done is we have been able to recuperate the margins that we had before the crisis. Then, for the future, we expect to keep our margins, to keep our business profitable. And it will be very complex in this flat scenario to improve -- to continue improving, okay? So the businesses are really stretched and optimized, and the further improvements are not easy to get. But overall, I will say that our aim is to maintain our margins in the current situation, once we have recuperated them from the last-year drop.

Fair, sir. Fair. Sir, one more question regarding the new orders which we have got in Europe. Sir, are these orders through replacement of the existing programs or these orders are new programs, which will lead to our market share gain?

Okay. You know that most of the products that we are getting in Europe are for electric vehicles that will replace the current internal combustion engines, okay? So we can expect that the electric vehicles will replace the internal combustion, the current programs. So this is a clear substitution, okay? The good point or the good news for us in -- regarding these new products that we have allocated now is that approximately 75 -- I mean, exactly 74% of the total new orders are for electric vehicles, okay? So that means that in the future, we will see more and more electric vehicles in Europe, and we will have a growth -- important growth in that segment. So that's the message. But coming to your question, yes, I think that there will be a substitution from the electric vehicle substituting the internal combustion engines.

Okay. Okay. Sir, just last question, if I can squeeze in. Sir, as our mix towards these -- execution of these electric vehicle programs improves, I think -- is this understanding right that in that case, our probability of margin improvement will be more as our value addition becomes higher in those kind of platforms?

Okay. It depends on the product. But if the value added that we are getting is improving, of course, we will have the opportunity to improve our margins. In the case of Metalcastello, for example, when we are talking about this electric vehicle components that are much more complex components, yes, we expect to improve our margins as the added value and the complexity of the product is growing. Also, there is all -- I can tell you that in India, we are doing also the same process. We are increasing the added value of our components, growing in the complexity. That means that we will be able to continue growing. Perhaps I missed this point in my previous answer, when we were talking about the improvement on internal efficiencies. But also, the change on the portfolio and the increase of the complexity of the products will give us room for this margin improvement. Of course, it takes -- we need to take the risk of making more complex products, and that is also additional effort from our engineers and from our production people. But that's the trend, and that's exactly what we are doing in Europe and also in India. But in both regions, we are in the same -- with the same path.

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

Questions for Ander. Am I audible?

Yes.

So Ander, I mean, Vikas has given, I mean, some color on these aluminum forging. So whereas we have aluminum forging in Europe and aluminum casting in the India side. So how are we seeing and when do we expect that really aluminum forging can really emerge for a big business like aluminum casting in India? And what are the -- I mean, the challenges -- difference between these 2 processes and if you can give a little more color as well as the end user?

When will aluminum forging come up in India? And what is the challenge in making aluminum forging?

Okay. We will see the aluminum forging coming to India soon for, let's say, a small product and small applications probably in two-wheeler sector, we already have certain aluminum forging components. And for the four-wheelers forge aluminum is, let's say, premium car component, okay? That's why the volumes that we can expect in India for aluminum forging are lower than other technologies, mainly because of this premium cars that should -- that they use this kind of aluminum forgings. In Europe, we are getting these new programs, this aluminum chassis component for premium cars. We are talking about premium cars like Land Rover or Mercedes or BMW, those are the companies that they use this chassis component being made in aluminum, very expensive components. And that's our bet for our European business. And if this trend is coming to India and there is this premium cars being produced in India in the future, we will be ready to do that, okay? So my view in this moment is that this aluminum chassis component will be produced in Europe at the first stage. And for the two-wheeler in certain small components, will be also produced in India. Okay? That's the answer to your question.

Okay. Fair. And second question, Vikas, when we are saying this two-wheeler is down, we understand it's largely export. Whereas in domestic, how are we seeing? Because in our presentation, you said that CRISIL is anticipating 7% of our growth in two-wheeler for FY '24 and then going. So how do we really read this? And what are the on-ground things that are happening?

Who is saying 7% growth in two-wheeler market in '24?

I mean, CRISIL statement, which we have published in CRISIL Research.

CRISIL Research. Okay.

9% to 10% to 11% in fiscal '24.

No. See, CRISIL publishes sales data, we are talking about production data. So when you are looking at those sales numbers, they are domestic sales. So domestic sales is recovering in India, as we talked about. Export sales has yet not recovered. I think the latest data projects that exports in India, on a YTD basis, I've said this earlier in this call itself, was 20% down. So you have to look at both. But yes, the good news is that the domestic market for two-wheeler in India seems to be recovering, but it is recovering slowly. It's not as if there's a huge recovery. So I think that trend will continue.

Okay. And secondly, on the tractor, how do we see -- really see on the ground, which there was a concern on monsoon and September was a good rain? So how are we seeing?

So on tractors?

Yes.

No. Tractors, I don't think -- at least for the next few quarters, we think it will be stable on a sequential basis, that is our expectation of the tractor market. So you are right. So the monsoons, unfortunately in India, was like a [indiscernible] curve. So June was very bad. July was extremely good. August was extremely bad, if you remember, the driest August in 25 years. And September was decent. So now that has its own impact. An agricultural expert will tell us that, that has its own impact, the water bodies, et cetera, and all that. So we don't expect tractors to grow too much in the coming months. Of course, there is a festive season that will have some impact. But tractor is expected to remain stable. If you look at the tractor numbers, I think Q3 numbers were negative year-on-year. But we do think it will remain stable at the sequential level. That's our reading. If we are proven wrong, we'll be happy about that.

Okay. And last question to Ander. In Europe also, we have seen some decline in Q3, and Q4 also will remain softer. Whereas in India, also we -- our volume ramp-up has not been in line with our expectation. So how much operating leverage do we have to, again, apart from our internal efficiency to improve the EBITDA margin?

Okay. As I mentioned before, we are continuously working on the internal efficiency improvement, okay? We are following our internal metrics on productivity -- on productivity, on, let's say, cycle-time reduction, cost reduction -- on the -- maintenance cost reduction, all these kind of things that we are doing in order to improve our margins. I can tell you that most of our verticals are well prepared to continue improving. So we all have certain room for improvement, all verticals. And let's say that we have a strong action plan in each one in order to continue improving. That means that if we improve, we can be also more competitive in certain components and gain more market. So overall, our approach is to be really efficient in order to be in the market with the proper margins. Also I mentioned before that the new products that we are launching are much more complex products than the products that we were producing before. So with these new products, we have a higher investment and of course, higher added value, and this requires higher margins in order to get the return on investment, okay? So everything is linked. And -- but the company's evolution in the last years has been really good. You can see that our EBITDA margins grew from some 2016, we were at 10%. And now, we are hitting this 17% with important growth. And we expect to continue growing and matching CIE margins. I mean, our parent group margin, that was the ultimate target that we have. So overall, the room for improvement is still there. It's true that if the market helps us and there is an additional jump in the market, we will have easier job to improve the margins. If the market continues, let's say, as -- a little bit decelerated as it is now, we will be struggling, but we will be working in order to get this half a point more or 1% more to our P&L. So the room and the actions are clear. Everything is identified. All the verticals have the opportunity to improve. So in that sense, I am optimistic, and that's my main job in this moment because the new orders are also being acquired at a very good pace. So we need to launch and to wait that our customers succeed with the launch of these products.

We will take that as our last question. I would now like to hand the conference over to the management for closing comments.

Okay. So as always, I would like to thank you all the participants for the well-directed and clever questions they made. Thank you for supporting and trusting our company. And also, I would like to say thank you to all the CIE India team for their hard job and the good results they are getting. Thanks for these effort and -- in these difficult times. Thank you very much, everybody.

Thank you.

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