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

Ladies and gentlemen, good day, and welcome to CIE Automotive India Limited 4Q CY '23 Results 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. Good morning, good afternoon as per locations to all the participants. Thanks to CIE India Auto Limited management for giving us the opportunity to host the call. We have here in the call, the senior management represented by Mr. Ander Alvarez, CEO; Mr. K. Jayaprakash, the Chief Financial Officer; Mr. Vikas Sinha, Senior VP Strategy; Mr. Oroitz Lafuente, Business Controller; and Mr. Swapnil Soudagar, DGM strategy. So over to the senior management to takeover. Thanks.

Yes. Thanks, Basudeb. Good morning, all. I welcome all of you on this call as also Mr. Ander Arenaza, our CEO. We will present CIE India results for Q4 C '23 and full year C '23. I'll refer you to the presentation that we have uploaded. Let me begin with an overview of the company. And if you refer to Page 5 of that presentation, it shows the legal structure of the company. In CY '23, the name was changed to CIE Automotive India. Sale of the subsidiaries of CIE Forgings Germany, namely our truck Forgings business in Europe was completed in October 2023, but was effective from 1st July 2023. All the German Forgings operations, assets and liabilities were categorized as assets and liabilities held for sale and classified as discontinued operation. Pages 6, 7 and 8 of the same presentation provide a bird's-eye view of our company. CIE Automotive India is a large diversified auto components group with presence across many processes, product lines, locations and customers. We now start with results of the India operations for Q4 C '23 on Page 10. The quarter was a mixed bag from the market point of view. Tractors suffered a double-digit drop versus the same quarter last year. Trucks were negative and light vehicles showed modest growth. The bright spot was 2-wheelers, which after struggling for the last few quarters showed robust growth. Sales at INR 13.9 billion were 4% higher year-on-year, largely in line with weighted average market growth. The India operations achieved an EBITDA margin of 16.5% in Q4 C '23 versus a recurrent EBITDA margin of 15.7% in Q4 C '22 and an EBITDA margin of 16.7% in Q3 C '23. Please note that the recurrent EBITDA margin of 15.7% in Q4 C '22 is calculated after deducting a onetime profit of INR 378 million on land sale in that quarter. The Indian operations continued to retain EBITDA margins in spite of uneven market growth. On Page 11, we have the Q4 C '23 results for our European operations. Sales of INR 7.3 billion in Q4 C '23 are same year-on-year versus Q4 C '22 and slightly higher than Q3 C '23 sequentially. While the European production grew 7% in the quarter, this was largely due to Eastern Europe, production in Western Europe grew merely 3%. As explained in earlier calls, Metalcastello is experiencing a decline since last 2 quarters due to drop in the U.S. market. Both these factors have led to stagnation in sales figures in Europe in this quarter on a year-on-year basis. EBITDA margin in Q4 C '23 was 16.9% versus 14.5% in Q4 C '22 and 17.2% in Q3 C '23. As energy costs stabilize, EBITDA margins have consolidated around 17% and EBIT margin is around 13%. On Page 12, we see the consolidated CIE India Q4 C '23 results. Consolidated sales were INR 21.3 billion, which was 3% higher year-on-year. EBITDA INR 3.54 billion and EBIT INR 2.76 billion, both of which were roughly same year-on-year and EBT of INR 2.45 billion, which was slightly lower. Please note that EBITDA, EBIT and EBT numbers of Q4 C '22 include an amount of INR 378 million on the onetime profit on land sale, so the last year numbers are higher because of this land sale. The full year C '23 results for our Indian operations are on Page 14. Sales increased by 5% versus C '22 to INR 55.3 billion. Automotive market growth in India in C '23 was uneven across segments, quarters and customers. Light vehicles grew reasonably, but two-wheelers and tractors were underwhelming. The first quarter was good, followed by a muted second quarter, but the festive season was encouraging. The performance of our key customers was also mixed with some suffering negative or flat demand growth. We had reported last year that all the business verticals were expanding capacity. There was a delay in ramp-up of some of these orders, especially at CIE Hosur and Aluminum verticals, and this impacted our sales growth. We have positive expectations from these orders in C '24. The EBITDA margin of 16.7%, EBIT margin of 12.8% and EBT margin of 12.2%, are all higher than C '22. EBITDA and EBIT were higher year-on-year by 10% and 12%, respectively. Going ahead we expect to regain growth momentum in India while incrementally improving margins. On Page 15, we have the full year results of C '23 for our European operations, with sales of INR 32.8 billion. There has been a 10% growth vis-a-vis full year C '22, largely in line with underlying market growth. Q1 C '23 sales growth was strong, but the rest of the quarters were very [ weak ]. Positive exchange rate impact was offset by steel price increases. EBITDA margin in C '23 was 17.8% versus 14.5% in C '22. EBIT margin 14.5% versus 11.4%. And EBT margin, 12.2% versus 10.9%. EBITDA and EBIT were higher year-on-year by 35% and 40%, respectively, in absolute terms. While the market forecast in Europe are muted, we are quite optimistic about our European business, which has high margins, high returns and very good cash generation. On Page 16, we have the C '23 consolidated results of CIE India. Sales were INR 88.1 billion, which is a growth of 7% versus C '22. The EBITDA margin was 17.1% versus 15.4% in C '22, EBIT 13.4% versus 11.8% and EBT 12.2% versus 11.6%. As explained earlier, the EBITDA, EBIT and EBT margins and numbers for C '22 include that onetime profit from land sale, which I've repeated quite a few times. The consolidated PAT in C '23 is INR 11.25 billion versus negative INR 1.36 billion in C '22. The C '23 PAT includes profit from discontinued CFG operations that I had explained earlier, of INR 3.275 billion. Adjusting for this, the recurrent consolidated PAT in C '23 was INR 7.976 billion at 9.1% of consolidated sales. Likewise, the adjusted consolidated PAT for C '22 was INR 6.735 billion after adjusting the loss of INR 8.475 billion from discontinued operations and the gain of INR 378 million from land sale in India. Thus, recurrent PAT in C '23 grew by 18.4%. As we said, the recurrent consolidated PAT in C '23 is INR 7.976 billion. The recurrent PAT in C '22 was 6.735 billion, and this is the growth of 18.4%. And this has been achieved and the sales have grown only by 7%. So even in a year of uneven sales growth across geographies, market segments and customers, CIE India has delivered an impressive bottom line growth. On Page 18, you will see our abridged consolidated balance sheet which shows the healthy state of CIE India. Return on net assets is 21.3%, the first time we have crossed the 20% mark. Return on equity is 18.8% and ROE of continued operations is 13.3%. Net financial debt is negative INR 8.2 billion. So net financial debt is negative. The cash flows are shown on Page 19. The company generated operating cash flows to the extent of 60% of consolidated EBITDA. Growth CapEx was INR 2.9 billion, 80% of which was spent on projects in India. Overall, CapEx was INR 4.57 billion, which is 5.2% of consolidated sales, which is in line with our norms. Overall cash flow generation was INR 9.7 billion, but this includes cash received from the CFG sales process of INR 3.76 billion. The Board of the company recommended a dividend payment of INR 5 per share giving approval in the AGM scheduled later in the year. This is double the payout made in the last 2 years. Section 3 of our presentation outlines our strategy. A combination of the following principles sets us apart from others namely: Make operations world-class, diversify customer base, plant locations and technologies, invest in a disciplined manner, continuously improve profitability, decentralized client management, and focus on ESG. Diversification is key to our aspirations. In India, we are present in 7 technologies, 4 market segments and more than 50 customers, out of which 20 plus of those customers are with annual sales of more than INR 500 million or INR 50 crores. This not only enables us to manage the volatility in sales at some of our anchor customers, but the portfolio approach helps us in protecting margins. Our disciplined approach to capital expenditure is encapsulated in a few key guidelines, and that is outlined in the presentation. We focus on improving productivity levels at our plants through a variety of projects namely: Optimizing plant layouts, automating machines and material handling, improving cycle times, eliminating unnecessary operations and manning and digitizing data capture. Teams from CIE Automotive global helped with know-how transfer. The success of our strategy can be gauged by the consistent improvement in performance over the years. Our EBITDA margins, PAT, free cash flows and return ratios are quite close to CIE Automotive's global benchmarks. The key thing is consistency is what we aim for. The next section analyzes some long-term trends in the automotive industry and how we gain. As climate change takes center stage, electric vehicles or EVs are gaining traction. The pace of this transition to EVs is varying widely across regions and segments, and we are in that stage of uncertainty right now. We have developed a comprehensive strategy for EVs and a selection of products that we pursue in the EV space under 4 categories has been shown in the presentations. Companies are increasingly expected to mind their carbon footprints. And thus, there is a push for localization. Near shoring also helps minimize supply chain bottlenecks as developed nations seek to meet stringent CO2 reduction targets, some polluting processes like steel and aluminum castings are migrating to emerging ones. Lightweighting and safety are 2 key themes in the industry. The former will lead to a push towards materials like aluminum forgings and castings and composites, all 3 of which are focus areas for us. The transition to EVs lightweighting and safety, all require components with higher precision, closer tolerances and better quality. And this is where we think we can score. We think all these issues could lead to more opportunities, especially in India. The next few pages of the presentation present market statistics and forecasts from relevant sources followed by the results submitted to SEBI in the prescribed format. The CIE India team is confident that it can utilize future opportunities and face future challenges with agility in order to meet the shareholders' expectation of sustainable growth and profitability. Thank you very much. I have taken a bit more time than usual. So thank you for that. And now we proceed to Q&A.

[Operator Instructions] First question is from the line of Jinesh Gandhi from AMBIT Capital.

A couple of questions from my side. One is on the EU business, given that outlook for industry is expected to be muted for the next few years. How should we build in for new business revenues, given the changes which are happening in the industry, particularly towards hybrids and EVs. Would there be content increase led growth or we will be largely limiting underlying industry growth in EU?

Revenue projections in our European business, given all the changes in the market. So for Anders' benefit, Jinesh, I'm just summarizing. So what he's asking is that the market in EU, the industrial market and also the automotive market is expected to remain -- not grow going forward. And then there are also changes like move towards hybrids and EVs. So in that context, how do we look at growth in Europe? Are we talking about stagnation? Or are we talking about an increase in content per vehicle, et cetera.

Yes, you are right. This is Ander speaking. The evolution of the European market for the next 4 or 5 years will be flat, okay? It will be a stagnant market in the automotive sector, mainly they expect a 2%, 3% drop for 2024. And the remaining years, absolute volume of car production will be around 17 million cars per year, that is the expectation. On top of that, we have in 2023, we had 12% of electric vehicles. And this percentage of electric vehicles will go growing probably a little bit slower than expected because there was a huge expectation of an exponential growth in the next year. This seems that it's not going to happen probably the electrification will go slower than expected, at least 2, 3 years of delay. That is what we all expect. And regarding CIE Forgings, what we had this year regarding the growth of our business in Europe. You saw that we had this 10% growth. The Forgings sector grew 16% and the Gear sector, Metalcastello business dropped -- had a drop of 6%. And this was mainly due to the export of the highway -- off-highway components that we are producing from Italy to U.S. So the U.S. market in the off-highway business is now in -- let's say, in the bottom side of the cycle. So the average is 10%, but you see that the performance of the different technologies or the sectors are different. For the future, what we are now seeing is that our new order book is really interesting. I mean we are getting important businesses, both in the Forgings and in Metalcastello with a huge weight of the electric vehicles in this year, for example, in the Forgings 73% of our new orders were electric vehicles, and in Metalcastello, 51% of the new orders were electric vehicles. So what we will see in the next year will be a transition from internal combustion engine components to electrified components for different customers. So what we expect is in that flat scenario or flat volume, flat evolution business. With the increase of the electric vehicles, we expect to maintain our business. So we see our future stable, and we are doing -- I think we are doing our job properly, and we are accomplishing the transition in an organized and solid manner. So we expect to keep this business in the near future in a stable way according to the market evolution.

Okay. Sir. And then just to clarify, so are we indicating that we are not expecting any material increase in content as EV share in our business increase. Is that the right understanding?

Yes. Our EV share will increase for sure. As I told you that the new orders are coming, the majority from the EV sector. But what we can expect at the same time is that the internal combustion engines will start the decline. Okay. So I think our aim is to balance both, let's say, reduction and increase. And maintain or even increase a little bit our business in the future. So -- but the expectation is that we will be able to make this transition smoothly.

Got it. And secondly, does this include any further ramp-up in Aluminum Forgings in Europe or that will be over and above what you are talking about stable revenues?

Yes. We have -- you know that we already got certain Aluminum Forging projects that we are now launching with different customers. We also got very important steel forge component, but for the battery pack for the commercial vehicle one important commercial vehicle customer. So let's say that the -- all these projects are being developed and both Aluminum Forging plus Steel Forging for the commercial vehicle battery packs, I think we will see good growth in that sector in the future.

Got it. And one last question is on the cash of INR 8.2 billion. So how much of this would be in India and how much of this could be in Europe? And as a follow-up question on that in case if we acquire something in India, can we access cash, which is lying in Europe? Or given the taxation policies, it might be difficult to access that.

JP, will you please take that?

Yes, I'll do that. So Jinesh, the Europe cash is all in that loan amount, which is about EUR 45 million is the Galfor. And I don't know if you saw the stock exchange, we are getting rid of the debt in Mexico by Galfor investing in there. So that cash will knock off the debt in Mexico of about EUR 50 million. About moving money -- so we will be left with very little cash in Europe in the immediate. Of course, the businesses are cash generating. So we will have to find a solution around how to get the money for acquisitions in India. We are working on that. As of now, Jinesh, we don't have a solution, which is tax efficient. India has -- as you can see from the balance sheet, the standalone sheet, something like cash INR 7 billion in cash in India. So we are adequately cashed in India if we need to go for an acquisition. So I don't see an immediate challenge there. But you're right, we still need to figure out how to get tax efficiently money from Galfor. Immediately, we have found a solution for immediate, but for the long term, yes, we are still -- we still don't have a solution which is tax efficient.

[Operator Instructions] Next question is from the line of Mahesh Bendre from LIC Mutual Fund.

Sir, earlier, we used to guide that based on the market growth we'll grow 5% higher than the market. So whatever the blended growth of the market we'll be 5% higher than that. So what is current quarter, the -- I think, performance as far as this guidance is concerned. And going forward, what is the outlook for this?

Okay. That is for India and Europe.

Yes. The -- let's say that our business this year -- this last quarter grew about 5% and the, let's say, the weighted market grew 3.9% something like that. So we were slightly higher than the market growth this quarter. But you are right that we are below this 5% of, let's say, higher sales than we were expecting. There are several reasons for this, let's say, limited growth that we had in this quarter, mainly -- and I would say that the main reason is that the delay of some of our main -- big projects that we were launching in -- sorry, the projects that we were launching in our different plants. Especially in Bill Forge that -- we have this electric vehicle businesses for Europe that has been delayed. As you all know, and also in the Aluminum business where we get nominated for several electric vehicle components and those projects have been delayed. So we are not concerned at all because of these delays. I mean, it's just normal delays because of the new technology entering and, okay, there are certain challenges for the customers to launch these projects. Sometimes it's related to the market, but sometimes it's related to the supply chain that is not well organized yet. And -- but we are receiving the feedback from the customer that this growth will come in the next quarters. So that is one of the reasons, especially in India. And regarding Europe, the drop is coming from the Metalcastello business that I explained in the last 2 quarters, we had a drop because of the cyclicality of this business for U.S. and also, as you know, in U.S., we have the elections at the end of this year and, let's say, all the big infrastructure investments are stopped until the new team -- the new president is elected, okay? So let's say that we are now in a transition period and waiting for this, but we are -- as the order book during all these years have been really, really good and we are now launching also additional projects. We will see their growth and their recovery coming soon. So in my opinion, it's just a transitory situation because of different reasons. But the -- I think the market is solid, the evolution, the new projects are also coming. The interest from the customers is also very high. So we will see this growth trend to recovery again.

And Mahesh, just to add to what Ander has just said, there are 2 other factors, which, of course, that's part of our business context in which we operate. One is, of course, the steel price decrease this year was pretty much affecting the revenues, the big amount. And also the transition from old Scorpio and Bolero to new Scorpio and Bolero, where we have a very large stampings business with M&M, and that was the difference, which you will not -- both of these, you will not see much of that in C '24. So of course, that's -- as I said, that's a normal part of the business context in which we operate. But these 2 factors, unfortunately, have added to the various delays that Ander talked about in C '23.

And it's also important to highlight that in 2022, we had a growth of 28%. So we, let's say, went much higher than, let's say, the market. This year, we have this 7% growth that is more or less aligned with the market with the comment that Vikas made about the raw material decrease and also the certain important projects that are now changing. So overall, I think that this is just a transition moment that we are now accomplishing, and in the near future, we will see again the growth coming back to our business.

Sure. Sir, delay at ramp-up at Bill Forge and Aluminum business, was it because of the client? Or is it because of the -- our limitations that we could not scale?

No, it's just the delay from the customer point of view. I mean, we are waiting, we are ready. We have all the investments and all the machinery ready to start, and there is a delay from the customers. They are -- they have their bottlenecks, not in our company, it's in other bottlenecks, and we are waiting for them to solve these bottlenecks and to start the delivery date. They promise us that we will start soon delivering at the maximum at a big level.

So this is for export order, sir?

Yes, it is export order, yes. Export order for electric vehicles, yes.

So it's a mix. Export orders for electric vehicles is what Ander has said. We have also talked about in Aluminum is EV orders for domestic. So some of these EV projects is what we are observing. As you know -- you see in the initial remarks, we were talking about how some of these EV projections are less rosy compared to what it was only 6 months back. And we are seeing that effect in delays in some of the ramp-up of some of the EV projects. That's just an observation. As I said, that's really part and parcel of the business context that we operate in, and we expect those to start coming like going up again this year.

Sir, is it possible to share for CY '23 what was the export from India?

Exact number, we'll have to check.

Something like -- 13% or something like that. We will give you now. I mean we are calculating, but it's between 11% to 13%.

And sir, once these orders get sorted out, do you think this will go up significantly, maybe 20%, maybe over the next 2, 3 years?

Yes. What we see is in certain technologies, we will see this export rate to go up. Clearly, in the Casting division, the Gears are also growing, and probably the Forgings will grow up also. We see a lot of demand from the customers to export the components. But you know that with all these geopolitical difficulties with the logistic bottlenecks that we have had in the Red Sea and so on, there is a mix view on the customers. And probably you know that our preferred route is local-to-local where we can deliver in each region, the products that we produce in each region.

Sir, last question from my end. So for this year, is it fair, I assume that domestic business will grow 5% higher than the our blended market?

Okay. I would say I'm optimistic with that, okay?

No, we don't make forward-looking statements, Mahesh, but that's a guideline that we follow. Over the long term, that's a guideline in India that we've always said that we follow. Like -- as I said, CIE is a very simple -- like we have very simple rules. Like we said, for investment, it is 5% to 6%, CapEx, is 5% to 6% of sales. So for India growth, this is the kind of heuristic that we have developed for ourselves, 5% plus higher than the weighted average market. So it is not -- it is something that we try and deliver all the time. But to say definitely, we will avoid definitive statements.

I'm just checking guideline only. Just I'm holding -- like in the last 2, 3 quarters, we have not been able to come out with this kind of -- so I'm just asking whether we are holding up this long-term, I mean, guidance going 5% above the weighted average of the market. So are we still holding it up or there will be a change for the next year?

No, we are holding it, okay? We hold it. I mean, perhaps with the delay of 1 quarter or 2, but the -- I think in the midterm, we will go for that for sure. That -- we are quite optimistic on that. And also, we checked that now the amount of export, we had this last year was 14% of our turnover. It's a little bit higher than the last year, 14%.

The next question is from Bharat Sheth from Quest Invest.

So Vikas or Ander as we've seen in our presentation on Indian slide, you have shown that we have approximately 50% plus clients and out of which around 20% are more than INR 5 crores or INR 50 million. So this is a long tail end of 30-plus customer, which is not meaningfully contributing to the whole our sales. What are our plans to ramp-up those products and generate what we are talking of growing higher than the industry rate.

Yes. Of course. So you have -- basically, the answer is in the question itself. So yes, we have opportunity to grow a lot of those customers, and we are looking at growth. And that's why we said this portfolio approach works. Some of those customers will definitely become big, and that is why we are confident that in the long term market for us, growth would be there.

But is there any this 50-plus customers, how was the same number and 20-plus more than INR 50 million last year and how it has changed? And exactly when do we think that we will be able to really, I mean, growth over 50-plus customers to more than 50 million run rate.

No, no, no. 50% over INR 50 million is a huge target that -- in a B2B kind of business that is a very, very high base. So all that we are trying to say that is we have a very robust portfolio approach. So we have very good anchor customers. So if you look at the customer pie also that we have presented later on, you will see we have very good anchor customers who are very large. And we also have a large set of other businesses who are emerging with us, who we are trying to grow. So between a mix of these anchor customers and the set of emerging customers, we are able to ensure both growth and profitability. That's the point. It's simply a portfolio approach that we are following here.

Meaningfully, when do we expect those really to and each one may be having a different auto or two-wheeler tractor or MHCV. So if you can say some color in which segment they are sitting large by -- where still there is headroom to grow.

No, no. There are lots of such new customers that we have added in the last few years. We have talked about it in the past, whether it is Hyundai, Kia, whether it is John Deere, whether it is Royal Enfield, there are a whole set of such customers that we have added post-COVID. If you look at our track record from 2020 onwards, you will see that this kind of customer addition has accelerated during that period, lot of export customers have been added also as Ander was talking about. So to that extent, who will ramp up, how much will they ramp up? That's exactly a question we can't answer. As I said, some will ramp up. Of course, internally, we keep looking at it. But the point that we are trying to make is it's -- this approach gives us stability, both on growth and profitability. That's what we are trying to present.

Okay. And can you throw more -- I mean, export opportunity, of course, I mean we are always -- I mean there's a nearshore kind of a thing. But still, we are around 11%, 13% in '23. So next 2, 3 years, where do we like to see kind of our export of the total India -- export from India?

So it is 14%, is what Ander clarified. Because both the domestic and export opportunities are growing. So there -- as Ander explained, there are 2 sets of contending principles that are happening. You know you also have the localization principle that is working. And of course, as we explained even in our talk, the -- because of environmental norms, there is, of course, a movement from the developing to the emerging world in certain technologies, castings, aluminum, over and above that, we have Forgings and Gears where we have other export opportunities. So that is -- that was what Ander also talked about these 4 businesses where we are targeting export growth and where we do see a lot of export opportunities coming our way in the next 3 to 4 years. So it is basically steel and aluminum castings, Gears and Forgings in that order.

And would you like to give some kind of margin side, how do we like to see in '24, India as well as Europe?

Europe margins are consolidating around 17% EBITDA. And in India also, it is around the same number. As we say, we will keep on incrementally improving it. You know the CIE global benchmarks are a little higher than that. So our job is to keep moving towards those numbers as much as possible. But that's what we intend to do going forward. But exact, as I said, 2024, we will not give a sort of forward-looking statement on what the margins are going to be.

Next question is from the line of Nitish Rege from ChrysCapital.

Just wanted a clarification. So could you please elaborate on these exports? So is this new business? Or are we just moving CIE manufacturing from EU to India? And also, is this CIE India factory in EU? Or is this the CIE parent factory in EU?

No, no, these are new opportunities largely. As I said, it is in castings -- in steel castings. Steel castings, we don't have any CIE factories in Europe in any case. So we have Forgings and Gears, some opportunity coming where we are, like we have aligned supply chain, say, between our Gears business in India and Italy, and we work together to supplying some of the customers. But that's a small part of the exports opportunity. Please realize that CIE in Europe does very well on margins. So it's not as if that they are wanting on that aspect. So largely, it will be a new business.