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

Ladies and gentlemen, good day, and welcome to CIE Automotive India Limited Q2 and H1 CY'24 Results Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand over the conference over to Mr. Basudeb Banerjee. Thank you, and over to you, sir.

Thanks, Amit. Good evening, good afternoon, ladies and gentlemen as per your location. Thanks to CIE Auto India Management for giving us the opportunity to host the post Q2 CY'24 result call. We have with us the management 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 over to you, Vikas.

Yes. Thanks, Basudeb. I welcome all of you on this call, as also Ander and Oroitz, both of them have just experienced the effect of the global IT outage, their connecting flight was delayed and they barely made it on time. So we sincerely thank them for taking -- making this special effort to be on the call. I will present CIE India results for Q2 C'24 and also for H1 C'24. Let's start with Q2 C'24 results for the India operations on Page 7. Sales in the India business was INR 14,463 million, which has grown 8% year-on-year versus Q2 C'23 and is also marginally higher on a sequential basis. This growth is also slightly higher than the weighted average market growth. If you recall, we had said that our growth in the past quarters have been hampered by slow ramp-up of certain orders. These orders have started ramping back as seen in the improving growth figures over the last few quarters in the India business. So if you look at the quarterly year-on-year growth in our India business, it was 1% in Q3 C'23, 4% in Q4 C'23, 6% in Q1 C'24 and 8% in Q2 C'24. While sales in India grew by 8%, EBITDA grew by 16%, EBIT by 21% and EBT by 20%. EBITDA margin in India without any onetime impact was -- has crossed 18% for the first time, and it was 18.1% in Q2 C'24. While we had reported an EBITDA margin of 18.7% in India in Q1 C'24, that included a onetime government grant at our Aluminum business, without which the EBITDA margin was approximately 17.2%. So even on a sequential basis, there is significant improvement in EBITDA margin. EBIT margin in Q1 -- Q2 C'24 for the India business was 14.4% versus 12.8% in Q2 C'23, and EBT margin was 13.8% versus 12.3% in the same quarter last year. The margins are just a result of improved profitability of the Indian operations. Overall, 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 CIE India for the quarter Q2 C'24. The slowdown in the European light vehicles market as well as the slowdown at Metalcastello, something that we have spoken about in the past calls, has caused -- has significantly impacted the results. Sales were at INR 7,604 million, which are down year-on-year by 11%. And if you compare with the light vehicles market data, which is ex of Russia, if you look at what is happening in Europe without taking consideration of Russia, it is down by 7%, the market. Just a note here, from now on, we'll present the European market data without Russia. Because as we know, the commercial contract between Europe and Russia is not there and is not expected to be there for the next many quarters. EBITDA margin for the European operations in Q2 C'24 was 17% versus 19.2% in Q2 C'23 and 16% in Q1 C'24. EBIT in Q1 C'24 (sic) [ Q2 C'24 ] was 13.1% versus 12.6% in Q1 C'24. And EBT 11.4% versus 11%. We have taken note of the sales drop in the European operations and corrective actions have already started to adjust the operations to the lower sales volume. On Page 9, we see the consolidated CIE India Q2 C'24 results. Consolidated sales were INR 22 billion, similar to Q2 C'23; EBITDA, INR 3.9 billion at a margin of 17.7%; EBIT, INR 3.1 billion at a margin of 13.9%; and EBT, INR 2.8 million (sic) [ INR 2.8 billion ] at a margin of 13%. The first half H1 C'24 results for our Indian operations are on Page 11. Sales increased by 7% versus H1 C'23 to INR 27 billion (sic) [ INR 29 billion ], all segments showed growth, except Tractors, which is down 7% year-on-year. The EBITDA margin was 18.4%; EBIT, 14.6%; EBT margin, 14%; and PAT margin, 10.4%, all of which are much higher than H1 C'23. In fact, this is the first half year when India PAT margin has gone beyond the 10% mark. It must be mentioned that the EBITDA includes 0.7% of onetime extra subsidy on our Aluminum business. The market in India is largely positive going forward. Light vehicles has grown in single digits, albeit from a high base. 2-wheeler demand seems to have recovered in the last couple of quarters and the half yearly growth is 20% plus. Tractors are also showing signs of recovery. We expect H2 to be better than H1 in India. On Page 12, we have the H1 C'24 results for our European operations. The impact of slowing light vehicle sales and slowdown in Metalcastello's customer segment has contributed to a 9% drop in sales. The EV orders that we were executing have also seen some slowdown from the customer side. The H1 C'24 sales are INR 16.5 million (sic) [ 16.5 billion ]; EBITDA margin was 16.5% in H1 C'24; EBIT margin, 12.8%; EBT margin, 11.2%; and PAT margin, 9.9% (sic) [ 8.8% ]. While making year-on-year comparisons, please note that H1 C'23 PAT included profit from discontinued operations of CFG. On Page 13, we have the H1 C'24 consolidated results of CIE India. Sales were INR 45.4 billion, which is phenomenal growth over H1 C'23. The EBITDA margin was 17.7% versus 17.4% in H1 C'23; EBIT, 13.9% versus 13.7%; EBT, 13% versus 12.7%; and PAT, 9.9% versus 12.8%. And this drop in PAT margin was because of the onetime profit from discontinued operations last year. Overall, the good performance in India has been offset by the declining market in Europe. On Page 15, you will see our bridged consolidated balance sheet, which shows the healthy state of CIE India. Return ratios have continued to be healthy. Return on net assets has been maintained above 20% and return on equity is at 14.4%, and almost reaching the 15% mark. The cash flows are shown on Page 16. The company generated operating cash flows to the extent of 76% of consolidated EBITDA. Growth CapEx for the first half of the year was INR 1.05 billion, largely focused on projects in India. Cash outflow due to dividends was INR 1,897 million due to the doubling of dividend to INR 5 per share. If you move to Page 18, where we have shown Other details there. The Other operating revenue in the India operations in Q2 C'24 is significantly lower than Q2 C'23. And this is because we have started to reuse a large chunk of scrap that is generated, and we are using it in-house. So the Other operating income for India in Q2 C'24 is significantly lower than in Q2 C'23 because we are reusing the scrap in-house. We are confident that we can utilize opportunities that arise and face challenges that we confront. All of this, we will do with agility. And with that, we proceed to Q&A. Thank you.

[Operator Instructions] The first question is from the line of Siddhant Dand from Goodwill.

Is my voice clear?

Yes, yes, please go ahead.

My first question was regarding our working capital cycle and cash flow from operations. That seems to have gone down and our receivables seems to have shot up. So what really happened here in H1?

So I'll take that Vikas.

Yes.

So, sorry, I didn't get the name, but the working capital and especially on the receivables it's because we did factoring and discounting at December 31, '23, which we have stopped doing on 30th June, therefore the number has gone up.

Okay. So our factoring and discounting has stopped? Any particular reason for that?

No. Right now, we are having enough cash. So, right now, we're not doing it.

Okay. And what kind of margin benefit do you think we can get from this?

No, this was finance cost, so not so much.

So finance cost benefit that we can get from those?

So that was only done in December. So that was about INR 20 million, if I'm not wrong.

Okay. So now this would be -- H1 would be a good working cycle guidance that will be similar to this and going forward?

Yes.

Okay. Okay. My second question was, H2 was supposed to be when we'll get the growth in this year. So are we on path for that?

Yes, we are on track. That's why -- I did talk about the improvement in growth trajectory from the last few quarters. So if you look at the last 3 quarters at 4% growth in India, 6% growth in India and 8% growth in India. So in India, very clearly, you see that. Now coming back to Europe, of course, in Europe, H2 is traditionally weaker than H1. That's the seasonality effect. You have August holidays of 3 weeks and you will also have 1 week holiday in December. So sequentially, H2 is always weaker than H1. And -- but we do see weakness in Europe, very clearly the markets are down, both for the off-road market as well as the light vehicles market. The off-road market is down by much larger numbers then -- but even the light vehicle market is down, and you can see that in our presentation. So in India, definitely, what we have said, H2 greater than H1. We still think that is going to happen. In Europe, H2 traditionally is worse off than H1.

So year-on-year, H2 is not looking good because of the weakness. Is that correct?

At this stage, I don't want to make any definitive -- like the forecast is changing in Europe. But yes, the markets in Europe are weak at this point of time.

Markets in Europe are weak. Okay. And anything on getting some of our European customers, like the Volkswagen Group and others into our foray in India? Or are they just too small or something?

Volkswagen is small in India. And we have a very large customer base in India, including some -- including European OEMs in India. So it's not that we don't have. But European OEMs in India are smaller. Our biggest customers are, of course, Mahindra in India, Bajaj, Maruti, these are the 3 biggest customers, Tata Motors, the 4-wheeler customers, you have Hyundai, Kia, John Deere. So we have many customers in India, like as -- if you go back to our annual report or the investor presentation, that we made at the end of the year of C'24, you will see that there are at least 20 customers in India with very significant revenue base. So we are a very well-diversified company when it comes to customer base in India.

And the next question is from the line of Jinesh Gandhi from AMBIT Capital.

This is Jinesh Gandhi from AMBIT Capital. A couple of questions from my side. One is, when we look at the European business, there has been clearly a slowing down of EV sales. So as a company who had been working towards electric vehicles, what are the changes do we need to make in the business given the less slowing down of EVs? That's the first question.

What changes in business, Jinesh, can you repeat that?

Given that we were also preparing for electrification in Europe and now we are seeing -- EVs have been seeing slower adoption. Do we need to make any changes in our business now or it remains status quo for us?

No. Of course, Ander will answer more, but yes. Because of this whole slowdown on the EV penetration side, there is a lot of uncertainty in the minds of the European customer also. So you are clearly seeing the effect on the entire market. So it is not just the EV orders that are delayed. Because of the EV orders are delayed, because the customers are also a bit in wait and watch mode. But I'll request Ander to elaborate more on that.

Yes, Vikas, you are right. The reality in the European market is that now all this electrification process has been a slowdown, mainly because of the elimination of the certain subsidies that certain countries were giving to the electric vehicles. And this is generating certain uncertainty and volatility in the market. So what we think is that all this electrification process will continue. The growth will continue in the future but at a lower pace, okay? So we see a delay in this process and we can expect 2, 3 years, I mean, just rough figures because nobody knows what will happen, but we expect 2, 3 years of delay in all this electrification process. So in the meanwhile, we continue working as usual. So the internal combustion engine components will continue being supplied to the market. So that is a good thing for us. And we are -- we continue working and let's say, we are getting new orders from the customers in the electrification side. So the reality is that all these delays will gives us the time -- enough time to prepare ourselves in this transition. So the transition will be softer than expected. And I think that is positive for the European companies.

Got it. Got it. And the second question pertains to the M&A part of it. So one is, obviously, India, we have been looking for acquisitions to strengthen our presence in plastics and maybe with some other customers as well. But in Europe, do we also now look at acquisitions given that some of our competitors would be seeing some stress because of higher interest rates and leverage on balance sheet. Are we open to acquisitions in Europe as well?

Not really. Let's say that it's not our preferred route right now to invest in Europe, in different countries, let's say, stressed assets. It's not the strategy. We prefer to focus our efforts on the India market where we think there will be a development in the future. Perhaps we can find any company that can be consolidated with our capacities and could make sense. But in this moment, let's say that the focus continues to be in India.

Got it. And lastly, in terms of CapEx, our guidance would remain same like 6% of revenues or we are increasing any of these investments in India?

Let's say that the average in the first half has been about 4% of our total turnover, so slightly less than the 5% that we have as a standard. But we think that in the second half of the year, we will recuperate because there are a lot of programs and investments ongoing. And by the end of the year, we will be around 5%, 5.5% of the total turnover. And mainly main amount of this CapEx will be focused on India, of course.

[Operator Instructions] The next question is from the line of Nitish from ChrysCapital.

My question is for Ander. Sir, I just wanted to ask what is the plan on Roof Systems? Why has it been cut outside CIE India? We have heard like 3 reasons in the last 3 years. In 2022, it used to be due to the Mahindra name; in '23, it was because of Chinese ownership; in '24, it was Tier 2 versus Tier 1. These kind of change in reasons somewhat I'm not able to follow, and frankly, not expected from a group like CIE. It seems the parent is trying to keep the Roof Systems business out of the listed CIE entity, CIE India. So going forward, will the parent also enter plastics, castings, forgings on its own in India?

Can I take that, Ander? Before Ander comment?

Yes, yes, Vikas, you will explain much better than me.

You talked about different reasons. They are not different reasons. If you allow me, of course, number one, we have to say that this business is CIE Spain's business, not our business. So it is not our decision. It is their decision. But I'll explain the rationale, what this business is about and what the thinking process is, of course, people will have different views. First -- but first, let me say that they are not different reasons. Roof Systems business is a Tier 1 business. Now what is a Tier 1, as you would be aware, the component industry has two kinds of companies largely. You have Tier 1 companies, you have Tier 2 companies. Tier 2 companies largely, of our kind, we supply parts, maybe complex parts, subsystems, but mostly this is based on the drawings provided to us either by the OEM or a Tier 1 company. So for example, crankshaft, crankshaft goes into an engine. The engine supplier or the OEM will give me the drawing of the crankshaft and I make it. So I compete on operational excellence, as I keep saying, investment discipline, diversification. And then you have a set of companies like Tier 1, like engine manufacturers, driveline manufacturers, steering system manufacturers, seating system manufacturers, they compete on customized R&D, and they work with a fewer set of customers, but their basic competitive driver is R&D. And it is -- they generate the drawing and then either they make it in-house or they can take the help of Tier 2 suppliers to make it. Roof Systems is a Tier 1 business. All the other businesses are Tier 2 businesses, okay? And therefore, when you say, will CIE also look at plastics or forging or this separately? The answer is no, because CIE India, since the last 10 years, has focused on Tier 2 businesses. Tier 1 business would require a lot of investment in R&D. Right now, for the Roof System business, the R&D is centralized. In fact, this is a fairly large business within CIE, and India is an extremely miniscule part of that business. In fact, wherever these businesses operate in CIE worldwide in any other geography, they operate independently. So, for example, even if in any country, there is forgings of or aluminum of CIE or machining of CIE and Roof Systems, they are managed separately. So it is an independent business managed separately within CIE itself. And the main reason is Tier 1, R&D. Now coming back to your question, that in 2021, we talked about Mahindra and there -- in Tier 1 businesses, there is greater sensitivity because there is R&D sharing between OEM and the Tier 1 supplier. That is why any such name, any association with any one particular OEM has -- creates anxiety with other OEMs, which is much lesser in the case of Tier 2 or nonexistent in the case of Tier 2 companies. So if you see whatever reason we are talking about all of them pertain to this particular difference. So to answer your question, will something else also not happen? Roof Systems is the only Tier 1 business within CIE. Everything else is Tier 2, and that's the reason why we have always maintained that the one difference in portfolio between CIE Global and CIE India is plastics. So they do plastics, we don't do plastics in India. We do composites in India, but not plastics. So that is the reason why this distinction was there and the reasons are fairly consistent. I hope I have answered your question.

Yes. So no, where I was coming from CIE Spain, both the Tier 1 and Tier 2 are in the same entity right now and CIE India has always been a flagship entity. So what kind of message does it send that just the Roof Systems is outside of our flagship entity in India? Because effectively, it's the same 15, 20 customers, which we will be sharing with the Roof Systems also with CIE India has. And now that there is no Mahindra name, it is more of a reason to integrate with the company.

Again, this is, again, not -- this decision is not in our purview. But again, let me attempt the reasoning behind it. No, it is true that customers are similar. But it won't be -- the number of customers that Tier 1 company services will be much lesser. Like, for example, we probably tell you that we -- I just told the other questioner that we have 20 company -- customers in India with substantial revenue base. A Tier 1 company may will probably not have that because they have customized R&D and they can deal with very few OEMs. Therefore, the OEM sensitivity that we are talking about. But coming back to your question, within -- even within CIE, that is what I was trying to explain, they are handled independently of the Tier 2 business, and it is centralized R&D. Yes, India is -- they have business in India, but it is a very small part of the global business. And two, let me also suggest this that -- let me also say this, that this was a business that has come to CIE via acquisitions made in 2009 and 2018 or '19. Exact date, I'll have to check. And they have been doing business in India, predating CIE India. CIE India was formed in the year 2013 and they have been predating that. They have been doing that business separately, maybe out of China or whatever -- therefore, China was also mentioned in your question. But it is largely a global business run out of like the centralized R&Ds in Europe. So China is just one geography that is serviced by CIE Golde, as this business is called. So that is why this decision has been taken. As I said, people can have different opinions. I'm just trying to give you the business logic that has been used by the CIE Group. Again, let me reiterate, it is not my business logic. It is -- frankly, the decision is not in the perimeter of CIE India. It's a decision, which has been taken by CIE Spain because it's a business owned by CIE Spain.

And the next question is from the line of Jyoti Singh from Arihant Capital Markets Limited.

Sir, my question is on the order book side, if you can give us some visibility, like earlier, the new order book was -- consist 40% of EV. So now, things is not pretty that good as earlier. So just wanted the visibility on the order book side on EV versus ICE?

I will take that, Vikas.

Yes.

In India, we have had in the first half of the year, total new order book of about INR 5 billion per year of, let's say, new projects. Out of them, 30% approximately are for electric vehicles. So that means that in the near future, our share of electric vehicles components will continue growing. So this is 30% in India. And in Europe, where we have a slightly lower amount of new businesses or new orders nominations, we had about INR 2.2 billion of new orders. And in -- we have -- 55% of them are pure electric vehicles. That means that the electrification pace -- speed of the electrification in Europe, as we all know, is much faster than in India. So the trend is consistent with our strategy where we will be slowly changing and making the transition from internal combustion to electrification. So we can say that this 55% of electric vehicles, new orders in Europe, and 30% of electric vehicles, new orders in India, are in line or aligned with our strategy for the electrification in the future.

The next question is from the line of Nemish Shah from Emkay Investment Managers Limited.

So I had a few questions on our Europe business. Also, if you could just highlight on the passenger vehicle segment of the Europe or European business, what would have been the decline there? Or would that be in line with the market decline? Or will it be lower, higher, some sense on that?

Nemish, you are seeing our PV segment revenues, are they in line with the market drop?