Mahindra CIE Automotive Ltd, supplier of automotive components, continues to face headwinds from the European markets. Higher gas/power prices are weighing heavily on profit margins. In an interaction with ICICI Securities, the management of Mahindra CIE said in Europe forging operations, power cost constitutes 4% of revenue. Thus, surging power costs accounted for 700-800 basis points of overall cost inflation but about 50-60% of this rise was passed on thereby providing some cushion to margin. One basis point is one-hundredth of a percentage point.
However, strong opportunities in the Indian markets is likely to hold Mahindra CIE in good stead. The management of Mahindra CIE said that it is aiming to take the revenue share of India’s operations to about 60% from 50% currently.
Further, the domestic passenger vehicle segment is seeing increased traction, which has prompted Mahindra CIE to add capacity across stamping, magnetics and warm forging operations. Also, the commercial vehicle segment is benefiting from a cyclical upturn, which is a plus.
With respect to the electric vehicle segment, Mahindra CIE is ready to scale up this business on the back of increasing focus on electric vehicles in two-wheelers and passenger vehicles. About 20%/25% of India/Europe businesses are under electric vehicle disruption risk, according to the management.
In view of the afore-mentioned factors, Mahindra CIE expects revenue in India operations to grow in mid-to-high teens in CY23-24. The company follows a January to December financial year. Also, it is confident of sustaining Ebitda margin in India operations at the level seen in the June quarter (Q2CY22), which is 15%. Ebitda is earnings before interest, tax, depreciation and amortization. Further, the company aims to increase the margin to about 17-18%.
“We expect Mahindra CIE to deliver a mean free cash flow of about Rs500 crore per annum in CY22-23E, with return on equity doubling to about 15% by CY23E (from about 8% in CY21). This would deliver around 7% free cash flow yield on a lean balance sheet," said analysts at ICICI Securities in a report on 27 September.
Meanwhile, shares of Mahindra CIE have risen by 18% in the past one year versus a 3% drop in the Nifty500 index. The stock is currently down 15% from its 52-week high seen on 15 September.
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