Mahindra CIE Rating: Buy- Strong show at the end of calendar year

Mahindra CIE Automotive’s (MACA’s) Q4CY20 operating margins were ahead of consensus estimates. Consolidated sales rose ~14% y-o-y to Rs 16.4 bn. India revenue share in Q4 (52%) surpassed Europe (48%) while India PBT contribution rose to ~64%. India business clocked six-quarter high margins at ~15.3% (up ~271bps y-o-y) while clocking ~17% revenue growth. MACA incurred incremental costs to streamline Europe operations, which restricted margins (down 86bps at 11.9%).

Company registered healthy FCF of ~Rs 2 bn in CY20, and we expect cumulative FCF of ~Rs 11.8 bn over CY21e-22e. We expect India revenues to grow at ~20% CAGR over CY20-22e driven by market growth and new order wins. Bulk (>60%) of MACA’s profitability (PBT) is now driven by India business while consensus still seems focussed on the Europe business. Stock remains undervalued (~11x P/E / 9% FCF yield on CY22E basis). Maintain Buy.

Key highlights: India business grew on the back of new customer additions (25 added in CY20). Consolidated Ebitda margin rose only 99bps to ~13.7% inclusive of additional costs in Europe business. India business has crossed the 15% CIE margin target even as the industry cycle enters a growth phase in CY21/CY22.

Maintain BUY: We believe MACA is a well-diversified MNC. We raise our estimates (by ~6%/4% for CY21e/CY22e, respectively) factoring in the better margin trajectory in domestic business. We raise our target multiple in view of the rise in contribution of India profitability to 15x (earlier: 13x) CY22e EPS of Rs 17.1. Maintain Buy with a revised TP of Rs 253/share (earlier: Rs 213).