Mahindra CIE: Margin gains, recovery in Europe biz key for the stock

Led by the India business, auto component maker Mahindra CIE posted better-than-expected operating performance in the December quarter. New customer additions in India and recovery in the European market helped increase consolidated revenues by 14 per cent compared to the year-ago quarter. 

The year-on-year growth has come after six consecutive quarters of decline. While the company ended the calendar year on a strong note, given the 65 per cent fall in revenues in the June quarter, CY20 revenues fell by 23.5 per cent. The company indicated that demand across all segments revived faster than expected in the September quarter and has continued into the December quarter. 

Analysts at ICICI Securities expect revenues from the Indian market to grow at 20 per cent in the CY20-22 period. This will be on the back of higher orders and new customer additions. India business revenues grew at 17 per cent in the quarter while the European was up 7 per cent. 

Strong growth across key markets rubbed off on profitability. Consolidated operating profit margins at 13.7 per cent were up 99 basis points and 188 basis points over the year ago quarter and on a sequential basis respectively. The company indicated that cost reduction efforts, cash protection and lowering of breakeven points led to the improvement. 

The Indian unit which accounts for 64 per cent of the overall profits prior to taxes reported a six quarter high margins of 15.3 per cent, up 271 basis points year-on-year. Consolidated margins could have been higher but for the restructuring in the European business which reported a drop of 90 basis points to over 11 per cent. The company indicated that the restructuring impacted the margins by 100 basis points in the quarter. The management expects margins to improve from the current levels on the back of volume improvement, internal restructuring and cost efficiencies.

To derisk the electric vehicle risk in Europe, the company is looking at increasing its market share in crankshafts, non-engine parts such as steering knuckle and aluminium forgings. While this is a positive, any rebound in the pandemic could impact its European revenues. 

The stock, which has gained 20 per cent in the last six months has underperformed its peers and the benchmarks significantly.

While it is attractively valued at 10 times its CY22 earnings, consistent improvement in margins and recovery in European business will be key for the stock going ahead.