Recommendation from automotive sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

CIE Automotive India Ltd : SUPPORTING THE GLOBAL AUTO BOOM

HERE IS WHY
✓   Mergers and acquisitions increase profitability
✓   Increase in net profit by more than 14 per cent
✓   Continued margin improvement

CIE Automotive India (CAIL), formerly known as Mahindra Forgings Limited, is a part of the CIE Automotive Group, a global auto component player. The company was renamed after the integration of the Mahindra Group’s Systech business with CIE’s operations in 2013. In 2015, Mahindra CIE Automotive Limited was established; combining Mahindra Forgings, Mahindra Ugine Steel, Mahindra Investment, Mahindra Hinoday, and the European forging division of CIE. CAIL operates in Italy, Spain, Lithuania and India. It is one of the largest ductile iron casting and compression moulded auto component manufacturers in India.

The company is engaged in the business of production and sale of automotive components to original equipment manufacturers, mainly dealing in stampings, forgings, castings, gears and composites products. The company has a well-diversified presence across geographies, products, and end-user industries, including the passenger vehicle (PV), commercial vehicle (CV), twowheeler (2W) and off-highway segments.

The company is expected to continue to benefit from CIE Automotive SA’s (CIE) strong technological expertise, along with its established relationships with global original equipment manufacturers (OEMs), which support its business prospects. In Q1CY24, on a consolidated basis, the company reported an increase in revenue to ₹2,393 crore, up by 6.8 per cent as compared to ₹2,240 crore in the previous quarter while it decreased YoY by 1.9 per cent. The EBITDA also increased by 9.6 per cent to ₹359 crore as compared to ₹327 in the previous quarter.

On a YoY basis, it decreased by 5.7 per cent. The net profit increased by 14.3 per cent to ₹202 crore as compared to ₹177 crore in the previous quarter and reported a decrease of 8.1 per cent on a YoY basis. CAIL’s leadership position in India and Europe strengthens its position, fostering client retention and attracting new customers. The company has shown consistent growth in margins, which could be a positive trigger for the stock. The European Central Bank’s signal to reduce interest rates presents a positive opportunity for CIE Automotive, as one-third of its business comes from Europe.

Lower interest rates could stimulate economic activity and increase the demand for vehicles and automotive components, potentially leading to potential revenue growth. CIE Automotive’s future outlook is promising, with continued margin improvement and strategic utilisation of its global expertise, which is crucial for sustained growth and shareholder value creation. Its growth drivers include a robust order book, an increased share of business with existing customers, and the addition of new customers. CAIL is expanding its capacity in all its verticals to meet the growing demand.

At TTM, CAIL is trading at a PE of 22.7x, which is the same as its three-year median PE and lower than its industry PE of 29.3 x. The company has maintained a healthy average (three-year) ROE and ROCE of 7.06 per cent and 14.6 per cent, respectively. The company has a three-year compounded sales and profit growth of 15 per cent and 102 per cent, respectively. The company is having debt-to-equity of 0.14x with an interest coverage ratio of 11.3x. Considering the aforementioned factors, we recommend BUY.