Edited Transcript of MAHINDCIE.NSE earnings conference call or presentation 27-Feb-20 11:00am GMT

Mar 21, 2020 (Thomson StreetEvents) — Edited Transcript of Mahindra CIE Automotive Ltd earnings conference call or presentation Thursday, February 27, 2020 at 11:00:00am GMT

* K. Jayaprakash

Kotak Securities (Institutional Equities) – Associate Director & Automobile Analyst

* Jinesh K. Gandhi

* Mahesh Bendre;Stewart and Mackertich;Senior Vice President – Institutional Research

Sundaram Asset Management Company Ltd. – Research Analyst

Ladies and gentlemen, good day, and welcome to the Mahindra CIE Q4 CY ’19 and Full Year CY ’19 Results Conference Call hosted by ICICI Securities Limited. (Operator Instructions) Please note that this conference is being recorded. I now hand the conference over to Mr. Nishant Vass from ICICI Securities Limited. Thank you, and over to you, sir.

Nishant Vass, ICICI Securities Limited, Research Division – Auto and Auto Ancillary Analyst [2]

Thanks, Faizan. Good day, everyone, and thanks for joining the call. From the management side today, we are represented by Mr. Ander Arenaza Alvarez, the CEO; Mr. K. Jayaprakash, the CFO; Mr. Vikas Sinha, Senior Vice President, Strategy; and Mr. Oroitz Lafuente, Business Controller.

Now I’d like to hand over the call to the management for their initial remarks. Over to you, sir.

Hi, good afternoon. This is Vikas. Good afternoon to all of you and good evening to those who are joining from Hong Kong and Singapore. Hope all of us are well. I welcome all of you on this call as also Ander, our CEO.

I will present MCIE results for quarter 4 of calendar year ’19 and full year calendar ’19, they’re referred to as Q4 C ’19 and full year C ’19.

Before starting with the results, I would like to state that the market scenario in India as well as Europe has not improved since our last quarterly report and in some cases, may have worsened. In India, this quarter seems to have continued the trend of slowing production in all segments. In Europe, the situation is equally challenging, but more so in the truck segment in Germany, where the demand scenario is one of the worst in recent memory. That said, MCIE has always been striving to maintain our margins and improve on our deficiencies, and we will zealously continue to do so.

We start with Page 5 of our investor presentation, where we have mentioned some key highlights for the year. This includes implementing a revised senior management structure, and the fact that we have completed the MCIE and Bill Forge merger. This means that from now on, Bill Forge will be reported as part of MCIE’s stand-alone business. We have also recounted briefly on Page 6, the acquisition of Aurangabad Electricals.

Page 8 shows the new legal structure as on December 31, 2019, which is post the changes that were made during the year. Pages 9 and 10 depicts the revenue splits by technology as well as geography and a brief overview of the end-use segments catered to, as well as some of the key customers that we have in different geographies.

India results, we start on Page 12. Q4 C ’19 shows growth in revenue due to AEL, which means the revenue of INR 8,269 million. Organically, though, without AEL, there has been a drop in sales. In absolute terms, the EBITDA margin from the India business was 12.6%. EBIT was 7%, though EBT has improved to 7% compared to 6.7% in Q3 C ’19.

In the previous quarter, we had talked about an ongoing EBITDA margin recovery plan, and this is now taking effect, evidenced by the sequential EBT margin improvement despite a market drop. We have now initiated action to aggressively target new business and CY 2019 has seen the highest addition of new customers in many of the divisions.

On Page 13, we have the Q4 C ’19 results for MCIE Europe. The revenue has dropped to INR 8,361 million, which was largely due to the truck market in Germany crashing in the period. The EBITDA margin is at 12.8%, EBIT at 8.8% and EBT at 7.6%. Q4 margins have improved sequentially as compared to Q3 C ’19, despite a drop in sales and onetime restructuring costs of about EUR 2 million in Germany. Now these have a payback period of a year. These margin improvements are due to the restructuring actions already taken.

On Page 14, we see the consolidated MCIE Q4 C ’19 results, which is a combination of the results in India and Europe. As mentioned earlier, the drop in sales has been a function of the underlying market drop. Despite that, we have an EBITDA recovery plan which is showing results. The EBITDA margin has improved to 12.7% as compared to 12.2% in Q3 C ’19. The EBIT margin is better at 7.9% compared to 7.8% in Q3 C ’19. And a huge improvement of 60 basis points over Q3 C ’19 EBIT — EBT margin to 7.3%.

Moving on to the full year results — the full year C ’19 results. The full year C ’19 results are on Page 16, and they show a revenue of — now this for is India, and they show a revenue of INR 33,798 million again, due to the inclusion of AEL. Without AEL, the drop would be around 12%, which is largely in line with the drop in production at MCIE’s key customers in India. The EBITDA margin has slipped to 13.8% for the year, the EBIT margin to 9%, and EBT margin to 8.6% all largely a function of drop in sales. The lower EBITDA margin is due to the slightly lower EBITDA — also due to the slightly lower EBITDA margin of AEL and the severity of the sales drop, especially in the second half of C ’19.

On Page 17, we have the full year results of C ’19 for MCIE Europe. There has been an 8% fall in sales vis-à-vis full year C ’18. Some of it is due to exchange rate impact. Real sales in Europe terms has fallen 6% due to the reduction in CV Forgings, especially in Q3 and in Q4 C ’19. The EBITDA margin has fallen by 0.8%, EBIT margin — and EBT margins have also shown a slight drop. As mentioned earlier, the main sales drop is in CV Forgings. We are working on a plan to realign the operations to the new market situation.

On Page 18, we have the C ’19 consolidated results of MCIE, which are a combination of the positive first half in India, Europe and AEL integration and the tougher second quarter, especially the third and fourth quarters. In C ’19, there was a 1% drop in sales, minus 9% in EBITDA, minus 15% EBIT, minus 17% EBT and a minus 36% drop in PAT compared to C ’18.

The drop in PAT needs an explanation. It was accentuated by 2 factors: the onetime negative impact due to the MAT credit loss incurred by MCIE after we changed to the 25% tax rate regime. And there has been a onetime tax write-offs in CV Forgings Germany of INR 892 million.

On Page 21 and 22, you will see our balance sheet and cash flow. In a year where our performance has been moderate, our cash generation remains very strong. FCF, the free cash flow generated during the year was in INR 4.2 billion. Our overall net debt has increased to about INR 11.4 billion, but this is largely because of a reduction in net cash as — if you recall the AEL acquisition was done in cash from our balance sheet. So if you look at the gross debt situation, the gross debt has come down from INR 16.1 billion to INR 14.7 billion, a reduction of INR 1.4 billion. This has translated to debt equity of 0.25x and a debt to EBITDA — net debt-to-EBITDA of 1.1%. There was a CapEx of INR 415 million in C ’19 on a consolidated basis, out of which INR 1,374 million was for growth, INR 1,218 million in India and INR 779 million in Europe. The investments have been made, both in India and Europe for the purpose of capacity increase in Bill Forge AEL and for machinery upgradation in European plants.

On Page 24, we have laid out MCIE’s overall strategic priorities where we are trying to replicate CIE’s strategies in India, these priorities spell out the current focus areas for our business, we are cognizant of current market realities, and we have to chose — and we have chosen to focus on operational efficiency improvements while canvassing for new business. These actions that we have undertaken during this year are not only to realign our business to new market realities, but also to make our businesses much better prepared to take advantage of the market opportunities when demand does come back.

On Page 25, we will see MCIE’s performance on the key financial parameters that our parent CIE uses to evaluate all our businesses. We have achieved an EBIT margin of 9.1%. Return on net assets has slipped to 11.1%, which is largely a function of the revenue dropped in this year. Likewise, return on equity decreased to 7.7% in C ’19. Now ROE in 2019 has been impacted by about 2% due to — mainly due to the one-time write-off of the tax setoff available against past losses in Germany that I talked about earlier. This loss can be returned back once the MFE performance improves. So this is — that 2% is not — 2% is not due to operational reasons.

These figures do look a bit subdued, and as such, reflect the market situation, but as mentioned earlier, we have continued our cash generation journey. The operating cash flow to EBITDA in C ’19 has been more than our target at 55%. We target about 50%, or in absolute terms at INR 5,507 million.

On Page 26, we have charted the quarterly trends in MCIE’s revenue and EBITDA percentage. Page 28 talks about MCIE’s stock performance as compared to the relevant indices, especially Nifty Auto and Market Cap. You know the story better there. The next few pages, talk about the market statistics and forecasts from relevant sources, followed by the results submitted to SEBI in the prescribed format.

In conclusion, let me say, on the back of CIE’s proven business model and MCIE’s successful efforts over the past to replicate CIE’s strategies in India, MCIE will emerge a stronger company once the demand stabilizes. As mentioned earlier, we have begun working to adapt our companies to the new scenario, which demonstrates our fast reaction, managerial speed and business resilience. These actions have gone through, where our margins have not dropped as much, as the drop in the market. We reiterate our assurance to all our stakeholders that MCIE continues to remain calm in this turbulence, and we intend to build a much more robust company, one which will be well placed to grow more in favorable market conditions.

Thank you very much for your patience, and now we can proceed to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Nikhil Kale from Axis Capital.

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Nikhil Kale, Axis Capital Limited, Research Division – VP of Auto [2]

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So in your opening comments, you talked about aggressively targeting new business this year. And also, you’ve seen — in CY ’19, you’ve seen the highest addition of new business. So if you could just throw some light on this, talk about any significant new order wins? And how and when do you see them ramping up going ahead?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [3]

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Yes, Nikhil, thanks. Yes, in this year, we have had very significant new orders, especially in the India business. In the India business, normally, it would be roughly about — almost 20% of our sales we have as new orders, so they will ramp up over the next 2 to 3 years.

Some of the ones that we have talked about in the past, Hyundai, Kia, PSA, turbochargers, so in fact, if you look at the strategic page we have highlighted that we have got extra orders due to BS-VI, small amount, but nevertheless, we have gained something around BS-VI. We are also gaining more and more foothold in the EV business, which continues to be very small, but we have had some orders there. So we are really focusing on some of these new age areas also. And more importantly, in India, 75% of the new order wins are non-Mahindra. And this, without in any way, compromising our services to Mahindra. We are all out to serve Mahindra, and so we are not defocusing even one bit on Mahindra. But nevertheless, the 75% of our new order wins this year have been non-Mahindra. Yes?

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Nikhil Kale, Axis Capital Limited, Research Division – VP of Auto [4]

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Okay. And similarly, if you could just highlight some data — details around the Europe business. I mean, new order wins there?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [5]

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No, Europe is more in the hold mode as of now. And so there, we are speaking with our various — it’s a much more stable business. In fact, our Truck Forgings business, we are actually engaged with most of the customers there. So it is more generating orders with the existing customers rather than new customers in Europe. So — and some of them are slowing down. Daimler has slowed down quite a bit. Caterpillar is also in a similar situation. So there, we are not talking about new customers and so on, but we are speaking with our existing customers as we go by. Oroitz, would you like to throw some more light on Europe. Hello? It seems they are not. Okay. Maybe when they come back, we will ask Ander and Oroitz to throw some light on this further, yes?

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Nikhil Kale, Axis Capital Limited, Research Division – VP of Auto [6]

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Okay. And my second question was on the EBITDA margin recovery plan that you talked about. Again, there, could you just provide some more color on what kind of cost savings or any benefits that you have seen in this quarter? And how do you see this panning out over the next year? So any numbers, that you could just share? That would be great.

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [7]

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Like, it is not — we are looking at the operations in an all-encompassing manner. So we are not saying keep this area, cost reduction will happen. Every cost head is being looked at in — with an absolute microscopic attention. So — and that you are clearly seeing in what is happening on the margin side, both in India and Europe.

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Swapnil Soudagar, Mahindra CIE Automotive Limited – Deputy General Manager of Strategy & IR [8]

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Sorry to butt in. This is Swapnil. But moderator, can you dial out to Mr. Ander and Oroitz again? They seem to have been disconnected. Sorry, Vikas, please continue.

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [9]

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Yes. So that is the case, watch our margins. That is what I would say. But JP, would you like to add something around this?

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K. Jayaprakash, Mahindra CIE Automotive Limited – CFO [10]

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No. I think, essentially, we’ve been working on manpower and whatever outsourcing we’ve done trying to in-source and save some money out in there and on material costs. So better negotiations and yield improvements.

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [11]

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Our improvement. Whole host — there’s a whole host of plan to look at how much power we are using for equipment, trying to — if we can optimize that, optimize the manpower, especially the contract labor that we are using. Like if we have, as JP pointed out, if we have put out something, a subcontracting, can we do it in-house so that we save costs, both logistics and utilize our existing manpower? So he mentioned material. So as you would see, every cost had something or the other in different places. We are looking — it’s a comprehensive program.

Over and above that, we are also looking at productivity improvement. Don’t forget, this opportunity is not just about cost reduction. It is also about productivity improvement. So you’re looking at how you can improve your machine layouts, introduce automation in a cost-effective way so that we can produce more on the same machines and so on.

So that — so it’s a comprehensive program. Therefore, I said, it is not about just one thing that I can highlight. But yes, it is lots of areas that we’re looking at.

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Operator [12]

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The next question is from the line of Rishi Vora from Kotak Securities.

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Rishi Vora, Kotak Securities (Institutional Equities) – Financial Analyst [13]

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I just wanted to reconcile the numbers. So if you look at your PPT Slide 16, over there, you have mentioned that the revenues from MCIE India is INR 33,798 million in INR terms. Whereas if you look at your Slide 38, over there, the stand-alone revenue is around INR 29,000 million. So what is this difference?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [14]

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Difference is AEL.

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Rishi Vora, Kotak Securities (Institutional Equities) – Financial Analyst [15]

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Okay. So this — when you were in Slide 16, when you were mentioning INR 33,798 million. In the stand-alone slide, there is no AEL integration done?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [16]

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Yes. JP, if you want to explain that in further detail?

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K. Jayaprakash, Mahindra CIE Automotive Limited – CFO [17]

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So the India segment is the MCIE stand-alone, plus AEL, plus Bill Forge Mexico, and Bill Forge’s Precision in India. Stand-alone is only the earlier MCIE plus Bill Forge holding company. Hello, Vikas?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [18]

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Yes.

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K. Jayaprakash, Mahindra CIE Automotive Limited – CFO [19]

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There’s lot of disturbance. So…

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [20]

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Yes, yes, if there are — there is some background noise, if you can put on mute whenever not required.

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Hitesh Goel, Kotak Securities (Institutional Equities) – Associate Director & Automobile Analyst [21]

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Yes. Hitesh here.

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [22]

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Yes. Hi, Hitesh.

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Hitesh Goel, Kotak Securities (Institutional Equities) – Associate Director & Automobile Analyst [23]

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Yes. So basically, you’re saying in standalone AEL is not integrated, right?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [24]

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Yes. So 9 months AEL and small amounts Bill Forge Mexico and Bill Forge Precision, which is a small company, JP, if you can introduce Bill Forge Precision. We have not talked about it in the past.

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K. Jayaprakash, Mahindra CIE Automotive Limited – CFO [25]

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The Bill Forge Precision is a company in Coimbatore, which essentially supplies to Hero. Turnover is around INR 300 million.

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Hitesh Goel, Kotak Securities (Institutional Equities) – Associate Director & Automobile Analyst [26]

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Okay. And there is no intercompany, right? In the stand-alone operation between AEL, standalone and Bill Forge India.

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K. Jayaprakash, Mahindra CIE Automotive Limited – CFO [27]

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Nothing significant, nothing significant.

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Hitesh Goel, Kotak Securities (Institutional Equities) – Associate Director & Automobile Analyst [28]

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So there is a no significant. Yes. Okay. So that is the main differences between stand-alone reported and your PPT number is AEL, basically? And AEL is 9-month consolidation, right, in this year?

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K. Jayaprakash, Mahindra CIE Automotive Limited – CFO [29]

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Yes, yes.

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Hitesh Goel, Kotak Securities (Institutional Equities) – Associate Director & Automobile Analyst [30]

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Okay. And basically, when you talked about this — new orders in euro, EUR 778 million. How should we look at it? Is it a 7-year order book that you’re talking about? I mean, over a product life cycle, right? These orders, so how should we look at it? How much is on the new models and how much on the old models?

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K. Jayaprakash, Mahindra CIE Automotive Limited – CFO [31]

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No, no, no. What are you referring to?

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Hitesh Goel, Kotak Securities (Institutional Equities) – Associate Director & Automobile Analyst [32]

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You said EUR 778 million, some new orders, right? Okay, that’s CapEx. Okay, okay, okay. Any color you can give us on the order book that you have in India and Europe?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [33]

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No. Like as I told you on Europe, I’ll again reiterate, as some of our existing customers are — most of the OEMs, truck and car OEMs, so we are working along with them. So we are not talking about — so whatever is there — order situation, we are there. As far as India is concerned, I think India, like the new orders generated last year would be, I think, roughly about 20% of our India business, India revenues is we have generated last year, and this would be over a — the peak volumes will reach over a period of 3 years, okay? And out of this, new orders generated in India, 75% is non M&M, and there are small amounts of BS-VI, extra coming due to BS-VI and some very minor amount of electric vehicles, but that is — we are making inroads there. So that is…

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Hitesh Goel, Kotak Securities (Institutional Equities) – Associate Director & Automobile Analyst [34]

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Yes, I understand, Vikas. But what happens is that the company is becoming very complex to model. So what suppliers have started to give is some order book guidance that this is the revenue order book that we have. Although I understand it’s not sacrosanct, but based on some assumptions, can you start giving us some order book number?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [35]

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Sure, Hitesh, let us — your feedback is well taken. Let us discuss this internally. And we’ll also check if you tell us who are the other best practices there, then we can look at that and try and see if we can start providing something.

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Hitesh Goel, Kotak Securities (Institutional Equities) – Associate Director & Automobile Analyst [36]

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Yes, yes, I mean, you can look at Motherson Sumi, you can look at global auto comps also, they give you some guidance on their order book or the revenues guidance over a cycle of a model. I mean, so like 7 years, 8 years, so that people have some sense how to model this, even endurance has started gaining some sense on their numbers or not. Otherwise, it’s very difficult to model the company now.

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [37]

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Okay, fair enough. We take your suggestion. And let us discuss internally with our team, and we will certainly look into that.

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Operator [38]

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The next question is from the line of Priya Ranjan from Antique Stock Broking Limited.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division – Research Analyst [39]

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Yes. So just — my question is on — the first is on the Europe decline. I mean, so can you just quantify what kind of decline was there in MFE and PV and plus Metalcastello for quarter and the full year?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [40]

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JP, you have anything there?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [41]

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See, I can answer to that, Vikas, I mean, I can…

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [42]

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Thanks, Ander. So we were waiting for you to come back.

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [43]

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Yes, we are already in the last 4, 5 minutes, we are here already. Okay. So no — in Europe, we have had, let’s say, a couple of impacts in the CIE Forgings, what we call — say, Forgings, our passenger cars, mainly passenger cars forgings dropped about 6%, 7% in the last quarter.

The commercial vehicles Forgings, this is German forgings, our German Forgings, what we call MFE dropped much more than that, okay? We had the drop of approximately 25% in this quarter.

You need to see or take into account that our main customer in MFE is Daimler. And Daimler in that period dropped something like 34% or 35%, okay? So the situation is that the market is dropping, probably in this last end of the year, all the manufacturers adjust their stocks to end the year properly with not big inventories. So we have had this impact, market reduction and inventory correction in Germany.

And then we have a different situation with Metalcastello. Metalcastello market is commercial vehicle gear, but mainly off-highway vehicle gears, especially our customers have Caterpillar, Meritor, CNH. And those markets have dropped importantly, especially in the United States, where we sell more of our production. So I think we have a seasonal drop of the market, and we have been affected by that, okay?

And regarding the forecast, so no one knows clearly what’s going on in the market, but what we see is more or less is we will keep this situation, this low — weak market in the next couple of quarters at least, okay? So that’s what we see, we are in the bottom of the valley, and we will keep in this situation until the revamp comes in the second half of the year. That’s our expectation.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division – Research Analyst [44]

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So in terms of — I mean, to the impact of this global crisis of health crisis. So how do you see in terms of the production cut back? And do you see the sharp production cut back even quarter-on-quarter basis or…

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [45]

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Sorry, I didn’t capture the question.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division – Research Analyst [46]

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Yes. So given the health crisis of corona and all. So a lot of company, and a lot of OEMs are planning to have a shutdown because of supply issues and all. So how do you see, I mean, for next 2, 3 quarters, at least, is — will the reduction in a couple of next quarter will be even lower than what we have in the fourth quarter numbers?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [47]

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Okay. You know that our main markets are India and Europe and partially also the states in the NAFTA market. Our presence in Mahindra CIE is 0 in China, okay? So we don’t expect to have any impact due to the coronavirus. I mean — it seems that we are now driven by the market, and the market is down, and this is a special situation, could be some affection, some temporary and short affection, but I don’t expect this to affect. In fact, we have not received any plant shutdown information from our customers yet, not in India and not in Europe. I can say you that.

That could happen if the virus spread more and the crisis growth, then that could happen, but it happened, in my opinion, and of course, this is a personal opinion, and I think that probably nobody knows. I think it will be a very punctual, a very limited impact and will be recovered immediately. That’s my feeling. I don’t think that will impact for sales.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division – Research Analyst [48]

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I’m just asking about the production cut. I mean, we are almost on the second month end of this quarter. So I mean the first quarter of 2020. So what is the production looking like — is like, I mean production of the end customer is like fourth quarter of CY ’19 or is it even below than that?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [49]

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No, it’s not below. It’s a little bit higher than the previous, the fourth quarter. So that’s what we see. We see some growth, but it is normal because the last quarter of the year, what we call Q4 in the — when we come from calendar year. So this is a Q4. Usually, is weaker due to this stock inventory corrections and also the Christmas holidays in Europe and in America. So first quarter is usually stronger. And we see better performance than the fourth quarter.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division – Research Analyst [50]

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And a couple of things on the order book, which we have given Vikas on the presentation. So one is, I mean, 75% of the new order you said is of non-Mahindra. But how much is out of this is coming from AEL? And how much is — I mean, coming from organically?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [51]

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No, Priya Ranjan, this is not the order book, of course. This is just an indication of the new orders that we have got, and it is just to indicate at — like in the past, we have had questions around the diversification effort. So it is just to indicate the diversification. It is not an indication of the order book. As you would know, we have OEMs and we have tier 1s, it is not as simple to give out an order book, and that’s what I — we’ll have to think internally, whether it is possible for us to do so or not. So let’s stick to that.

AEL is an integral part of MCIE. And I think what you see is the diversification effort is equally across includes AEL and includes non-AEL. So let’s — that’s how I would explain it.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division – Research Analyst [52]

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And in terms of EV and BS-VI orders, I mean, can you just elaborate a little bit on which are the clients from EV side and from BS-VI? I mean, I presume that all your models or all your product will also be available on BS-VI, because every product has to move to BS-VI, so…

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [53]

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Yes, yes, yes. So that you are right. And all that we are saying is that on BS-VI, we gained something around that, right? As far as EVs is concerned, our main customer is Mahindra EVs, both 3-wheeler and 4-wheelers.

——————————————————————————–

Priya Ranjan, Antique Stockbroking Ltd., Research Division – Research Analyst [54]

——————————————————————————–

Okay. Okay. And in terms of — so the new business, I mean, the only business, which we have left is Plastic. So how and when do you want to add that business in India in this year or next year, I mean?

——————————————————————————–

Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [55]

——————————————————————————–

Okay. Let’s say that we are active now, again, after the acquisition and integration of Aurangabad Electrical, we are ready to add new companies, new opportunities. So we cannot give you a date, but once we find a suitable company and we find, let’s say, suitable price or agreement with them, we will add it. So our strategy is to add this part to the company as soon as possible.

——————————————————————————–

Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [56]

——————————————————————————–

No, but Priya Ranjan, just one thing we need to emphasize is that right now, our focus is clearly to make sure that our operations are in order. So that is our first focus area. And as Ander pointed out, as and when, if we have a good candidate and a good price, we’ll have a look at it.

——————————————————————————–

Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [57]

——————————————————————————–

Yes.

——————————————————————————–

Priya Ranjan, Antique Stockbroking Ltd., Research Division – Research Analyst [58]

——————————————————————————–

Just lastly, only 2 things. One is on the Mexico. Can you just a little bit throw some light on how is the ramp-up happening? And how is the margin and profitability of Mexico plants are moving up?

——————————————————————————–

Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [59]

——————————————————————————–

Yes, we have seen important growth in Mexico this year. You know that in 2018, we travel, with quality deliveries with the technological, let’s say, training of the team and all these processes that are a standard when you set up a new plant.

Now we have — I think that we have a fantastic team. We have hired skilled people, and we are making a very close follow-up from India and from Europe, okay? So the situation from the production point of view is now 100% under control. Quality rates have improved dramatically, and we are growing the deliveries to the customers. Not only that, we have already gained new businesses for the plant. So we are now already planning to continue investing and increasing the number of machinery to cope with the demand that we expect. So we think that it will be a successful story in 1 year, 1.5 years.

——————————————————————————–

Priya Ranjan, Antique Stockbroking Ltd., Research Division – Research Analyst [60]

——————————————————————————–

Okay. And lastly, on this — so the cost reduction effort and all, is how much we are expecting to retain when the market will recover? I mean, some of it will — you might have to expand because your team said — your team size you might have curtailed back or your contract labor might have come down, but once the volume picks up, that part of the cost will come back. But how much of the automation and other parts, which you think is — can we retain out of, say, out of 100 in terms of cost saving, how much is retainable even if the volume recovers and how much is not retainable?

——————————————————————————–

Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [61]

——————————————————————————–

Okay. You know that in India, we had the reduction of the EBITDA margin due to the volume drop. Now we are recuperating these margins. In Europe, you already show that the sequential margin has improved, and we expect to continue improving as the restructuring actions are complete and finished, okay?

So once the market comes again, let’s say, that all these actions that we have taken will remain. So we expect to increase our margins further than the previous good margins that we had before the crisis, okay? So it’s true that we will need to add additional people, but our strategy is to adjust the structure to the current sales, and if the sales come, and we continue our growth in the future because the market revamps, then we will have the opportunity to increase our margins and increase our profitability, thanks to our efficiency.

So the strategy is very simple, is to do their homework right now in the crisis model, we can do the job, and then be ready for the volumes when they can. So we expect improvement, especially in India, we think that we should improve our margins in the next, let’s say, when the volume revamps, again, that we expect that it will be in the second half of the year.

——————————————————————————–

Operator [62]

——————————————————————————–

The next question is from the line of Shyam Sundar Sriram from Sundaram Mutual Fund.

——————————————————————————–

Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. – Research Analyst [63]

——————————————————————————–

Sir, my question, I’ll start with Europe, at first. We’ve seen a 23% euro revenue drop this quarter. This seems to be much higher than the underlying industry decline, you did indicate the CIE Forgings would have seen about 6% to 7% decline. And the CV part would have declined by 25%, but the overall decline of 23% seems much higher. If you can help us explain some of the reasons for this decline? That would be helpful.

——————————————————————————–

Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [64]

——————————————————————————–

The decline in Indian money is more related to the decline of Daimler, that is our main customer, but Daimler drop in production, the production of Daimler, medium and heavy trucks, that is our main business, declined 35% in this last quarter, okay? So that was the main impact in our drop in Europe. So that’s why we had a bigger drop than the market in that specific business.

——————————————————————————–

Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. – Research Analyst [65]

——————————————————————————–

Okay. Okay. And Metalcastello, how much revenue decline, sir?

——————————————————————————–

Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [66]

——————————————————————————–

No. In Metalcastello, it’s also important drop because as I told before, the off-highway vehicle market has dropped importantly or about 30% also in the last quarter. And it seems that — yes, that is more or less the drop. And we are facing that drop. So both Metalcastello and MFE has been affected negatively due to this market reduction, yes.

——————————————————————————–

Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. – Research Analyst [67]

——————————————————————————–

Understood, sir. And Metalcastello, are we seeing any improvement there in the off-highway market sequentially? Is there any pickup there?

——————————————————————————–

Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [68]

——————————————————————————–

Not sequentially yet. Not sequentially. In — we don’t see a recovery yet. We expect to have the recovery, but not in the short term. So let’s say that we are waiting, and we are ready to — and preparing everything to the market, we are waiting for the market revamp, but not yet. That is the reality now.

——————————————————————————–

Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. – Research Analyst [69]

——————————————————————————–

Right, sir. In Europe, there on the passenger vehicle side, there is an emission norm-related penalty that kicks off from 2020. Given this, how is our — how are our OEMs reacting to that? Is there any shift between diesel and petrol? And more importantly, from our — from CIE Forging perspective, are we gaining or losing on that front?

——————————————————————————–

Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [70]

——————————————————————————–

No. In our, let’s say, in passenger car forgings, we are not affected because we are producing both diesel and gasoline engines. So they transfer from one to the other is not affecting because we are — particularly we are positioned for almost — most of the carmakers and in both technologies, gasoline and diesel, okay? So no effect on that.

What we see is that due to this fines that have been implemented by the European Commission starting 1st January 2020, we have seen a revamp of the diesel again, okay? Diesel engines that were in, let’s say, negative trend during the last year, the last quarter in the Q4 2019 grew. And this first quarter — first/second quarter, they continue very strong, okay? So we felt that everybody thought that was, let’s say, loser in this technological change in the automotive world. Now probably, it’s a temporary issue, but it’s been — it’s very, very strong in this moment. And the main reason is that the diesel engines emit less CO2 than the gasoline engines.

So the carmakers, in order to avoid their fines from the European Union Commission, they are trying to produce more diesel cars than gasoline. So it’s kind of tricky situation, but that is the reality. But regarding our business, is not affected for that change.

——————————————————————————–

Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. – Research Analyst [71]

——————————————————————————–

Okay. Sir, is that also a reason why, I mean, the European passenger vehicle market is weak because of this changeover between gasoline and petrol again. Is that also a reason or are there more fundamental demand drivers that you’re hearing from your OEMs?

——————————————————————————–

Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [72]

——————————————————————————–

Okay. The European car market is a very mature market, okay? So expected growth is that could — can be 1% or 2% annually, no more than that because it’s a mature market.

However, in this particular situation, the main problem that the market deflation is that due to the uncertainty — the technological uncertainty of the diesel, gasoline penalties, bans to enter into the center of the cities, the electric vehicle push from the government and all these things, the consumer is a little bit lost, okay? There is uncertainty for the consumer, so the decision of the consumers is to wait until there is a clarification in the technology, there is a clarification in the norms, in the rules and legislation. And once this is clarified, they will — the market will come back. So I can say you that we have a lot of people around us that they are a delaying the acquisition of the car because they don’t know what to acquire, okay?

So I think this is a main reason of the decline in Europe. We see a decline of 5%, 6% right now in the market. So according to the economy evolution, we should be growing 1% or 2%. So that’s the impact of the technological uncertainty.

——————————————————————————–

Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. – Research Analyst [73]

——————————————————————————–

Okay, okay. Understood, sir. That is very helpful. Sir, in terms of Mahindra Forgings Europe, the CV restructuring, you have — I mean, from the financials, we see you’ve taken a restructuring charge there. If you can highlight some steps taken there to improve the profitability of MFE. That would be helpful.

——————————————————————————–

Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [74]

——————————————————————————–

Yes. I said yesterday in the Board that despite the market drop, and despite the results were not a very brilliant, my feeling is that we are very proud of the job that we’ve done in — especially in Germany and also in Metalcastello. The main actions, you know that we reduced all the overtime. Immediately, we eliminate all the contract workers and adapt our productions and reduce our inventories, that all this actions have been already taken, and then we are making some voluntary retirement schemes, where we’re trying to do it in a smooth way, and organized way and agreed with the unions, we are trying to get voluntary retirement. So of course, that has a cost in Europe, and that — those are the main cost that we have already provisioned in the last quarter, okay? So we were talking about approximately EUR 2 million.

Depending on how the market performs, perhaps, we will need to continue provisioning some additional restructuring cost or not, okay? So this is — now we are — we continue adjusting all the costs, reducing the maximum, not only unnecessary expenses in the company and in the production. We are, in certain factories, we are stopping the factory one day per week. So we avoid this unnecessarily stock to be produced. So those are the kind of actions that we have taken. And we have been — and that’s why we are quite proud of what we accomplished, because despite this 25%, 30% drop in the turnover, we were able to keep our very small margins, okay?

So instead of being within a very negative situation, we survived. That’s the reason that why we are kind of proud, if we can say that, but we did the job, okay? So — and we need to continue doing the job to get the minimum profitability that we are looking for.

——————————————————————————–

Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. – Research Analyst [75]

——————————————————————————–

Right, sir. That was helpful. We have also seen a very good jump in Europe margins from 11.2% last quarter to about 12.7% this quarter. Here, I mean, the steps that you’ve highlighted for MFE, those are also some of the reasons? Or is there any mix also that has helped. I mean, MFE going down and while the CIE Forgings holding up? Is that also a reason for this margin improvement?

——————————————————————————–

Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [76]

——————————————————————————–

No. Partially, yes, partially the effect of the mix fell, because the drop of the MFE with lower margins have been bigger than the drop of the passenger car. But the — globally, the margins in all the businesses remain more or less equal and we recuperate the MFE where we had a very bad third quarter, okay?

In the third quarter, in MFE, we suffered because we had a big drop, and it was unexpected or we didn’t expect so big drop. And for the fourth quarter, we recuperate because we did our homework, and we therefore make the restructuring and now we recuperate those margins. So you have both effects. MFE recovery plus mix improvement.

——————————————————————————–

Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. – Research Analyst [77]

——————————————————————————–

Okay. Understood, sir. That’s very helpful. Sir, one last question, if I may squeeze, sir. From a Bill Forge Mexico’s point of view, how — what kind of ramp up can we see in CY ’20. Can we touch around somewhere around the USD 30 million in CY ’20? Or some color on how we will ramp up there from a Bill Forge Mexico perspective?

——————————————————————————–

Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [78]

——————————————————————————–

Okay. This year, in 2019, in Mexico, we had a growth of something like 40%, 39% growth in the company. So you can see that the growth is important. And for the next year, we expect to have also important growth, not as big as that 40%, but our idea is to have more than double-digit growth in Mexico for 2020, okay? So that’s the expectation.

And if we succeed with a couple of big projects that we are now negotiating with our new potential customers, we will probably go further and continue the growth at a very, very high rates, okay? So we have been — a strategy to go to — at the end, $35 million or $40 million plan, and we still stick to that plan, probably 1 or 2 years later than expected, but that’s our strategy.

——————————————————————————–

Operator [79]

——————————————————————————–

The next question is from the line of Jinesh Gandhi from Motilal Oswal Securities Limited.

——————————————————————————–

Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division – SVP of Equity Research [80]

——————————————————————————–

First, a couple of clarificatory questions. In India, what was the organic growth or decline in the fourth quarter?

——————————————————————————–

Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [81]

——————————————————————————–

Organic. When you say organic, Jinesh, you mean without AEL?

——————————————————————————–

Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division – SVP of Equity Research [82]

——————————————————————————–

Right, right.

——————————————————————————–

Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [83]

——————————————————————————–

JP, would you take that?

——————————————————————————–

K. Jayaprakash, Mahindra CIE Automotive Limited – CFO [84]

——————————————————————————–

Sure. The other thing in India, the organic growth in the last quarter?

——————————————————————————–

Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [85]

——————————————————————————–

Yes, without AEL.

——————————————————————————–

Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [86]

——————————————————————————–

Minus 10% more or less minus 12%.

——————————————————————————–

K. Jayaprakash, Mahindra CIE Automotive Limited – CFO [87]

——————————————————————————–

Minus 12%.

——————————————————————————–

Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [88]

——————————————————————————–

Yes.

——————————————————————————–

Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division – SVP of Equity Research [89]

——————————————————————————–

Okay. 12% decline?

——————————————————————————–

Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [90]

——————————————————————————–

12% decline that is more or less the market decline, yes.

——————————————————————————–

Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division – SVP of Equity Research [91]

——————————————————————————–

Sure, sure. And second question pertains to — with respect to the PAT numbers which you used to share for the full year for India and European business. Can you share that as well?

——————————————————————————–

Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [92]

——————————————————————————–

No. PAT for India, Europe?

——————————————————————————–

Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division – SVP of Equity Research [93]

——————————————————————————–

Right.

——————————————————————————–

K. Jayaprakash, Mahindra CIE Automotive Limited – CFO [94]

——————————————————————————–

Okay, okay. So PAT for India would be whatever you’ve seen the stand-alone of $1.7 billion plus AEL of about $250 million. So close to about $200 million — sorry, $2 billion. $2 billion.

——————————————————————————–

Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division – SVP of Equity Research [95]

——————————————————————————–

Right. And Europe?

——————————————————————————–

K. Jayaprakash, Mahindra CIE Automotive Limited – CFO [96]

——————————————————————————–

We have 3.5, right? So another 1.5 from Europe.

——————————————————————————–

Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division – SVP of Equity Research [97]

——————————————————————————–

Balances, okay. Understood. Okay. And with respect to CY ’20, what kind of CapEx are we looking at for CY ’20?

——————————————————————————–

Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [98]

——————————————————————————–

Okay. From the CapEx point of view, as we see the market is very low. We decided to stop the — our CapEx, capital expenditures, in the short term, and we have limited. Of course, we have, in certain machinery — in certain technologies, we have some niche because we expect some new products to be launched.

And for example, we have new businesses, we have a new plant being built in Hosur, in 2020. But we will try to limit maximum the CapEx, at least in the short term, except they already awarded new businesses, like also a plant that I mentioned. So I cannot give you now the figure of the CapEx but will be lower than 2019 CapEx.

——————————————————————————–

Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division – SVP of Equity Research [99]

——————————————————————————–

Understood. Understood. And third question was that regarding your comment for the India business. In the presentation, you’re talking about important commercial activity to increase share of business in the new projects. Any color which you can give on what are we referring to? And by when we should see that reflecting in our P&L?

——————————————————————————–

Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [100]

——————————————————————————–

Jinesh, we talked about it, like the new orders that we have got. And that has a time span of 2 to 3 years.

——————————————————————————–

Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division – SVP of Equity Research [101]

——————————————————————————–

Sure, sir. You’re referring to the new orders? Okay, sir.

——————————————————————————–

Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [102]

——————————————————————————–

Yes, yes. But that is more from a point of view of diversification to highlight diversification rather than just growth.

——————————————————————————–

Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division – SVP of Equity Research [103]

——————————————————————————–

Sure, sure. That’s a fair point. And lastly, with respect to AEL, would you be able to share their performance in CY ’19? How — what was their growth and margins, you indicated 12%, like what was the top line growth there or decline?

——————————————————————————–

Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [104]

——————————————————————————–

The AEL performance, Ander?

——————————————————————————–

Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [105]

——————————————————————————–

Okay. Now, AEL performance is approximately at expected 12% EBITDA level. That is more or less flat during the year. And the — let’s say, the decline they have had is less than the rest of the businesses in India. So we can say that we were more or less flat, perhaps 4%, 5% decline only.

You know that Bajaj, also the main customers of Aurangabad, I — we can say that they performed better than the rest of the 2-wheelers. So Bajaj have been a winner in this market. The last quarter, we showed some decline, but that’s the general view. So we can say very stable market situation and a stable EBITDA levels in AEL.

And as we mentioned also, the new project pipeline is important. And we are getting new businesses internally for India, but also big businesses for export in Europe. So we think that the company will continue growing in the next future.

——————————————————————————–

Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division – SVP of Equity Research [106]

——————————————————————————–

And AEL export opportunity you’re referring to is the gravity die-casting opportunity?

——————————————————————————–

Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [107]

——————————————————————————–

Yes, it’s gravity but also high-pressure die-casting, both technologies.

——————————————————————————–

Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division – SVP of Equity Research [108]

——————————————————————————–

Okay, they started getting orders there? Or that’s still a work in progress?

——————————————————————————–

Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [109]

——————————————————————————–

No, no. We have already confirmed orders for a couple of customers, yes. We are quite successful this year on that and we expect to continue being successful on that. So yes, the expectation for the AEL in the aluminum sector are good. We are optimistic.

——————————————————————————–

Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division – SVP of Equity Research [110]

——————————————————————————–

Okay. And last question on AEL considering its 2-wheeler exposure, do you see them getting impacted by electrification of 2-wheelers, is their product portfolio anyway getting influenced by electrification or doesn’t help them?

——————————————————————————–

Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [111]

——————————————————————————–

Jinesh, to answer your question, this is the best guess that we can make essentially and I will refer to the latest update that CRISIL has come out. And I think their assessment is that electrification in 2-wheelers will be the first among all the automotive segments. But within 2-wheelers, the electrification will come more on the scooter side, rather than on motorcycles. That’s their assessment.

Again, these are very fluid assessments, and it can change. And there are 2 reasons for that. I think the cost drop in scooters — e-scooters it is almost comparable, coming very close to what the IC scooters are there. And — but the difference is still there in motorcycles. So they expect that in the next 2 to 3 years, maybe roughly 50% of the scooters will migrate to e-scooters.

Motorcycles would largely remain untouched for 2 reasons. As I said, the cost differential is still there. And second, most of the incremental growth in motorcycles is coming from the rural areas, which have — the price sensitivity is a little on the higher side. So that’s their assessment. So if you look at where we are supplying, I think Bajaj being our main 2-wheeler customer, so I think they will be less affected.

But you are right, at the end of the day, we all have to plan both Bill Forge and AEL, they are planning that, planning and thinking about this. In fact, Bill Forge has started work in the electric space in a small way. So that’s how we see it. So yes, we are cognizant of the challenge. But I think there’s no need to panic around that.

——————————————————————————–

Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division – SVP of Equity Research [112]

——————————————————————————–

Sure. And did we get any orders for e-Chetak or that is — there’s nothing much for us on that?

——————————————————————————–

Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [113]

——————————————————————————–

We’ll have to check that, Jinesh. We’d not really check that.

——————————————————————————–

Operator [114]

——————————————————————————–

The next question is from the line of Mahesh Bendre from Pivot and Microtek (sic) [Stewart and Mackertich].

——————————————————————————–

Mahesh Bendre;Stewart and Mackertich;Senior Vice President – Institutional Research, [115]

——————————————————————————–

Yes. Sir, out of INR 3,400 crores of goodwill on our balance sheet. What part of that represents the goodwill coming from Germany?

——————————————————————————–

Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [116]

——————————————————————————–

JP, your area.

——————————————————————————–

K. Jayaprakash, Mahindra CIE Automotive Limited – CFO [117]

——————————————————————————–

Yes, yes. About 18% to 20%.

——————————————————————————–

Mahesh Bendre;Stewart and Mackertich;Senior Vice President – Institutional Research, [118]

——————————————————————————–

And given the operations in Germany, is there any scope of revaluing that goodwill going forward? Because I’m asking this because our return ratios are depressed instead of too much goodwill is getting built up on the balance sheet because of the acquisitions? So reaching to the CIE level…

——————————————————————————–

K. Jayaprakash, Mahindra CIE Automotive Limited – CFO [119]

——————————————————————————–

Okay. Can I respond to that? Okay. So goodwill is always evaluated at the end of the year for the future cash flows. And we don’t see any reason for impairing it now.

——————————————————————————–

Mahesh Bendre;Stewart and Mackertich;Senior Vice President – Institutional Research, [120]

——————————————————————————–

Okay. So I mean, I’m just asking, just when we try to compare ourselves with CIE in terms of achieving ROC/ROE there is a limitation beyond which we cannot improve because of this kind of goodwill and — so any thought process on improving ROE, return on equity, going forward?

——————————————————————————–

K. Jayaprakash, Mahindra CIE Automotive Limited – CFO [121]

——————————————————————————–

See, we touched almost 16% last year on return on net asset with all the goodwill. And we believe we can move our return on asset with the market coming up and the margins actions that Ander talked about. So let’s wait and see how that pans out.

——————————————————————————–

Mahesh Bendre;Stewart and Mackertich;Senior Vice President – Institutional Research, [122]

——————————————————————————–

And sir, last question. With the end of this financial year — calendar year. Do you see any growth in domestic business as well as international business for CY ’20?

——————————————————————————–

Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [123]

——————————————————————————–

CY ’20, as Ander pointed out, the first half of 2020, we think it will be flat, and we do foresee some growth in the second half of the year.

——————————————————————————–

Mahesh Bendre;Stewart and Mackertich;Senior Vice President – Institutional Research, [124]

——————————————————————————–

This is for both Indian and international operations?

——————————————————————————–

Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [125]

——————————————————————————–

Overall. Yes.

——————————————————————————–

Operator [126]

——————————————————————————–

The next question is from the line of Priya Ranjan from Antique Stockbroking Ltd.

——————————————————————————–

Priya Ranjan, Antique Stockbroking Ltd., Research Division – Research Analyst [127]

——————————————————————————–

Okay. Just lastly, from JP, is this — I mean, the tax reversal in, I mean, tax write-down for Germany. Can you just throw some light, is it — what is it related to? And how can we get that tax credit back in the future?

——————————————————————————–

K. Jayaprakash, Mahindra CIE Automotive Limited – CFO [128]

——————————————————————————–

Yes. This is related to the losses of the past on which you can set up against the future profits. So we have taken a conservative call right now, and we will, of course, write it back as we see the profits coming back.

——————————————————————————–

Priya Ranjan, Antique Stockbroking Ltd., Research Division – Research Analyst [129]

——————————————————————————–

So if profit comes…

——————————————————————————–

Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [130]

——————————————————————————–

If it is a limitation, we are not looking at this negatively. We are not looking at this. We can do then in the future with no limitation.

——————————————————————————–

Priya Ranjan, Antique Stockbroking Ltd., Research Division – Research Analyst [131]

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So why was it needed to, I mean, net it off this quarter — this year, if it is — I mean, we — it’s available for us?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [132]

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At this year, we have seen a reduction of the sales. I mean, this market situation where the sales are lower than previous year. We have taken a conservative approach, and we have been heavily written off. In case in the future, if profit still come back again, we’ll then activate them with no issues.

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Operator [133]

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The next question is from the line of Basudeb Banerjee from AMBIT Capital.

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Basudeb Banerjee, AMBIT Capital Private Limited, Research Division – Research Analyst & VP [134]

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A few questions. One, you mentioned earlier that 75% of incremental orders are excluding Mahindra for India business. So does that include AEL and BFL, I suppose it includes?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [135]

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Yes. Yes, it includes all.

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Basudeb Banerjee, AMBIT Capital Private Limited, Research Division – Research Analyst & VP [136]

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So if I exclude AEL and BFL for core erstwhile stand-alone business, how much will be ex Mahindra?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [137]

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Basudeb, the reason why we acquired those companies was to diversify. No, so we look at it as a whole.

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Basudeb Banerjee, AMBIT Capital Private Limited, Research Division – Research Analyst & VP [138]

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So basically, that 75% number looks on the higher side, that’s very good. So that is primarily because of diversification, but core business — and second thing is, which are the new customers, if you can highlight, which we have added in recent 3 months?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [139]

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So one, of course, we have — over the year, we can talk about. We have talked about Hyundai, Kia, PSA, Turbo Energy. So there are many.

And just to go back to the nomenclature, AEL and Bill Forge are also core businesses for us. So we reiterate, like we have integrated both these businesses, and they have — they are functioning very well within the CIE system. And I think the cultural integration of Bill Forge is absolutely complete with AEL. Of course, the journey has started, but we are very happy with the pace of integration at AEL also. So to that extent, whole — the AEL-Bill Forge was — one of the strategic reasons was diversification. And in fact, that’s the point we’re trying to make that we have achieved some of the strategic goals that we had set out with those acquisitions. But having said that, coming back to your original question and — without Bill Forge and AEL, there is also significant diversification happening.

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Basudeb Banerjee, AMBIT Capital Private Limited, Research Division – Research Analyst & VP [140]

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Yes. So that will be more healthy to understand that ex of this is it, that diversification is happening, nothing better than that. And as similar to the AEL number, which you said is somewhere around 4%, 5% decline and 12% static EBITDA margin, how was the same thing for BFL this calendar year?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [141]

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Ander, Bill Forge performance. Question on Bill Forge, how has Bill Forge fared?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [142]

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Yes, Bill Forge. Also, I would say, flat performance during 2019, we had less than 5% drop in the total business. So you can see that this less — the performance is better than the market performance.

And in terms of margins, yes, the Bill Forge improved slightly in margins. So we will — we are now at a level, let’s say, that above 18% EBITDA.

So let’s say, that Bill Forge performance in 2019 has been good. And our expectation for 2020 is to grow, despite the current market situation, we will grow.

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Basudeb Banerjee, AMBIT Capital Private Limited, Research Division – Research Analyst & VP [143]

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That’s great, sir. And last question. If I missed out in the initial part of the call, if you highlighted Metalcastello performance for the full year and your outlook on any impact of these recent news of virus on Metalcastello specifically?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [144]

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Yes. Metalcastello had a fantastic first half of the year. And in fact, despite the drop in the second half. Overall, we had a growth of certainly…

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K. Jayaprakash, Mahindra CIE Automotive Limited – CFO [145]

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1%.

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [146]

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1% growth. So in 2019, we had a positive growth of 1% in the total calendar year.

But as I mentioned, this growth is divided into different phases, okay? First half with a very positive trend and second half with a weaker situation. Now in this moment, in the first quarter, first half of 2020, we are in the bottom of the valley. And we don’t expect to have a revamp of the market again, till the second half of the year. So now we are achieving some positive news from the customers, but not confirmed yet. So we prefer to be in the safe side and to be conservative on that. And we think that we will continue in the same, let’s say, with low sales in the next months, yes.

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Basudeb Banerjee, AMBIT Capital Private Limited, Research Division – Research Analyst & VP [147]

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So I suppose you said in the earlier part of the call that similar to MFE, Metalcastello was also down north of 30% Y-o-Y in this quarter. So — and such kind of weak momentum is going to persist for next 2 quarters, as you were saying. So how has been the swing in EBITDA margin because of such a sharp decline?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [148]

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I cannot disclose plant by plant the EBITDA margin, so I prefer not to disclose that. But what we had is — we reduced the EBITDA margin approximately 2% due to this reduction. So we took our actions, and we have been impacted, but I would say, marginally, in the profitability. So Metalcastello continue at a rationable and positive EBITDA level despite the market drop.

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Basudeb Banerjee, AMBIT Capital Private Limited, Research Division – Research Analyst & VP [149]

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And any specific comments on the recent virus on Metalcastello performance specifically?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [150]

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No. It’s a market — directly market impact. I mean, our main customer dropped, importantly, in the last quarter, the sales, and they are also struggling, probably there are some adjustments in the market, but we hope that this is just a temporary issue and the market will come back and rebound.

In fact, we have been visiting them a couple of times in this period. And the expectations they have are not bad. So let’s wait and see. Now what we are doing now is we are restructuring internally in order to pass this process, this period and try to be ready for the revamp when it comes.

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [151]

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No. Basudeb, on the — your question was regarding the coronavirus impact because it’s in Italy, right?

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Basudeb Banerjee, AMBIT Capital Private Limited, Research Division – Research Analyst & VP [152]

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Yes, yes, yes.

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [153]

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Right now, we have not seen any impact so far. We have not yet seen any indication from our OEMs either. But this is a fluid situation, and if it corrects itself in the next 2 to 3 weeks, then it should not be a major issue.

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Basudeb Banerjee, AMBIT Capital Private Limited, Research Division – Research Analyst & VP [154]

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Sure. Understood. And last question, sir, any update on the 2 assets of CIE acquisition, which has been discussed many times earlier. So is it — any chance in CY ’20 or it’s not going to happen in the foreseeable future?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [155]

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Ander, this is regarding that BCM, Brazil, China, Mexico, whether it will happen in 2020 or later?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [156]

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Okay. Not sure. Let’s say that this is a decision that needs to be taken in the Board level both in CIE and Mahindra CIE. And I repeated that this is really our strategy, so it’s still our plan and we will find the proper moment to do that, okay?

Now our plan was to accomplish this integration during this calendar year, this 2020. But now with the special situation of the market, we are a little bit cautious on that. So not — we don’t have the fixed date, but it is definitely in our plans and we will do it.

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [157]

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And Basudeb, just to add to that, our entire focus right now is internally on the operations at the plant. So we’ll see how to do, even on the question around acquisitions or around this, I think, we will take it slow on most of those things. Even — now we also talked about how we are cutting down on CapEx, et cetera. So really, the focus this year is on operations, and then we’ll take it from there.

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Basudeb Banerjee, AMBIT Capital Private Limited, Research Division – Research Analyst & VP [158]

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And last, what sustainable tax rates for stand-alone and consolidated, we should look at?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [159]

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JP, tax rates?

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K. Jayaprakash, Mahindra CIE Automotive Limited – CFO [160]

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Yes. So I think for standalone, we should be able to get 26%, 27%. And CONSOL at — since, now India has come down to 25%, 26% we should be able to get down to — CONSOL will also at 25%, 26%.

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Operator [161]

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(Operator Instructions) As there are no further questions, I would now like to hand the conference over to the management for closing comments.

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited – SVP of Strategy [162]

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Yes, thanks a ton for your patience, especially at this hour of the day in India and it is even later hour in Hong Kong and Singapore.

So thanks for your patience. Thanks for your time, and we promise that we’ll continue to do our best. Thank you very much. Have a good evening, and a good day to all.

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited – CEO & Whole Time Director [163]

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Thank you very much, everybody.

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K. Jayaprakash, Mahindra CIE Automotive Limited – CFO [164]

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Thank you.

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Operator [165]

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Thank you. On behalf of ICICI Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.

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