Motilal Oswal Bullish on CIE Automotive India, Sets Target Price at ₹650

Motilal Oswal is optimistic about CIE Automotive India and has given it a “Buy” rating, setting a target price of ₹650 in their report dated October 11, 2024.

Market Overview

The management recently shared insights on the company’s performance. The Indian market is currently facing weak demand in the tractor and passenger vehicle (PV) segments, although the two-wheeler (2W) sector remains strong. The global automotive market, especially in Europe, is slow. However, the electric vehicle (EV) transition in India is seen as a growth opportunity due to promising new orders. In Europe, the risks associated with the EV transition are lessening as many European automakers are reconsidering their EV timelines and focusing on hybrid vehicles, which could benefit CIE Automotive.

Company Strengths

CIE Automotive has become a resilient player in the automotive industry with several unique financial attributes:

• Net Debt-Free: The company has no debt.
• Positive Free Cash Flow: It generates cash efficiently.
• Focus on Profitability: Management prioritizes operational efficiency and profitability over just increasing sales.
• Diversified Technologies: CIE Automotive is the only company in India offering seven different automotive technologies and ranks among the top suppliers in these categories.

Demand Insights

• The demand for tractors and PVs in India is currently weak, but 2W demand is healthy. The management expects tractor demand to recover in the second half of the year, thanks in part to strong sales trends from key customers like Mahindra & Mahindra (M&M) and Bajaj Auto (BJAUT), who are launching new models.
• CIE Automotive aims to outpace overall industry growth by 5-7% in the long run and is involved in multiple models of M&M and Bajaj Auto’s new launches. It also has around 10-12 growth customers contributing significantly to its revenue.

European Market Challenges

The automotive demand in Europe is weak due to uncertainties in transitioning to EVs, leading to delays in orders. The management anticipates a 7-8% decline in the European market this year, with the second half expected to perform even worse than usual.

EV Opportunities

In India, about 20% of CIE Automotive’s business comes from components for four-wheelers (4Ws) and two-wheelers (2Ws), while 50% is from PV EVs. Even though the EV transition in India is slow, the management views it as an opportunity, having secured a significant order book, including around 30% for EVs as of the first half of 2024.

Future Focus

Despite near-term challenges in demand, CIE Automotive is committed to improving profitability. The company plans to invest approximately ₹15 billion over the next three years, primarily in India, where it is receiving new orders. It aims to sustain its margins and improve operational efficiency across all regions.

Valuation and Outlook

Motilal Oswal believes that the Indian market will drive the company’s growth in the near future, even though the outlook for the European market remains weak. The stock currently trades at 25x and 20x estimated earnings for 2024 and 2025. They reaffirm their “Buy” recommendation with a target price of ₹650, based on expected earnings by September 2026.