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Edited Transcript of MAHINDCIE.NSE earnings conference call or presentation 24-Apr-20 10:00am GMT

Q1 2020 Mahindra CIE Automotive Ltd Earnings Call

May 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Mahindra CIE Automotive Ltd earnings conference call or presentation Friday, April 24, 2020 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ander Arenaza Alvarez

Mahindra CIE Automotive Limited - CEO & Whole Time Director

* K. Jayaprakash

Mahindra CIE Automotive Limited - CFO

* Oroitz Lafuente

Mahindra CIE Automotive Limited - Global Business Controller

* Vikas Chandra Sinha

Mahindra CIE Automotive Limited - SVP of Strategy

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Conference Call Participants

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* Amyn Pirani

CLSA Limited, Research Division - Research Analyst

* Jayesh Gandhi

Aditya Birla Sun Life Mutual Fund - Aditya Birla Sun Life Resurgent India Fund - Series 5 - Fund Manager

* Jinesh K. Gandhi

Motilal Oswal Securities Limited, Research Division - SVP of Equity Research

* Nikhil Kale

Axis Capital Limited, Research Division - VP of Auto

* Nishant Vass

ICICI Securities Limited, Research Division - Auto and Auto Ancillary Analyst

* Nitin Shakdher;Green Capital;Founder & CEO

* Priya Ranjan

Antique Stockbroking Ltd., Research Division - Research Analyst

* Puneet J. Gulati

HSBC, Research Division - Analyst

* Shyam Sundar Sriram

Sundaram Asset Management Company Ltd. - Research Analyst

* Ujwal Shah

Quest Investment Advisors Pvt Ltd. - Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentleman, good day. And welcome to the Mahindra CIE Q1 CY '20 Earnings 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. Thank you, and over to you, sir.

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

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Thanks a lot. Good day, everyone. And thanks for joining us today for the call. From the management side, 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, the Business Controller.

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

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

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Yes. Thanks. This is Vikas. Thanks, Nishant. Good afternoon, everyone. I welcome all of you on this call as also, Ander Arenaza, our CEO. Thank you for being with us in these trying times of the COVID crisis. I hope and wish that all your loved ones are taking care and are safe.

Before we start with the results, let me take this opportunity to state that COVID is a global humanitarian crisis before anything else. MCIE salutes the frontline health workers, policemen and other workers who are risking themselves every day to keep our life moving when many of us are locked down at home.

Let us now start with the MCIE results for the first quarter of CY '20. We will start with some background on MCIE -- AMCIE, and I'm referring to the presentation that we uploaded yesterday with the legal structure on Page 5 and some highlights of Q1 C '20 on Page 6. Significant among the highlights is the fact that CIE has reinforced, our parent CIE Automotive of Spain has reinforced faith in MCIE by acquiring an additional 121,000 shares of MCIE from the open market in the last week of Q1 C '20.

Results for our India business for Q1 C '20 are on Page 8. We have managed to keep the EBITDA at 13%, which is an improvement over Q4 C '19, despite the sales being lower. So sequentially, sales have come down, but margins are up.

The last fortnight of March was affected badly by the COVID crisis, which has lowered sales in Q1 C '20. The EBT is INR 16 million in this quarter, but this includes a INR 413 million of negative exchange rate fluctuation associated with the Bill Forge Mexico USD loan of USD 26 million. This is a mark-to-market and is an exceptional item.

Our European results for Q1 C '20 are shown on Page 9. The sales dropped substantially compared to Q1 C '19 on account of the double impact of the drop in demand due to COVID-19 and the slowdown in the market for our Gears Italy business. Due to these 2 effects, EBITDA has fallen to 10.5%. Labor adjustment measures have already been taken in this quarter, and they will provide a cushion in the coming quarters.

And now if we go to Slide 10, we will see the consolidated results, which are a combination of the evolution in both India and Europe. Despite a difficult market situation worldwide, our EBITDA is at 11.7% in Q1 C '20. In absolute terms, EBITDA is 37% lower compared to Q1 C '19, which, if you would recall, was one of the best quarters MCIE has had. I would like to mention again that EBT is at INR 455 million and includes INR 413 million in terms of the exceptional item of negative exchange rate fluctuation due to the Bill Forge Mexico USD loan.

Slide 13 and 14 talk about the market forecast in India and Europe from different research companies. We would, however, like to emphasize that the real-life situation is very fluid and evolving rapidly. Therefore, any market forecast can be taken as a general trend, but these could change rapidly based on how the pandemic pans out. In general, all agencies are forecasting substantial drop in demand in all segments, both in India and Europe. April sales will be close to 0 in India and much lower than normal in Europe. Our German and Italian plants have currently restarted and our Spanish plants have missed it. But May and June, sales are still uncertain. We expect potential recovery in Q3 C '20, Q3 C '20 in India and Q4 C '20 in Europe. The uncertainty is caused by the fact that the consumer would be careful about discretionary spend as household balance sheet gets battered by the lockdown.

Let us turn to pages 16 to 18, where we have elaborated our response to the COVID crisis. Let me reiterate again, we are treating this as a humanitarian crisis, first and foremost. At this time, MCIE has started with providing masks and sanitizers to all employees and periodic sanitization of workspaces and operations were continuing pre lockdown. Manufacturing operations across all MCIE plants in India are currently shutdown as per local government directive. MCIE is committed to all stakeholders during this time, including contract and temporary workers and suppliers. We are following all the government directives regarding all these stakeholders.

Due to the prolonged nature of the COVID crisis and the fact that the lockdown seems to be the only available antidote, it is a huge economic crisis as well. This is an unprecedented situation, where both the demand and supply sides are affected. The demand situation, especially is challenging during these uncertain times. Q1 C '20 saw some demand slowdown, but that could pale in comparison to what we might see in Q2 C '20, as we have talked about earlier. Despite this situation, we are confident that MCIE will come out of this in a relatively better position. We have already put in place robust guidelines and systems in place for the structured restart of operation and subsequent stabilization once the lockdown ends. We have been completely focused on managing this complex situation. There is a weekly review of the cash flow. Teams are also working with customers to understand demand and delivery scenario.

CapEx is being reviewed, and only the most urgent and important will be approved; inventory is being drawn down; outsourced activities are being reviewed for insourcing; overtime is being curtailed; all heads of costs, including labor costs, are being reviewed closely. Here, I might mention that European governments are applying aid schemes to our plants in Europe to help reduce our European labor costs to the tune of EUR 3 million to EUR 4 million in Q2 C '20. Let us remember that auto industry is an important constituent of the European economy, and European governments will continue to have an eye on its well-being. It is worth pointing out that we have already embarked on a journey of operational improvement in both India and Europe pre-COVID in the last few months. We have been able to improve the EBITDA percentage in India in Q1 C '20 compared sequentially to Q4 C '19 in spite of a drop in revenues, as pointed out earlier. Similarly, the truck and off-road markets in Europe have faced a massive drop in volume, and we have been able to manage this drop without a large hit on our European margins. The post lockdown measures will draw upon these projects.

MCIE's cash position is secure, and it has unused working capital limits to be comfortable even if current lockdown is further extended over a much longer period, our demand recovery is much slower than even what the worst-case scenarios are envisaging. MCIE has a solid debt position, enough headroom to pay debt and raise debt if required. MCIE's parent, CIE Automotive of Spain, is a global MNC and has a robust system of managing cash across its worldwide businesses. It is willing and able to help MCIE in the event of any liquidity requirements. CIE has reinforced its faith in the company and recently bought MCIE shares in the open market in late March, as pointed out earlier. CIE itself is also secure from a financial point of view, so we do not foresee any problem from that scope.

We believe that MCIE is in a secure position to not only manage this crisis and its fallout, but we are quietly optimistic that we will emerge stronger when the crisis blows over. Thank you very much. And now we can proceed to the 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 Priya Ranjan from Antique Stockbroking.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division - Research Analyst [2]

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I mean good performance in difficult times. How do you see -- foresee in terms of what kind of guidance you are getting from the OEMs in Europe side and in India? That is the first question. And second question is on the kind of support you are getting from the -- I mean, wage support, et cetera, in Europe, can you just throw some light?

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

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Ander, first question is what are the OEMs saying, both in India and Europe on the market situation? And second question is about the support that the European governments are giving on the labor costs.

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [4]

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Yes. Okay. Regarding OEMs information that -- what we are getting right now, let's say that most of the OEMs are planning to resume production beginning of May, okay? Some of them, they are planning to start as early next week, 27th of April. And even, for example, some of them, like Daimler or Renault, they have already started, but at a very low rate. And next week, they will continue the ramp up and our expectation is that most of them will be running at -- in the first week of May, starting 4th of May or 11th of May, in that range, okay? So what we see, the ramp up will start beginning in May, and we hope that by the end of May, the production will be stabilized, okay? And in India, we also expect that beginning of May, once the lockdown is finished, we will start the production ramping up step-by-step, okay? So yes, we'll see a very weak April, and we will see a ramp up in May. And in June, we will see what the market says. It is important to say that the uncertainty is very high in this moment. But our view is optimistic. We think that the Q3 in India will be -- we will see the market revamping and in Europe probably will be a little bit later by Q4.

And regarding the support from the government, it is -- in Europe, it's a little bit different. We have different programs in each country. But in Italy, for example, we have a program called Cassa Integrazione, and the government is paying approximately in Italy 60 -- 80% of the labor costs, while the company is in lockdown. And in Germany, the programs that the German government is applying, pays approximately 70% of the total cost of the labor, okay? In Spain, it's a little bit less. In Spain, the payment is approximately 35% to 40%, okay? That's the support that the governments are giving us in Europe.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division - Research Analyst [5]

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Okay, okay. And given the circumstances, do you foresee some kind of, I mean, say, EBIT or EBITDA loss in the first quarter? Because I mean, 1 month will be completely out of...

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [6]

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Q2, you're talking about Q2. Let's talk in calendar year terms for us.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division - Research Analyst [7]

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Yes. So in Q2, do you see -- foresee kind of EBITDA loss and overall scheme of thing? And if you -- if whatever cost program, et cetera, you have, so at what level of top line or operation do you think that your cash or EBITDA breakeven might happen?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [8]

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Okay. Let's say, the situation for the Q2, it will be tough for all the markets, especially because the sales in April will be, as Vikas said, close to 0 in April in India and something like 30% of the normal month in Europe, 25% of the normal month, so we will be affected for that. And the EBITDA margins, of course, will be affected. But what we think is that after April, in May and in June, we will start recuperating our standard margins. As you saw in the presentation, in India despite the drop that we had, the sequential margin -- EBITDA margin has improved in this first quarter calendar year 2020. This is mainly because we were doing our -- we continue applying our efficiency improvement plans in all the technologies in our Indian divisions. And I think we were performing very, very well.

Now, yes, we will be affected in the second quarter. It is very difficult for us to say how much we will be affected. But what I can say is that by the Q3, we will come back to the normal situation. We'll continue doing our works. In Europe, we will have the government support. In India, I think that the market will revamp a little bit faster than in Europe, that will help us. And as we are in a very strong and solid cash position, we will, of course, survive, and we expect to finish all this process. And we want to use all these unfortunate times to improve our management systems, to improve our internal efficiencies and to finish all this process in a better range for situation and be -- as Vikas said in the -- at the end of the presentation, we want to be in a stronger position to cope with the market at the end of this year, okay? So the impact, we -- of course, we will have this impact. It's difficult to say how much we will -- which kind of drop we will have in the Q2. You saw that Q -- in the first Q, with this drop, important drop of 30% approximately in Europe and, let's say, without Aurangabad Electricals, we dropped approximately another 30% in India also. So you saw that we only lost 1% EBITDA. So yes, we will lose something, but we will continue in a positive range in the Q2.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division - Research Analyst [9]

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Okay. Nice to hear that. And just lastly on -- I mean, say, 2 -- on 2 things. I mean one is on, how do you see yourself after this COVID situation? Because I think if this persists and -- because what we are thinking is that probably for next couple of quarters, the utilization level at many levels -- many tiers of vendors, et cetera, will be lower. So do -- some of the tiers -- smaller tier vendors, et cetera, might face problem in terms of liquidity and all. So do you foresee as strengthening yourself in terms of market share? And secondly, on any opportunistic acquisition target you can think of investing?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [10]

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Yes. I think that in this situation, the market will tend to consolidate the business in the stronger partners, okay? So in this case, we hope to be in the winner list. This is what everybody expects, and what we expect also is to consolidate and to increase our market share in this situation. Regarding the opportunities, the acquisition opportunities, of course, we are open to acquire companies. And if the target company meets our requirements and it's aligned with our strategy, yes, we will go for those companies. So let's say, we are open, we'll continue working. I think this is important -- let's say, this drop in the market and this virus pandemic is a favorable thing. But we don't see the -- let's say, that we'll have an optimistic view of the future. So we are only thinking on the day after and reinforcing and continue our strategy as -- with business as usual.

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

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But Priya Ranjan, before we move on, I think, let's point out that our first focus area is to get our plants back and running and improve our position with our customers. So M&A will be a second option, not the first.

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [12]

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Yes, of course, yes.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division - Research Analyst [13]

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And sir, lastly, one thing, I mean, just on general global thing, which is -- I mean, there has been a lot of talk of, I mean, say, local to local manufacturing, supply chain moving away from China. So I mean, even Japan government has given some kind of incentive to move out manufacturing from China. So I mean, any sense you are getting this is happening? Or some companies are trying to do that or even evaluating this?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [14]

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Yes. I would say this is -- right now, we have received some -- we have seen some movement from -- in some divisions. For example, in the magnet division, we clearly see this trend. However, I think it's too early to say that in -- for the rest of the divisions. But you are right that probably this movement from China to India could happen because, in my opinion, the logistic chain, the supply chain in our industry will be reviewed deeply in the next times, okay? So yes, we see an opportunity there that some of the Chinese production can move to India. In certain divisions, already -- it's already happening, but it's too early. I mean, I think it -- we need some more time to see the real effect of this pandemic.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division - Research Analyst [15]

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Okay. That's all from my side. One last thing, I mean, from JP, if it is -- he is there. So what is the net debt level? And what is the cash generation has happened in the first quarter?

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K. Jayaprakash, Mahindra CIE Automotive Limited - CFO [16]

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Our debt level has remained at the same as of 31st December '19, Priya. Essentially some committed capital expenditure we had to go through. So the debt has remained at the same level.

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Operator [17]

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(Operator Instructions) The next question is from the line of Puneet Gulati from HSBC.

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Puneet J. Gulati, HSBC, Research Division - Analyst [18]

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Best wishes for overcoming this COVID crisis. Just trying to understand while we talk about plants, customer plants getting ready to open in May, do you have some insight into what kind of production levels are they targeting?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [19]

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Vikas, can you help me with the question?

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

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No. The question, Puneet. Puneet Gulati -- Mr. Puneet Gulati from HSBC. He is asking that, yes, we have talked about OEMs restarting their operations from April end and May, but what kind of production levels compared to a normal month, how much are they targeting in May? That's the question.

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [21]

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Okay. In May, okay, it's very difficult to say because there is a big uncertainty yet on the customers and this is why it is difficult to answer because the customers are changing their plans every week, okay? My expectation can be around in May, the market can be at a rate of between 40% to 50% of the normal month.

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Puneet J. Gulati, HSBC, Research Division - Analyst [22]

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Okay. And do you foresee any your supply chain-related issues to emerge when you start production? Or is that largely on track?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [23]

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No. We don't foresee any problem on the supply chain, no. We have been managing that, and we have created our stocks and no problem. Until now, there is no issue.

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Puneet J. Gulati, HSBC, Research Division - Analyst [24]

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And your vendors are all geared to start as you start as well?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [25]

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Yes, yes, yes. We -- they are ready, and we are ready also. In fact, we are willing to start as soon as possible. And in fact, in India, we've got some clearances in -- from the government for certain plants, and we have already started some production in just 1, 2 plants.

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Puneet J. Gulati, HSBC, Research Division - Analyst [26]

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Okay, okay. That's nice.

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [27]

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So that's in Rajkot. The gears plant in Rajkot is operating at some low level. And we produced some medical equipment at our composite plant at Mangaon, so that is allowed because it is medical equipment.

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [28]

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Yes. And also, Aurangabad Electricals for some export production, we have started also.

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Puneet J. Gulati, HSBC, Research Division - Analyst [29]

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Aurangabad plant?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [30]

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Yes, Aurangabad plant, it's aluminum hydrosilicate, yes.

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Operator [31]

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The next question is from the line of Jayesh Gandhi from Birla Sun Life Mutual Fund.

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Jayesh Gandhi, Aditya Birla Sun Life Mutual Fund - Aditya Birla Sun Life Resurgent India Fund - Series 5 - Fund Manager [32]

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Couple of questions for you, Ander. In Europe and also in India, there were a few plants that we had, which were not as optimal in terms of profitability as you would have liked them to be. What opportunity do we have now to shut those capacities or restructure them so that when we restart, all our plants are in good shape and profitable?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [33]

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Yes. Okay. We are doing -- we are managing this situation continuously, okay? So this is our main job. I mean, manage the capacities, produce with efficiency and make this business profitable in the long term, okay? And we have been working on that, and that's why we have been restructuring our business in -- especially in Germany, as you know, that we -- this is our most complicated business. We have been restructuring the business. And despite the huge drop that we have in this Q, we were able to manage the EBITDA levels at the same level that we had in 2019, okay? So yes, you can see that we are doing this restructuring. In India, also, we were -- we are doing also the job, and we are making all our plans. We think that India will perform well, very well because we were seeing already the results in January, February, then in March, we saw the drop. But January, February, we had a very good trend. And I think that when the market comes again, Q3, Q4, we -- you will see a good performance and good evolution in India also. So in Europe, we continue our plan. We are not changing the plan because of this crisis because we have already that plan. So we are doing the restructuring, we are optimizing the businesses. And in both regions, we are doing the job.

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Jayesh Gandhi, Aditya Birla Sun Life Mutual Fund - Aditya Birla Sun Life Resurgent India Fund - Series 5 - Fund Manager [34]

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Wonderful. Good to hear that. My second question is more general in nature in the sense that on the other side of the crisis, say, 6 months or 1 year out, do you expect same level of automobile production in the sense, commercial vehicles or passenger vehicles, to happen? Or is there now a realization that the world was producing just too many cars and commercial vehicles and the production is going to be much lower, and hence there should be some destruction or reduction of capacity, and we will also have to do that?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [35]

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Yes. Okay. I think we will recuperate, and the recuperation will be different in different sectors, okay? Passenger vehicles, probably, they will not come back in 2021, they will not come back to 2019 figures, probably it will take 1 or 2 years to come back to that situation. So we will see the drop this year and then recuperation. I think that the tractor sector probably, we will see good year even in 2020, even in this difficult situation, we see the tractor business going up. And the 2-wheeler drop that we saw in this quarter, there's -- but we will see less. I would say, half of the drop than the passenger vehicles and 2-wheeler probably will be one of the winners in the new era that we are going to live in the next years with -- as you know, that this crisis will change how we will move, how we will see the communications and the transportation of the people around the world. So we will see a change in the paradigm. And in this sense, the 2-wheeler will recuperate also. And finally, the truck vehicle, the information that we have is that this year, in 2020, we will see the drop; next year, we will recuperate part of the drop; and until 2022, we will not see the truck market at the same level than 2019. So that's more or less the view. So we will see the recuperation in some sectors quite fast; and in other sectors, we will take 1 or 2 years to come back to the normal situation.

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Jayesh Gandhi, Aditya Birla Sun Life Mutual Fund - Aditya Birla Sun Life Resurgent India Fund - Series 5 - Fund Manager [36]

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Yes. So just as a follow-up, since the customers -- your customers are not going to produce that much, our top line and our sales will also not go up. So at lower sales, we have to achieve higher margins or higher EBITDA, and we are gearing for that.

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [37]

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Sorry, I didn't understood. Vikas, can you translate?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [38]

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Yes. Mr. Jayesh Gandhi, BSLI, he's asking that our sales level will reduce in 2020. So at the reduced sales level, can we target higher margin?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [39]

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Yes. One, I would say -- yes, now the margins are affected because of the drop. This is a normal effect. We are trying to minimize this effect. Once the market comes back or at least, we don't need to recuperate 100% of the market to come back to then our normal margins, okay? That is the -- because we are adjusting also our fixed cost, we are adjusting our internal costs, improving efficiency. So with some drop of the market, we will be able to recuperate the margins. That is the strategy.

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Operator [40]

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

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [41]

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Ander, you did talk about employee benefits grant coming from the government towards these payment of labor wages. So when we say the governments are ready to pay 60% to 80% of the labor cost, is it all the overall -- on the total labor wages, or is there any -- are there any underlying conditions to it? If you can just help us understand and how much benefits will -- from Mahindra CIE Europe perspective, how much can we expect during the quarter?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [42]

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Okay. In -- the government, they have these schemes that you have to ask for and explain why you are asking for these aid schemes. In this case, in India -- sorry, in Italy, in Spain and in Germany, we have applied for them, and we have been already granted, and we are already applying or receiving this support, okay? So these amounts are approximately, as I mentioned before, they are 80% of the total cost in Italy, 70 -- approximately 70% in Germany and a little less in Spain, okay? And the impact of this approximately, it's EUR 4 million in the quarter -- in the -- by quarter. That is the amount of the support from the government, just an approximate figure.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [43]

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So EUR 4 million for the entire quarter, Ander?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [44]

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Yes, yes, yes.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [45]

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Okay. Okay. So this is on a base of, say, EUR 30 million kind of an employee cost?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [46]

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It's based on, sorry?

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [47]

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No. So this 4 -- on an average, employee cost in Europe will be around EUR 30 million per quarter?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [48]

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Yes, yes. It can be. Yes. Approximately, yes. We can check that, but yes, yes, yes.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [49]

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Approximately. So then this EUR 4 million is on the base of EUR 30 million. So I'm just trying to understand, Ander, so when we say 80% of peak labor wages will be borne by government, this doesn't seem to be 80%, right? So just trying to understand that, sir.

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [50]

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Yes. 80% is in Italy. But no, the point is the 80%, while they are stopped, okay? And we don't expect our people to be stopped all the quarter, okay? If we were stopped all the quarter, the amount would be much higher, okay? That is the point. So you would consider that if we had -- let's say, imagine that the sales goes down to 0 in all the quarter, the amount that we would receive from the government would be something like, in average, I think, more or less the EUR 15 million, okay? But as we plan to produce in May and in June, we only asked for those -- that support when we have the plants idle.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [51]

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Okay. Understood, sir. Just one more question. So even when we start also, we will be -- just as an addendum to the same question, even when we start, we may not be employing the entire labor, right? We may start with, say, 25% of the labor and then gradually we'll ramp up, isn't it?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [52]

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Yes, yes. And in fact, we are only applying this support system when we don't need to produce, okay? So for example, I will give you an example in April. In April, one of the plants in Germany has been working more or less at 1 shift during all the month because we had certain orders to cover from our customers. So in that plant, we didn't ask for the whole month of support from the government. So we will -- we only asked for 2/3 of the amount.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [53]

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Okay, okay, okay. Understood, understood, understood. Sir, one more question on the other expenses, would -- how much of the other expenses can we consider as there will be fixed costs and how -- once the plants start running, and how much will be variable?

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Oroitz Lafuente, Mahindra CIE Automotive Limited - Global Business Controller [54]

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You can say that in the global -- at MCIE level, our fixed cost per month, including both salaries and also the normal cost, and now they stopped, could be at about INR 1,000 million per month. That's our fixed costs per month, more or less.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [55]

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Sorry, sir, how much -- INR 100 crores. For MCIE console, including employee costs, you're saying INR 100 crores per month, is it?

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Oroitz Lafuente, Mahindra CIE Automotive Limited - Global Business Controller [56]

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That's it.

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [57]

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But on a euro consolidated level, yes.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [58]

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Yes, yes, yes. At the consolidated level. Okay. So this is the fixed cost. Then on the balance are the...

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [59]

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Fixed costs means -- all fixed costs, all fixed costs, including labor and...

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [60]

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Right, right, right. And other factory overheads also includes. Hello?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [61]

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Yes. Carry on.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [62]

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Yes, yes. Other factory heads are also included in this where the plants are running, sir?

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Oroitz Lafuente, Mahindra CIE Automotive Limited - Global Business Controller [63]

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Yes, yes. All the factories included there, yes.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [64]

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Okay, okay. Understood, understood. Sir, sorry, one more -- one last question. Because of the COVID guidelines being put in place in our factories, is there any increased cost of operations? Are you foreseeing any incremental cost because of these new guidelines being put in place?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [65]

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We think that we will have some incremental costs, some, of course, maybe coming from additional claiming services and probably less efficiency, especially in the beginning. But in the midterm, once we train everybody and we optimize these processes, I think that the cost increase coming from these measures will be marginal. So we don't expect impact. I would say that in Europe, the impact is -- will be close to 0; in India, can be a little bit higher due to the amount of people that we have, so we need to keep distances and increase certain cleaning procedures in the plants. But overall, I think for Mahindra CIE, once we have implemented properly the measures, we are not counting on impact, but will have some marginal in India.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [66]

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Okay, okay. Understood. And lastly, on the CapEx for CY '20, any guidance if you have planned for it, please?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [67]

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Okay. For the CapEx, what we -- we have continued our committed CapEx that we planned to -- we launched in 2019 or beginning 2020, so we continue with that plan. What we are now is -- we have cut it -- let's say, we have cut the new investments that are not essential for the customers and the production, so we postponed some of the CapEx. But in the, let's say, I see that the -- once the market comes back, we will restart the programs. So we will more or less expect the same CapEx than the previous year, that is -- until now, we are in the INR 900 million, which is the CapEx we have had in the first quarter. So we expect to keep the CapEx plan and eliminate only or postpone the non-necessary ones.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [68]

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So -- sorry, for the full year, how much CapEx you mentioned, Ander? Sorry, I didn't get the number.

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [69]

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In the first quarter, we made INR 900 million. But all this CapEx is programmed or planned and committed by previous -- during 2019. That's why we continue with these plans.

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Shyam Sundar Sriram, Sundaram Asset Management Company Ltd. - Research Analyst [70]

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Okay, okay. And for the full year CY '20?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [71]

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Okay. We need to check that. I have not that figure now in mind. We need to review the...

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K. Jayaprakash, Mahindra CIE Automotive Limited - CFO [72]

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Yes, Shyam, we'll have to...

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

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I'll take it off-line, sir. I'll take it off-line. No problem.

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [74]

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No, no. It's not a matter of offline. What we are saying is that we will review the CapEx situation. If the market comes back, if the market comes back and all the customer-related commitments on CapEx that we have made, we will do. But it is subject to the market coming back. That's the reason why it is difficult for us to give a number. But during this period, whatever is not required to keep the customer requirements going, we are either cutting it or postponing it. So we really don't know how much that CapEx would be, whether it will be INR 90 crores x 4 or INR 90 crores x 2, we don't know as of now.

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Operator [75]

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The next question is from the line of Amyn Pirani from CLSA.

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Amyn Pirani, CLSA Limited, Research Division - Research Analyst [76]

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I don't know if this question has been answered earlier because there was some disturbance on the line. But with regards to India, obviously, we do not have any wage reimbursement program by the government. But I just want to understand what will be your mix of contract and permanent workforce? And in that context, what are your surpluses of your payments to contract workers, say, during the time of the lockdown? I understand that in March and in April, you would have paid everybody as per my understanding. But, say, if the lockdown were to continue or it were to come back again and when the production ramp-up is very slow, how does the difference between the permanent employee and the contract employee works in terms of the wage payment?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [77]

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Okay. During the months of March and May, we have kept all our permanent and contract workers, and we have paid them 100% of the salaries, okay? This is the suggestion from the government, and we helped and we tried to keep our workers because we value them, and we think that we will need them for the near future, too. So I think this is a strategy from our company to keep our workers, protect them and try to -- and to survive through this pandemic properly. Then our ratio of contract workers, it's different. It's different from one division to another, but we can consider between 30% to 40% of the -- of our workers as contract workers. And we -- depending on the future in the market, we could see a reduction in the future. But right now, we are trying to keep them. And until we don't see the real evolution of the market, we are not making any decision. So that is what we agreed in the Board of the company, and that's what we are applying in the moment.

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Operator [78]

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The next question is from the line of [Ravikumar Vaidyanathan], who is an individual investor.

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Unidentified Participant, [79]

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Sir, I have a couple of questions. The first one is on the -- when I look at the consolidated results, I see that there is a INR 45 crore exchange loss booked during the quarter. I understand this is a loan which the Mexican subsidiary has taken from the group company. So just wanted to know, it's a huge shake to the P&L. So just wanted to know what is the reason we have not hedged the FX there?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [80]

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Okay. This effect has been -- because we have USD 26 million loan in our subsidiary in Mexico, Bill Forge Mexico. And the peso, the Mexican currency has been -- has had a huge depreciation in the last quarter. This -- the impact of this exchange rate or currency depreciation has been, as we said, something like INR 42 crores, INR 43 crores. The -- what we are now planning for the next quarter is we will change the functional currency to the U.S. dollar because in Mexico, all our sales are done in U.S. dollars, okay? So we have the sales. I mean all our customers are invoicing us in U.S. dollar, and the raw materials we buy, we buy in U.S. dollars. So let's say, most of the COGS and the P&L is based on U.S. dollar. That means that we use the -- we will use the dollar as the functional currency. So we will avoid this kind of effects in the future, and we will recuperate in the next quarter this impact.

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Oroitz Lafuente, Mahindra CIE Automotive Limited - Global Business Controller [81]

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All of our collections in Bill Forge Mexico are in U.S. dollars. We have not made any kind of hedge for this loan. Because as we were collecting, we were paying them also with the U.S. dollars. That's the reason of not making any kind of hedge. We (inaudible) U.S. dollars. We will abolish this kind, let's say, in artificial exchange recuperation, yes.

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Unidentified Participant, [82]

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Okay. Because that's a substantial impact. I think the peso depreciated almost 20% this quarter. So while given this kind of a currency, I was just wondering from a risk management standpoint, I was wondering why the company has not hedged the FX part of the loan.

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Oroitz Lafuente, Mahindra CIE Automotive Limited - Global Business Controller [83]

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Yes. That's the reason. Our collections are in dollars. We will have cash to repay the loans.

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Unidentified Participant, [84]

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Yes. Okay. The second question is, I think in the introductory remarks, I was -- I heard that one of the group company has been purchasing shares of the MCIE India in the last quarter. I saw it in the trading information as well. So just wanted to know, I mean, it's more like a token purchase that is done, so I just wanted to know whether that is continuing because we are not (inaudible) after the 31st of March so.

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

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Of course, our trading window was closed till tomorrow. I think that a trading window for us will open only after the result. So that we certainly -- CIE certainly could have got more, but our trading window closed on 3rd April. And CIE is willing and able to buy more, if required.

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Unidentified Participant, [86]

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Yes. Sir, if you permit me to ask one more question. So I just -- if I understand correctly, the debt-to-equity ratio is, what, somewhere in the region of 1:4 for the company. So just wanted to know if -- have you done any kind of a stress test in the worst case scenario if the lockdown is to get extended by, say, another quarter or 2, just wanted to know what would be the pessimistic view of the debt moving? Do you have any kind of a ballpark number, whether it will move from the current 1:4 to where?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [87]

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We have not done any, let's say, any forecast on that scenario because the uncertainty is so high that it's difficult to make any calculation right now depending -- because everything will depend on the evolution of the market. So the main message, in this case, regarding the debt is that our debt level is very low in this moment compared to EBITDA is 1.5 -- approximately 1.5x EBITDA. And the cash situation of the company is very, very solid. We have been managing just with the available cash and with the available credit lines. We can survive and we can keep the company running normally in the next 6 months, okay? So the situation is very solid. Even in Europe, the situation is solid, and we have the support of our mother company, let's say, CIE. So let's -- globally, the debt situation is under control, and it is not a problem for that in this moment. We are focusing our efforts right now on the efficiency and preparing the company to the, let's say, to restart properly the production.

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Operator [88]

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The next question is from the line of Nitin Shakdher from Green Capital.

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Nitin Shakdher;Green Capital;Founder & CEO, [89]

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I have 2 questions. My first question pertains to the loan provision of Bill Forge Mexico USD loan provision cost. Now that's a substantial hit to the bottom line, as we can see from the figures. I'm worried, is there any other unhedged exposure that the company has, which might come out in quarter 2 or quarter 3 because this is quite a large exposure for a ForEx provision? And my second question pertains to, considering the situation in Europe, does it make strategic focus or sense for the company to focus on increasing sales growth within OEM customers in India?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [90]

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Second question, Nitin, can you repeat the second question, what exactly you've had? Given the situation in Europe...

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Nitin Shakdher;Green Capital;Founder & CEO, [91]

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Given the situation in Europe in terms of plants and manufacturing and production and prod output, is there any strategic focus from the company to regain sales growth from OEM customers in India and shift hedge or domestically look at ever-increasing sales growth within India as well?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [92]

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Okay. Just to answer to the second question, and I will let JP or Oroitz to answer to the first question. Regarding the sales between Europe and India, you know that we have in the last year, we were approximately 60% of the sales in Europe and 40% in India, okay? And our strategy is clearly to continue growing and focusing in India. And we want to balance this percentage between the regions. So yes, we -- our strategy is to continue growing faster in India and increasing our position in India rather than in Europe. So I was expecting this year to be 50-50 approximately. Okay, due to this virus crisis, probably it will like take some more time. But the strategy is clearly, as you said, increase our position in India rather than in Europe. And coming back to the first question.

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Oroitz Lafuente, Mahindra CIE Automotive Limited - Global Business Controller [93]

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Yes, regarding the first question, according to the law that we have different balance sheet, on the balance sheet is this information for loans. The rest of the loans in Europe, they are in euros. And in India, all the financials we have are in INR. So the Mexican loan is the only one we have generated this kind of big differences.

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

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And I hope you understood the answers.

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Nitin Shakdher;Green Capital;Founder & CEO, [95]

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So this is a one-off, right? I mean it's not a continuous going. It's a one-off. Can we expect it to be a one-off?

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

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So it's a one-off. And to answer your question, why we didn't hedge it, I think Oroitz answered, are all our receivables in Mexico are in dollars. And we will change the (inaudible).

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Nitin Shakdher;Green Capital;Founder & CEO, [97]

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Yes. That was answered. Yes. There's only one last one which I have. Considering CIE has created an open market purchase on the company, is there any discussion within the management to look at buyback from the Mahindra Group, considering the valuations of the company at this point in time?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [98]

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Nitin, buyback from Mahindra Group requires Mahindra approval. As I told you earlier, CIE is both willing and able to increase its holding in MCIE as Ander has reiterated it's an important part of CIE's business worldwide. So they are both willing and able. As far as the buyback from Mahindra is concerned, it's really M&M's decision. So we'll have to wait for that.

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [99]

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We -- let's say, from the CIE view, it's clearly that India will be one of the major automotive markets in the future. And despite this crisis, I think that India will recuperate faster and better than the rest of the regions in the world. That's our expectations. That's why we continue thinking that India bet it's relevant and will be one of the major bets of CIE for the future. That's our position. That's why CIE is increasing the stake in Mahindra CIE.

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Operator [100]

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The next question is from the line of [Pritesh Chheda] from Lucky Investments.

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Unidentified Analyst, [101]

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Sir, I missed one of your comments on the expense of help that the European governments are going to give to the operations in terms of salary bill. So you said that the months for which and operations were not done is where the month for which the government will pay the full salary bill. That's how you put it out or I misread it?

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

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No. So Ritesh or Hitesh, I just?

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Unidentified Analyst, [103]

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This is Pritesh.

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

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Pritesh, P-R-I?

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Unidentified Analyst, [105]

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Yes. P-R-I.

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [106]

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So what Ander said, see, whenever the plant is not working in either April or May, at that point of time, the government will pay at different places, different levels. So 80% in German -- in Italy, 70% in Germany, 30% in Spain. From the days the plant is not working. Based on the days that they have not worked, we assume that the help would be in the region of EUR 3 million to EUR 4 million in this quarter, depending on the number of days they have not worked, over a rough salary bill of say anywhere between EUR 25 million to EUR 30 million in the quarter, right?

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Unidentified Analyst, [107]

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Okay. And any other payouts other than the salary bill? Or it's only the salary bill which is covered?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [108]

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No, only the salary. I mean, they pay the cost of the labor. The strategy of the European government is to avoid the workers to be dismissed, okay? So they want to keep the workers employed, and they are supporting the companies to help the payment of the salaries. So the companies are not dismissing these workers. That's the strategy.

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Operator [109]

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The next 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 [110]

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So firstly, just wanted to check in the Europe business, we've seen sequentially sales have improved, however margins have contracted. So just wanted to understand if this was a function of the mix. Have you seen MICE revenues improve sequentially, which typically has a lower margin?

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

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So Nikhil, your question is, the Europe sequential revenues have increased between Q4 to Q1, but the margins have dropped. That's the question?

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Nikhil Kale, Axis Capital Limited, Research Division - VP of Auto [112]

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Yes.

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

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So a little bit around mix. As we pointed out, the Metalcastello numbers have come down, Metalcastello is a high-margin business, and the German numbers have remained same. And Germany is relatively low-margin business. So if you do that mix thing, that is the reason why it has been here.

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Nikhil Kale, Axis Capital Limited, Research Division - VP of Auto [114]

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Is there also some -- is there also a function of some gross margin expansion due to lower raw material costs and which we might have to kind of pass on to customers going ahead?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [115]

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No. No. There is no raw material impact in this quarter. In fact, the raw material is dropping in the prices in this period. So there is a reduction on the steel price in this period. So no, it is not an impact of the raw materials.

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Nikhil Kale, Axis Capital Limited, Research Division - VP of Auto [116]

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Okay. And secondly, I think going ahead with the demand remaining weak, the focus will be on cost control. Now over the last couple of quarters, you have kind of what you're too aggressive in cutting costs. I think in the last con call, you have mentioned that you have let go of some of the contract workers in Europe, also cut back on the overtime. So I wanted to understand what is the potential or the headroom that we have to cut costs going forward, especially in the Europe business?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [117]

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So Ander, the question is, is there -- since we have been cutting costs, especially in Europe for the last few months, is there still some headroom left to make further cost reduction?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [118]

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Yes. Yes. In fact, we were thinking that the market will stabilize in the Q4 levels -- Q3, Q4 levels at that time in the -- especially in Germany. Now after this virus impact, the truck market evolution is a little bit uncertain in this moment. But yes, of course, we need to continue making the adjustments. That's the task. And regarding if we have room or not, yes, we have some room yet. And we need to continue working on that.

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Nikhil Kale, Axis Capital Limited, Research Division - VP of Auto [119]

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Okay. Okay. Just lastly, you mentioned the government support. Just wanted to check, does that come with certain guidance that once the production starts, you cannot let go of workers or anything like that?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [120]

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Vikas, can you fill in?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [121]

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The question is, the government is supporting the various plants with this labor cost support. Are they putting a condition that you cannot let go of workers once the restart happens? And you have -- there is a lock-in period that you cannot let go for customer sometime, right?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [122]

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Yes. Yes. Okay. In different -- let's say, the conditions are different in the different countries, okay? They set a temporary condition that we should not dismiss or we should not fire these workers that has been supported by the government during this period. But this timing means the overall 2, 3 months of nondismissal of these workers. So -- but there is no major condition on that support.

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Operator [123]

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Next question is from the line of Jinesh Gandhi from Motilal Oswal.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [124]

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My question pertains to what would be our breakeven utilization rates both for Indian and European operations? Would you be able to share that?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [125]

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The breakeven -- sorry, I -- is that the question?

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [126]

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Breakeven utilization levels.

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [127]

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Sorry.

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Oroitz Lafuente, Mahindra CIE Automotive Limited - Global Business Controller [128]

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Breakeven utilization.

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [129]

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Ander, what he is asking is that at what sales levels will we have an EBITDA breakeven. EBITDA breakeven or cash breakeven, what are you asking, Jinesh?

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [130]

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Cash breakeven, cash breakeven.

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [131]

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So cash breakeven, not EBITDA breakeven. Cash breakeven, at what level of sales as compared to, say, normal sales.

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

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More or less -- it's a difficult question because it's different in each of the divisions, but in situation even in Europe, we are calculating, and we will tell you, but something like 40%. Yes. I think we are calculating. Right now, Oroitz is making the calculation. But approximately, we have 30% of the standard sales drop, we can have the breakeven level. So approximately 70% of the standard we can survive.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [133]

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Okay. It would be for both India and Europe?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [134]

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Yes, this is for both India and Europe, yes.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [135]

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Okay. Okay. Second question pertains to the organic decline in 1Q at India and consol level, if you have that number.

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [136]

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Okay. Yes.

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

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Jinesh, what is the question? Question...

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [138]

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Can we -- ex of AEL, what would be the decline in India and consol revenues?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [139]

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Yes. Without the -- ex AEL, in India, what's -- the drop could be 30% approximately Q-on-Q. And in Europe, as you saw, it's -- also it's 30%. So we would be at 30% drop in the Mahindra CIE ex AEL.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [140]

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Okay. This is compared to same quarter last year?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [141]

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Yes. Yes.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [142]

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Yes. Okay. Okay. And last question on...

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [143]

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The same quarter last year was a very good quarter, if you recollect it.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [144]

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Okay. Okay. Obviously, that was near the best quarter of last year. Yes. And last question pertains to -- for the European operations, what would be revenue decline in euro terms, given that there has been also benefit of INR depreciation?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [145]

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Vikas, can you help us with the question?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [146]

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So he is asking -- Jinesh is asking, in euro terms, how much did the European business decline Q1 C '19 to Q1 C '20 in euro terms without the exchange rate?

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Oroitz Lafuente, Mahindra CIE Automotive Limited - Global Business Controller [147]

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There has not been any relevant change on the exchange rate.

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

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No, it's 33%, yes.

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Oroitz Lafuente, Mahindra CIE Automotive Limited - Global Business Controller [149]

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Exchange rate effect has been peanuts, very negligible.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [150]

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So no difference, potentially?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [151]

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No difference in the ForEx exchange rate.

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Operator [152]

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The next question is from the line of the [Vivek Kumar from Shiv Sagar Investments].

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Unidentified Analyst, [153]

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Sir, I just want to know like in forging technology, I think, Mahindra CIE will be the major arm for the group, CIE. So what is the potential for the next 5, 10 years in the forging technology, with the revenue?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [154]

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[Vivek], so you are essentially asking, see, are we -- is Mahindra CIE...

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Unidentified Analyst, [155]

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What is the role of Mahindra CIE with respect to the total group -- the whole group of CIE? Where is (inaudible) to the different technologies?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [156]

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So -- no, we have always said that Mahindra CIE is CIE's arm in India and Southeast Asia. So anything that CIE does in any technology in India or Southeast Asia will be through Mahindra CIE, and Mahindra CIE is also the global arm for CIE in the Forgings business, okay? So anything that CIE does further in Forgings will happen through Mahindra CIE. So this is what Mahindra CIE's relation vis-à-vis CIE is. So that's one. And then your second question was really, where do we see forging technology going.

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Unidentified Analyst, [157]

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And how big is the opportunity size, yes?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [158]

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Look, forging technology is perhaps the oldest technology known to human kind, if you look at it. So the questions will be asked with respect to electric vehicles and so on. If electric vehicle comes, there will be a little bit of decline, no doubt. But given all these social distancing and other things that are coming up, I think there will be some pause on whatever is happening on electric vehicles. So we continue to see IC engines playing a big role. Of course, IC engines will remain in trucks and tractors and some of those things. So to that extent, forging will remain a very important part. What exactly will happen in 10 years' time, we have not taken a call like what...

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Unidentified Analyst, [159]

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If you say like INR 5,000 crore revenue in Forgings, I think it is around INR 4,000 crores, INR 5,000 crores. So how are the competitors doing? Like, is it possible for a INR 10,000 crore revenue from just the Forgings in the next 5, 10 years in the group?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [160]

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Of course, of course it is possible. Of course, it is possible. You have Bharat Forge before us -- before you, the kind of revenues they have. So it is possible. So there is enough growth opportunities in forging. In fact, we see in the near term, there will be greater opportunities in this area, as OEMs focus more and more on designing, developing new technologies, new cars, there's a whole lot changes happening in the auto industry. So there will be less focus for OEMs on the Tier 1 technologies like engines and so on and so forth. And companies like us will have greater opportunities in the medium term actually. So we do foresee opportunities coming our way in the medium term.

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Unidentified Analyst, [161]

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And with respect to different technologies for die casting, aluminum die casting or roofing or this composite, if you buy a company in India, and that has a factory I suppose in U.S. or Europe, then how do we align that? Like we are...

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

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We'll see. We'll see when it comes. We'll see when it comes to that. Of course, our first preference is to expand in India, as Ander's pointed out, because CIE attaches great importance to the Indian market. It will come -- if we have an M&A opportunity in which there is an adjunct plant in Europe or U.S., we'll have a look at that at that point.

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Unidentified Analyst, [163]

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Yes, the call benefit is different to different like -- for die casting -- aluminum die casting or any other advantage India, then we can make that revenue also and that --

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [164]

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What is the question?

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Unidentified Analyst, [165]

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Like, if we have cost advantage in India with respect to different technologies, and then we can make it Indian hub for CIE Group, is it possible?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [166]

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Look, at the end of the day, within the CIE system, CIE is a very efficient company worldwide, as you are aware. CIE makes very high margins all over the world. So not just in India or Europe. So wherever there is an opportunity for exports from India, we will definitely look at that. But it's not true that CIE entities in Europe make less margin or lower margins than the Indian entities. In fact, a large number of them make higher margins than the MCIE plants in India. So it depends. If there is an opportunity, we'll surely look at it.

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Unidentified Analyst, [167]

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And today, the CIE -- the portion is around -- Mahindra CIE portion is around 35% of the total group, I think the turnover.

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [168]

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No. No. No. On a consolidated level basis, I think M&M will be anywhere between 10% to 15% on a consolidated basis. On an -- in India basis, there will be anywhere somewhere around 30%, 33% for the India revenues and less than 15% for the consolidated.

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Unidentified Analyst, [169]

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It is only 10%?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [170]

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Around 15%, you might say. Because India is roughly about 50% of the consolidated revenue, and they are 30% to 33% of India revenue.

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Unidentified Analyst, [171]

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India is having INR 8,000 crores revenue in Mahindra CIE consolidated.

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [172]

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Yes.

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Unidentified Analyst, [173]

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And the group -- the total CIE revenue is, I think, $2 billion. So $2 billion or?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [174]

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Oroitz, what is the overall CIE revenues in C '19? Is that revealed? Or like we are still waiting for the Board meeting, I guess? We can talk about...

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Unidentified Analyst, [175]

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Last year, what was it last year?

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Oroitz Lafuente, Mahindra CIE Automotive Limited - Global Business Controller [176]

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Yes, you make a forecast of the figure. We cannot disclose. But you can say EUR 3.5 billion. This is the -- so it's approximately Mahindra CIE is 25% of global CIE.

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Unidentified Analyst, [177]

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Yes, 25% of the global CIE?

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Oroitz Lafuente, Mahindra CIE Automotive Limited - Global Business Controller [178]

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Yes.

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Unidentified Analyst, [179]

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Okay. So is this going to change or something like there's -- can we see that in next 5, 10 years?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [180]

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That -- as I said, India is an important focus area for CIE, but it depends on how the market grows. So it really depends on how the market. But India remains a focus area for CIE.

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [181]

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Yes. Yes. Absolutely.

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Operator [182]

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The next question is from Ujwal Shah from Quest Investment.

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Ujwal Shah, Quest Investment Advisors Pvt Ltd. - Equity Analyst [183]

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Just wanted to know the performance of Bill Forge and AEL during last quarter. And what kind of margins did they achieve?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [184]

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Okay. Both AEL and Bill Forge has performed better than the rest of the divisions in India, mainly because they are more focused on 2-wheelers and exports. And the drop has been a little bit less than the rest of the divisions of Mahindra CIE in India, okay? The margins in AEL, you know that last year, we were about 12% of EBITDA, and that's the range where we are now getting 12%, 13%. This is the EBITDA margin level in AEL.

And Bill Forge, Bill Forge has good year, last 2019, and we were improving, especially because the problems in our Mexican plant were solved, and we were improving the margins. EBITDA margins in Bill Forge are around 18%. And in this quarter, due to the drop of the market in the last month of the quarter in March, we had some reduction on that margins, but the -- our standard margins are 12% in AEL and 18% in Bill Forge.

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Ujwal Shah, Quest Investment Advisors Pvt Ltd. - Equity Analyst [185]

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Great. And also wanted to know on the European business, Ander, our CV side business, during best of the times, when CV business was booming when the growth was very strong, both from Europe as well as the U.S. side. So even during that times, our CV margins were around 8% at best. So what is the long-term strategy that CIE has for that CV business because the rest of the business in Germany is making wonderful margins? And the CV side, because of perennial problems, having plants in Germany, whatever be the reason. And during the best of the times, the margins haven't been good. Are we seeing a long-term strategy to hold on to the CV business as we see margins improving there? Or at some opportune time we might think of selling it out?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [186]

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Okay. We -- as you mentioned, and our CV Forgings margins obviously are the worst margins that we have in Mahindra CIE, especially in our Forgings in Germany. However, we continue working to turnaround this business and to make them at least at the profit level that we can survive in the long term, okay? So our strategy in this period was to reduce the size slowly, slowly of this business and controlled downsizing of this business because they are not giving us the proper profitability and, at the same time, continue with the restructuring activities to increase their performance. I think that our businesses in Germany right now are improving. And we will be able to keep them in Mahindra CIE, perhaps with some downsizing and consolidation in the future. But our aim and our strategy is to make them profitable and to have a long-term business even if it is not as big as it is now, but with a smaller business with a little bit higher margins than current ones. That's the strategy.

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Operator [187]

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

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Priya Ranjan, Antique Stockbroking Ltd., Research Division - Research Analyst [188]

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Just only 2 things. One is on -- have you heard anything from your OEM side, particularly on their CapEx reduction, particularly on the product development or the maintenance plans, et cetera, where you might be associating with your OEM partners? And second part is on the cost side. So at -- if suppose I was purchasing a 100 tonne of, say, steel, and if my volume has become like 70 or 60, so will the sale price drop will help me? Or I mean, will it will -- I mean, my prices might go up because we might have contracted for a little longer?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [189]

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Okay. Vikas, can you help me with the second question?

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [190]

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So the second -- the first question is are OEMs reducing CapEx? And will that affect our programs? The second is on the cost side. The question is steel prices are going down, but are we contracted with our steel suppliers so that we will not benefit from any reduction in steel prices going forward because we have been contracted for a longer period?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [191]

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Yes. No. Okay. Regarding the OEM's CapEx, we have not yet any information from them to -- that they are cutting CapEx or development. No, we don't have that information yet, okay? We don't know if they are going to disclose anything in the near term. But till now, let's say that we continue the programs that we have been -- we are developing with them with no stop, okay? So till now, there is no movement on that. And regarding the cost of the steel, let's say, that we have the -- our contracts and commitments are short-term commitments. And no, we are not squeezed on that. We'll manage this -- we negotiate with our customers, and we negotiate with the steel suppliers, and we find the agreements. So there is no risk on that.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division - Research Analyst [192]

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Okay. But I mean, is that -- I mean, the prices of steel, et cetera, is also linked to the volume, I mean?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [193]

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Not really. No. No. The -- of course, we agreed with the steel mills the prices on certain volumes, but there's flexibility on that. And we can balance between the -- we are not working only with 1 steel mill. So we can we can decide the strategy. So as our customer does with all of their suppliers, we balance the supply from different sources, and we decide the strategy each time. So we don't expect to have a burden or a loss due to that, not at all.

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Priya Ranjan, Antique Stockbroking Ltd., Research Division - Research Analyst [194]

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Okay. And lastly, on the working capital side. So I mean, I have been hearing mixed trends from the OEM side. Some OEMs are actually extending the credit period. Some OEMs are shortening the credit period to help the suppliers. So I mean, what are you witnessing and between different timing, say, India or Europe or between customers, major customers, how do you see that?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [195]

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Not yet. We have had certain delays, in fact, in the payment in some customers, but then they are recuperating. And let's say, the payment terms continues in the same situation. No changes on that, smoothly. But no, not relevant. No. And we say that also as a company, we are in a strong or relatively comfortable position. We are paying on time to all our suppliers. I mean this is the decision to support also to our supply base.

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Operator [196]

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That was the last question in queue. I would now like to hand the conference back to the management team for closing comments.

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [197]

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Now thank you very much. Thank you very much for listening to us patiently. Please rest assured that we are working very hard, and we are very optimistic, and we are very confident that we will deal with this crisis in a good manner. And yes, Ander, do you have anything to add?

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [198]

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No. Just my comment is the same is to reinforce that despite the situation is difficult for everybody in terms of the health of the -- of our -- the citizens in the different countries we are located. Regarding the business, we need to have an optimistic view. And I think that the market will come back. Perhaps it will take 1, 2, 3 quarters to come back, but we are prepared. We are in solid financial position. We are doing our job. We are completely focused. And I think that we will emerge stronger than before. So that's the point. And thank you to everybody.

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Operator [199]

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On behalf of ICICI Securities, that concludes the conference.

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [200]

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Thank you.

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Ander Arenaza Alvarez, Mahindra CIE Automotive Limited - CEO & Whole Time Director [201]

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Thank you.

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Oroitz Lafuente, Mahindra CIE Automotive Limited - Global Business Controller [202]

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Thank you very much.

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Vikas Chandra Sinha, Mahindra CIE Automotive Limited - SVP of Strategy [203]

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Thank you. Have a good day, guys.

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K. Jayaprakash, Mahindra CIE Automotive Limited - CFO [204]

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Thank you so much.

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Operator [205]

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Thank you, you may now disconnect your lines.