Mahindra CIE Visit Note_050514

8/10/2019 Mahindra CIE Visit Note_050514

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Emkay Global Financial Services Ltd. 1

Mahindra CIE Automotive

Strong parentage; scalable business model

May 05, 2014

Rating

Not Rated

CMP

Rs112

Target Price

NA

EPS Chg FY14E/FY15E (%) NA

Target Price change (%) NA

Nifty 6,710

Sensex 22,480

Price Performance

(%) 1M 3M 6M 12M

Absolute 71 146 150 220

Rel. to Nifty 64 128 129 167

Source: Bloomberg

Relative price chart

30

49

68

87

106

125

Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14

Rs

-20

18

56

94

132

170%

Mahindra CIE Automotive (LHS) Rel to Nif ty (RHS) Source: Bloomberg

Stock DetailsSector Auto Ancillaries

Bloomberg MACA IB

Equity Capital (Rs mn) 3250

Face Value(Rs) 10

No of shares o/s (mn) 325

52 Week H/L 126/ 35

Market Cap (Rs bn/USD mn) 11/ 184

Daily Avg Volume (No of sh) 413,022

Daily Avg Turnover (US$mn) 0.6

Shareholding Pattern (%)Mar'14 Dec'13 Sep'13

Promoters 79.4 79.5 52.9

FII/NRI 3.4 5.1 6.8

Institutions 4.0 0.5 0.5

Private Corp 4.3 4.3 13.6

Public 8.9 10.7 26.2

Source: Bloomberg

Ronak Sarda

[email protected]

+91-22-66121281

Kaushal Maroo

[email protected]

+91-22-66121252

Global auto ancillary player in the making with strong

promoter backing and a larger product portfolio

CIE has a strong track record turning around operations postacquisition with intense cost focus

Key focus will be on >600bps margin expansion to 8-10% over

next two years at Mahindra Forgings Europe operation

Global player in the making, with strong promoter backing

Mahindra CIE, post merger, becomes one of the largest auto ancillary suppliers, with a

turnover of ~US$1bn. It has a diversified product portfolio for commercial and

passenger vehicles, spanning across Europe and India. With CIE Automotive, the

company now has the backing of a successful global auto ancillary parent, a larger

product portfolio and enhanced ability to make investments to further reap benefits of

the larger scale.

Phase 1: Turnaround at Mahindra Europe and new products in India

The companys initial focus will be to turnaround Mahindra Forgings Europes (MFE)operation, which has been impacted by high operating costs. CIEs objective is to

improve its profitability in line with its own operations (operating margin improvement

from 2% in FY14 to 8-10%) over the next 2-3 years. It also bodes well for turnaround

possibilities, since CIE is well known for its intense cost focus and decentralised

management. The steps being undertaken are as follows:

Improve productivity:The company has increase productivity by 25-30% at MFE byreducing machine setup time and the frequency of the machine setup

Power subsidy: High power cost (8% of sales) in Germany was one of the keyreasons for sharp jump in manufacturing costs. The govt has announced an annualrecurring power subsidy of EUR 5mn, which will lower costs by 150bps

Lowering employee cost: It intends to lower employee cost (~30% of sales) byreplacing temporary employees to increase automation and outsourcing of smallercomponents

Marketing and sourcing benefits for the combined European operations

Demand/economic recovery in both Europe and India can enhance the earningsleverage even further. Key global customers (Daimler, Volvo, Scania, etc) have

guided for flat to positive growth in 2014

India ops will offer new products from CIE for Indian PV OEMs. Further, it willleverage CIEs present relationships with global OEMs in India to offer new products.

Phase 2: Future plans to scale operations

CIE intends to bring all its forging businesses (across Brazil, Mexico and China) underMahindra CIE. The company plans to bring new products in the plastics and aluminium segments at

India operations

The company will also explore new geographies across Asia to expand its footprint inthe continent through both organic and inorganic routes

Outlook and valuation

Economic recovery in Europe can provide delta to operating performance in near term

leading to re-rating, the revenue profile however remains skewed to Europe which

contributes >65% to total revenues. Assuming domestic revenue growth of 10-12% CAGR,

MFE growth of 4-6% CAGR (Euro terms)and CIE Forgings of 6% CAGR (Euro terms)

over next two - three years, the company can achieve revenues and EBITDA of Rs 64.2bnand Rs 7.0bn in FY16 from Rs 50bn and Rs 3.3bn last year. At CMP of Rs 112, stock is

trading at 0.9 FY14P EV/sales and 12.3FY14P EV/EBITDA and FY16E 0.6 EV/sales and

5.8 EV/EBITDA.

Note: Consolidated financials will be available post conclusion of the merger transaction


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Mahindra CIE Automotive Visit Note

Emkay Research May 05, 2014 2

Exhibit 1: Mahindra Systech & CIE Automotive merger structure and combines entity

Source: Company

Exhibit 2: Combined forging segment product portfolio

Source: Company

Exhibit 3: Forgings contributed 65% of FY13 revenues

Composites

1%

Casting +

magnet

9%Gears

10%

Stampings

15%

Forgings

65%

Source: Company

Exhibit 4: EBITDA contribution is ~50% due to lower contributionfrom MFE (FY13)

Forgings

54%Stampings

21%

Gears

16%

Casting +

magnet

8%

Composites

1%

Source: Company


3/5



Exhibit 5: Europe accounts for ~65% of revenues

0%

20%

40%60%

80%

100%

MFL

CIE

Hinoday

Composites

GearsIndia

Metal

castello

MUSCO

Global sales Domestic sales

Source: Company

Exhibit 6: High operating costs at MFE results in subdued EBITDAmargin performance

0

3

6

9

12

15

MFL

CIE

Hinoday

Composites

GearsIndia

Metal

castello

MUSCO

(%)

Source: Company

Exhibit 7: CIE Automotive focus on financial strength

Source: Company


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Exhibit 8: Revenue & EBITDA Snapshot

FY13 FY16E Comment

Sales

M&M Forgings 22,164 29,758

MFE 17,921 24,9974-6% CAGR in Euro terms driven byrevival in German HCV segment

MF India 4,243 4,76210-12% CAGR driven by newlaunches; upside in case of sharprecovery in domestic PV segment

CIE 10,424 12,415 6% CAGR in Euro terms

Hinoday 4,788 5,899

Composites 503 620

Gears 1,061 1,331 New plant commissioned

Metalcastello 4,022 5,423

MUSCO 7,664 8,841

Total 50,626 64,287

EBITDA

M&M Forgings 430 3,119

MFE (68) 2,500Expect margins to improve to 8%from -ve in FY13

MF India 498 619

CIE 1,390 1,738 Margin to remain flat at 14%

Hinoday 257 354

Composites 19 31

Gears 99 160

Metalcastello 449 542

MUSCO 691 1,061 Improvement in operating profitability

Total 3,335 7,005

EBITDA margin (%)

M&M Forgings 1.9 10.5

MFE (0.4) 10.0

MF India 11.7 13.0

CIE 13.3 14.0

Hinoday 5.4 6.0

Composites 3.8 5.0

Gears 9.3 12.0

Metalcastello 11.2 10.0

MUSCO 9.0 12.0

Total 6.6 10.9Source: Company, Emkay Research

Exhibit 9: Valuation summary

Sales EBITDA EV/EBITDA EV/Sales ROE ROCE

FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY15E

M&M CIE # 59,788 64,287 5,884 7,005 8.2 5.5 0.8 0.6 NA NA

Motherson Sumi 349,683 404,433 36,695 46,932 10.5 8.2 0.5 0.4 36.1 30.7

Apollo Tyres 141,838 158,414 18,408 20,542 5.4 4.9 0.7 0.6 18.3 19.7

Bosch * 98,636 115,827 15,776 19,532 19.2 15.5 3.1 2.6 15.8 19.3

Bharat Forge * 66,229 75,073 11,781 13,388 9.8 8.6 1.7 1.5 18.8 16.0

Exide 65,765 75,669 9,197 10,963 10.4 8.5 1.5 1.3 15.0 20.9

Amara Raja 41,071 48,446 6,590 7,770 10.8 9.4 1.8 1.5 27.7 35.0Source: Company, Bloomberg, Emkay Research # - Not rated; * - Consensus estimate


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Mahindra CIE Visit Note_050514