Amalgamation process nears completion! • Mahindra CIE Automotive :: ICICI Securities, PDF link

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Amalgamation process nears completion!
• Mahindra CIE Automotive’s (MCI) Q2FY15 results continued to reflect
the margin improvement, especially in the European business, which
saw margins rise to 7.2% (3.4% in Q1FY15, 3.1% in Q2FY13) led by
product rationalisation and cost reduction initiatives. Topline for the
European business at €63 million, however, was lower by ~7%
• India business topline at | 94 crore was flat YoY while the EBITDA
margin improved to 13.9% (11.1% in Q1FY14)
• The management has indicated that the amalgamation process for all
the companies is likely to conclude in the next five or six weeks
Strong Tier-1.5 supplier to global OEMs…The TILA factor!
MCI is a strong tier-1.5 supplier to global OEMs, i.e. a supplier of critical
components to OEMs. With global car makers moving towards
homologation with modular architecture, global platforms and standards,
automotive suppliers need to meet the increasing intensiveness. We
believe MCI’s greatest advantage is in its significant geographic spread
that has the “there is little alternative” (TILA) factor associated with it.
With a presence ranging across Europe, Latin America (LatAm), North
America Free trade Agreement (Nafta) region and Asia, the alliance
produces a company with limited competition in terms of presence.
CIE’s turnaround path key; demand growth the joker in the pack!
CIE’s management has laid out clear plans for the turnaround of hot spots
in MCI. The first one targeted is Mahindra Forgings Europe (MFE), for
which CIE had targeted a 600 bps EBITDA margin increase on an overall
basis in 36 months. The results of CIE’s efforts are already bearing fruit
with margins reaching 7% this quarter. CIE’s intense cost focus and
decentralised management, bodes well for the sustenance of this
turnaround. An added kicker may emerge in the form of
demand/economic recovery in both Europe & India, which may enhance
the earnings lever even further.
Past rendered irrelevant as bright future beckons! CIE focus strong…
We feel MCI provides a rare, unique Indian auto component play, which
has a global footprint with global promoters along with massive
turnaround possibilities in the company. Post the consummation of the
deal, CIE would hold 51% in the entity while Mahindra would directly hold
~20%. MCI has a presence across both commercial vehicles and
passenger vehicles with complementary strengths of dual parents. With
cost controls and economic recovery playing out, we expect utilisation
levels to improve leading to EBIT margins rise to ~8% and RoCE
expansion to ~14.5% in FY17E. CIE’s track record on turnarounds via cost
control and high focus on financial metrics gives us confidence.
Possible multiplier in financials to reflect in price, multiples; reiterate BUY
Mahindra CIE Auto is a unique case of valuation considering the massive
turnaround possibilities. We expect utilisation levels to improve leading to
EBIT margins rising to 9.0% and RoCE expansion to ~15.9% in FY17E.
We expect a significant increase in dividend payouts to ~40% in line with
CIE’s philosophy of high dividend payouts (~40-50%). CFOs are also
likely to balloon to ~| 700-800 crore (FY16E-17E). We value MCI on a
combinational basis of PE and EV/EBITDA, considering it is a turnaround
company and upgrade our multiples in line with multiple expansion for
peers in the forging space. Our target price of | 260 implies an upside of
~37%. We continue to recommend BUY.

LINK
http://content.icicidirect.com/mailimages/IDirect_MahindraCIE_Q2FY15.pdf