Mahindra CIE Automotive: The making of a global auto-component player :: Kotak Sec,report

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The making of a global auto-component player. We initiate coverage on Mahindra
CIE with a BUY rating and target price of `280. Mahindra CIE will become a global
auto-component powerhouse with the scale of business in India and merger of CIE
Automotive’s global forgings business. We expect the company to deliver strong
earnings growth over the next few years, led by an operational turnaround in
Mahindra’s European forgings business and strong growth in the Indian business.

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Mahindra CIE to become a global auto component player
CIE Automotive bought controlling stake (53%) in Mahindra CIE, formed after the merger of
Mahindra’s forgings, stampings, gears, castings and CIE Automotive’s European forgings
business. CIE Automotive is a global supplier with a significant presence in forgings, stampings
and plastics in Europe and NAFTA. CIE grew briskly through organic and inorganic routes but
maintained double-digit EBITDA margins and post-tax RoCE of 17% in the automotive business.
CIE Automotive has a strong track record of operational excellence. We believe with the change
in management, Mahindra CIE will become a global auto-components player with strong
capabilities in forging, stamping, gears and casting.
Turnaround of Mahindra Europe and new product development would be key catalysts
The company is likely to implement its strategy in two phases. In the first phase (FY2014-17), it
will focus on improving Mahindra CIE’s Europe business profitability through (1) price negotiation
for some old contracts, (2) productivity enhancement, (3) EUR4 mn annual power subsidy from
the German government, (4) reduction of some temporary staff and (5) outsourcing low-end
jobs. We expect EBITDA margin in the Europe business to improve to 12.9% in FY2017 from
6.2% in FY2014.
In the second phase (FY2017-20), the company will focus on enhancing the product portfolio of
its businesses in India and adding new clients. In phase two, we expect new products to
account for about half the incremental revenue over FY2017-20. We expect Mahindra CIE’s
revenues and EBITDA to grow by 2X and 4X respectively over FY2014-20.
We initiate coverage with a BUY rating
We initiate coverage on the stock with a BUY rating and target price of `280. We value the stock
at 12X FY2017E EBITDA. We believe 12X EV/EBITDA multiple is justified, driven by strong growth
in EBITDA over the next six years. We believe the company can grow its EBITDA by 4X over
FY2014-20. We expect the company to deliver strong cash flow (FCF/EBITDA conversion of
40-50%) and fund its capex plans through internal accruals. We see weak execution as a key risk
to our investment thesis.
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily14012015bb.pdf