M&M : Auto-comp ambitions get a boost :CLSA

M&M has announced a strategic alliance with Spain-based auto-components
firm – CIE Auto. M&M will buy 13.5% stake in CIE Auto while CIE will buy
stakes in M&M's auto-comp subs in a largely cash-neutral deal. The key
rationale is to widen the geographical, customer & product footprint for both
firms given that there are minimal overlaps in these three areas. M&M has
struggled in the auto-comp space for the last 8 years and we believe that this
alliance has the potential of becoming value-generative in the long-term. The
fact that the transaction is largely cash-neutral also gives comfort given the
tough business environment in India and overseas. We await more details in
the concall but view it favourably based on details shared so far. Retain O-PF.

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q M&M has announced a strategic tie-up between its auto-component businesses with
Spanish auto-component company CIE Auto. The Mahindra group and CIE Auto will
take stakes in each other’s’ companies in a largely cash-neutral deal.
q CIE Auto is a supplier of auto components to companies in Europe, North America
and South America. CIE Auto makes components for engine & powertrain, chassis &
steering assembly and exterior and interior of the vehicle. CIE has 60 industrial
plants. In 2012, CIE Auto had revenues of Eur1.65bn with a net profit of Eur61mn.
CIE Auto is listed in Spain and has a market-cap of Eur635mn (US$847mn).
q M&M will purchase 13.5% stake in CIE Auto for Eur96.24mn (Rs.7.4bn). The
purchase price is at a 7% premium to the closing price of CIE Auto on Friday. M&M
will get two seats on the board of CIE Auto.
q M&M will sell 52.7% stake in Mahindra Forgings (virtually its entire stake) to CIE
Auto for Rs3.9bn. This is at 21% premium to the closing price of Mahindra Forgings
on Friday. M&M will also sell 65% stake in unlisted subsidiary - Mahindra Hinoday
Industries - to CIE Auto for Rs2.7bn and its 30.4% stake in Mahindra Composites to
CIE Auto for Rs0.1bn. Total cash inflow from these transactions will be Rs6.7bn.
q The net cash outflow for M&M from the above transactions will be just Rs0.7bn.
q M&M will then merge all its listed and un-listed auto-component companies in India
(Mahindra Hinoday, Mahindra Composites, Mahindra Gears, Mahindra Ugine Steel,
Mahindra Investments) along with the forgings business of CIE Auto into Mahindra
Forgings, which will be renamed as Mahindra CIE. CIE Auto will be the majority
shareholder of this new merged company with a likely stake of 50%+ while M&M
will own ~20% stake.
q The above transactions have triggered open offers in Mahindra Forgings and
Mahindra Composites, which have been separately announced.
q The strategic rationale for this alliance is to widen the geographical, customer and
product footprint for both companies. CIE Auto is largely present in Europe and the
Americas while M&M's auto component businesses are largely present in Asia and
Europe to some extent. The alliance will create a cross-continental auto-component
company with combined revenues of US$3bn. This is important as auto OEMs like
their suppliers to have presence in all the markets where they are expanding.
q M&M also says that the product profile and customer base of both companies is
largely complementary. Mahindra believes that it will gain from CIE's presence in
the Americas (50% of CIE's revenues) and will now be able to target a wider range
of customers. CIE will gain an entry into India with this alliance and will use the
India base as a gateway into Asia.
q M&M is hosting a conference call on Monday to give more details on this alliance, so
should get more details then.
q Our view: While we await more details in the conference call on Monday, the
alliance looks like a positive development based on the details shared so far. M&M
has always had big aspirations in the auto-components space for the last 8 years
and had acquired some companies in Europe in the past. However, the sharp
slowdown in European auto demand resulted in their European companies turning
loss-making while the India auto-components business did not grow as planned as
well. This alliance gives M&M a fighting chance in auto-components space provided
both companies work towards generating synergies from the complementary
products, geographies and customer base.
q The fact that the deal is largely cash-neutral provides a high sense of comfort as we
(and the market) would have been unwilling to give any benefit of doubt for an
outright acquisition. Also, the fact that CIE Auto is a listed company gives M&M an
exit option for its 13.5% stake in CIE in case the relationship does not proceed
smoothly.
Figure 1
Our SOTP based target price for M&M is Rs1,110/sh
SOTP target price FY15
M&M core business (12.5x core P/E) 872
Value assigned to subsidiaries after 20% holding company discount (Rs) 239
SOTP target price (Rs) 1,110
Source: CLSA