Mahindra CIE (MACA) is a multi-technology automotive components supplier, with annual revenue of INR53b in CY16. It is one of the top manufacturers of forging parts in India (leader in crankshafts and stub axles) and the EU. India contributes 38% of MACA’s overall business, while the EU contributes the rest. It caters to top customers like Maruti, M&M, Tata Motors and Hero Moto Corp in India. MACA acquired Bill Forge (BFL) in India at INR13b in 2016, enabling it to diversify further.
All set for growth phase
Benefits of consolidation + operating leverage to drive ~29% EPS CAGR
MACA is all primed for a growth phase, after three years of consolidation. We believe all ingredients are in place for sustained growth: (a) India business high dependence on fast growing segments, (b) scope to add customers in Metalcastello and focus on value add at MFE, (c) limited growth capex, (d) supportive parent, and (e) focused M&A strategy.
A strong, focused and disciplined parent, CIE has instilled financial discipline and high focus on delivering value-accretive growth. MACA would play an important role in CIE attaining its 2020 targets of doubling profits and RoNA of 20-25%. n We estimate consolidated revenue CAGR of ~8% over CY17-19E, EBITDA margin expansion of ~260bp to ~15.1% by CY19E and EPS CAGR of ~29%. Strong earnings growth and limited capex (5-6% of sales) would drive improvement in capital efficiencies (RoEs to improve 630bp to 12.9%).
We initiate coverage with a Buy rating and target price of INR297 (20x CY19E EPS), implying 19% upside.
Consolidation done; all set for growth
In the last three years since it acquired MACA, CIE embarked upon restructuring and consolidation of operations under MACA. With phase-1 of consolidation largely done, MACA is now focused on growth in phase-2. In the India business, it is targeting organic as well as inorganic growth (to gain access to key PV customers in India, plastic and aluminum technologies, and SE Asian markets). In the Europe business, it would be investing selectively for growth. MACA is CIE's vehicle to expand in SE Asia and forgings technology worldwide. To achieve these objectives, CIE has implemented a new organization structure at MACA, headed by a new CEO from CIE, supported by key CIE senior executives in key positions.
India (ex BFL) – focused on fast-growing segments
MACA's India (ex BFL) business is focused on fast-growing/recovering segments of UVs, LCVs and Tractors, which contribute nearly 2/3rd of revenue. Top-2 customers, M&M and Tata Motors, which contribute over 55% to revenue (ex BFL), are witnessing good recovery in volumes, driven by product lifecycle as well as rural recovery (for M&M). MACA's India (ex BFL) operations would also benefit from (a) problem with debt-laden Amtek Auto, (b) new products/customers,(c) focus on product-process-location optimization, and (d) focus on increasing exports. We estimate 8.8% CAGR in India (ex BFL & gears) operations over CY17-19. Benefit of operating leverage and improvement in mix would drive ~310bp expansion in EBITDA margin to ~12.7% by CY19. The share of India business is likely to grow from 38% to 48% by CY19, with the BFL acquisition driving higher growth and margin expansion.
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