Mahindra CIE Automotive Ltd (MCAL) is head quartered in Mumbai and is amalgamated entity between Mahindra group and CIE Automotive after combining their forging and other automotive component businesses. The Company offers forging and casting components to passenger vehicles in India and Supply forging components to commercial and passenger vehicles in international market.
Unique business structure provides an edge over its peer
MCAL is formed by the strategic amalgamation from two automotive conglomerate Mahindra group and CIE Automotive CIE Automotive; an industrial group based in Spain is involved in supplying auto components and subassemblies to the global automotive market. The Company has 80 manufacturing plants across in Europe, USA, Asia and Africa. It has a successful track record of merger and acquisition with almost 70 M&A transactions since 1996. CIE is known for its disciplined investing and stringent return hurdles criteria based entity and has achieved 13% sales CAGR and 15% EBITDA CAGR over CY02-16. The Company remains highly profitable due to its stringent cost controls and plant efficiency gains. Over the last 12 years the company has able to maintain its EBITDA margins in the range of 11.4% - 14.8% (average 14%) despite business volatility.
Niche play provides high growth momentum in the upcoming period
MCAL is a niche service provider and has proven track record in forging and stamping business. It is also one of the few auto-component companies to have consistently sustained double-digit margin even during the FY09 crisis. These are underpinned by CIE’s intense cost focus (surrounding overheads) through decentralized plant management and best-in-class production processes. CIE can help the India business diversify its customer dependence (M&M contributes 50-55% of revenue) and expand its product range (currently much smaller compared to peers like Amtek and JBM). MCAL can leverage CIE’s global OEM relationships (with VW, BMW and Ford) for Indian supplies and bring in CIE’s forgings and stampings products into India. We believe new relationships/products to start contributing to revenues from FY18 onwards and constitute ~21% of India revenue by FY20.
Robust Financials makes MCAL lucrative
Consistent growth in the top line also backed by operating margin improvement makes Mahindra CIE Automotive more lucrative. Consolidated EBITDA margins have improved to 12% in FY16 from 8.3% in FY12. This shows that company has improved in operating efficiency. Net profit has also improved to 514 Mn from the loss of 493 mn. We believe that this will create a great opportunity for the investor for longer term horizon.
At CMP of `241, MCAL is trading at 2.7x at its FY17 BV of 86.4 which is at an attractive valuation. With 20% sales CAGR, strong margin improvement and strong Business perspectives, We expect stock to trade at 3.2x its FY17E price to book value of `92.8. We assign a BUY rating on the stock with a price target of `297 in next 12 months which is more than 23% upside from current levels.
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