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Published on 14/03/2019 11:12:50 AM | Source: ICICI Securities Ltd

Hold Mahindra CIE Automotive Ltd For Target Rs.340 - ICICI Securities

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Mahindra CIE Automotive (MACA) has approved the purchase of a private company named Aurangabad Electricals (AEL), a tier-1 supplier of aluminium die casted components for two wheelers and passenger vehicles.

 

Our view:

Our estimates (derived from MACA’s suggested deal multiple of 6.7x EV/EBITDA) suggest AEL acquisition is ~15-16x FY20E EPS. On initial working, the AEL valuations thus appear reasonable to us considering the implied controlling premium for the transaction and the key technology addition AEL brings to MACA. On the balance sheet side, our initial workings suggest a likely creation of ~Rs4bn goodwill, which is likely to depress RoCEs in initial years. We have not yet introduced financials from AEL in our model; MACA is available at an attractive FCF yield of 5.2% CY18. We maintain our BUY rating on the stock and value it at 18x CY20E EPS arriving at a target price of Rs340/share.

 

Deal and funding highlights:

* As per the transaction details, MACA will pay a net equity consideration of Rs8.3bn on a cash basis. As per MACA, the deal is valued at 8.7x/6.7x EV/EBITDA FY19E/FY20E respectively. It implies an expectation of ~30% YoY EBITDA increase from AEL in FY20E.

 

Key highlights of AEL:

* AEL is a crucial supplier to a number of domestic and global two-wheeler and passenger car OEMs and tier-1 companies, e.g. Bajaj Auto, Ashok Leyland, NidecGPM, Bosch, etc. It employs more than 3,300 employees, is likely to report revenues of ~Rs8.6bn (up 34% YoY) in FY19. Its operating performance is reasonable with EBITDA margin at ~12% in FY19E, RoCE at ~21% in FY18E. It manufactures products via high-pressure die casting (HPDC) as well as gravity die casting processes (GDC). AEL has recently completed its growth capex and we can expect only maintenance spends (4-5% of sales) in the foreseeable future.

* AEL has witnessed strong improvement in EBITDA margins in last few years from ~7% level to ~11.8% currently, driven by new product additions (machined crankcases), increase in exports (turbocharger covers) and introduction of new processes (GDC). AEL has overall capacity of 1,800MT/month across plants in India with ~350MT capacity for GDC while balance is for HPDC.

* The key management personnel of AEL including the erstwhile promoters (Mr. Rishikumar Bagla) will continue to drive the business forward. We believe, going ahead, the key focus areas for MACA will be: a) to grow content per customer with new emission standards coming into effect, b) expand exports via new customers and via GDC products, c) generate product, process and business synergies between CIE’s aluminum vertical and AEL.

 

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