Published on 17/03/2017 2:56:03 PM | Source: Motilal Oswal Securities Ltd
Update On Mahindra CIE Ltd - Motilal Oswal
Focus on M&A for exponential growth
* Focus on consolidation and customer diversification:
After facing bottlenecks at its European operations and slowdown at its key India customers (TTMT and MM) over the past two years, MACA will now look to expand and consolidate its businesses. CY17E growth is likely to be led by order wins from Renault India, Caterpillar (gears business) and Ford Europe (via Bill Forge), as well as 20% growth at Bill Forge (BFL).
* Targeting 20% RoNA:
The main focus is to reach the targets set by its parent CIE Automotive: EBITDA margin of 15%, RoNA of 20% and Europe/India revenue CAGR of 2.2%/10% over CY17-CY20E. n M&A to be important growth driver: In future, 50% of growth is likely to be driven by the inorganic route. The company aims to (1) acquire new and bigger customers (Maruti Suzuki and Hyundai), which bring higher volume with clean balance sheet and good track record, and (2) further diversify and reduce dependence on Indian customers. It is targeting to finance acquisitions via internal accruals, but would be open to raise equity funds for attractive M&A targets.
* BFL operations to normalize and grow:
After demonetization impacted 2W volumes, BFL operations are expected to normalize from 1QFY18, which would imply margin normalizing to ~20% level. BFL is expected to grow at a CAGR of 20% over next two years, led by normal growth in India, gradual ramp-up in Mexico operations and a new export order win from Ford. It is working on means to reduce working capital.
* BFL Mexico plant ramp-up of 30% in first year:
Mexican operations were started for its customer GKN to produce CV joints; it is likely to bag more orders from other customers. The new plant in Mexico is expected to operate at ~30% utilization in first year and 60% in second year. Investment of USD12m to generate USD20m by 2018 in a gradual manner. The target margin is likely to be at 12%. The import tax by the US if it comes is not likely to impact BFL Mexico operations significantly.
* Limited growth capex requirement:
Current utilization level stands at >80% at CIE Spain, 70% at Germany/the UK and 65% in India excluding BFL. Metalcastello (50% utilization) is likely to do incremental business of EUR10m over next two years. Capex is likely to be ~5-6% of sales for next two years. n Content per vehicle reflects weaker mix of customers: The content per vehicle in case of products of MM has gone down from INR20,000/unit of Bolero and INR15-16,000/unit of Scorpio to ~INR12-13,000/unit of KUV1OO.
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