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Emkay Global Financial Services Ltd. 1



Mahindra CIE Automotive
Strong parentage; scalable business model
May 05, 2014
Rating
Not Rated
CMP
Rs112
Target Price
NA
EPS Chg FY14E/FY15E (%) NA
Target Price change (%) NA
Nifty 6,710
Sensex 22,480
Price Performance
(%) 1M 3M 6M 12M
Absolute 71 146 150 220
Rel. to Nifty 64 128 129 167
Source: Bloomberg
Relative price chart
30
49
68
87
106
125
Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14
Rs
-20
18
56
94
132
170 %
Mahindra CIEAutomotive (LHS) Rel to Nif ty (RHS)

Source: Bloomberg
Stock Details
Sector Auto Ancillaries
Bloomberg MACA IB
Equity Capital (Rs mn) 3250
Face Value(Rs) 10
No of shares o/s (mn) 325
52 Week H/L 126/ 35
Market Cap (Rs bn/USD mn) 11/ 184
Daily Avg Volume (No of sh) 413,022
Daily Avg Turnover (US$mn) 0.6
Shareholding Pattern (%)
Mar'14 Dec'13 Sep'13
Promoters 79.4 79.5 52.9
FII/NRI 3.4 5.1 6.8
Institutions 4.0 0.5 0.5
Private Corp 4.3 4.3 13.6
Public 8.9 10.7 26.2

Source: Bloomberg

Ronak Sarda
ronak.sarda@emkayglobal.com
+91-22-66121281

Kaushal Maroo
kaushal.maroo@emkayglobal.com
+91-22-66121252
Global auto ancillary player in the making with strong
promoter backing and a larger product portfolio
CIE has a strong track record turning around operations post
acquisition with intense cost focus
Key focus will be on >600bps margin expansion to 8-10% over
next two years at Mahindra Forgings Europe operation
Global player in the making, with strong promoter backing
Mahindra CIE, post merger, becomes one of the largest auto ancillary suppliers, with a
turnover of ~US$1bn. It has a diversified product portfolio for commercial and
passenger vehicles, spanning across Europe and India. With CIE Automotive, the
company now has the backing of a successful global auto ancillary parent, a larger
product portfolio and enhanced ability to make investments to further reap benefits of
the larger scale.
Phase 1: Turnaround at Mahindra Europe and new products in India
The companys initial focus will be to turnaround Mahindra Forgings Europes (MFE)
operation, which has been impacted by high operating costs. CIEs objective is to
improve its profitability in line with its own operations (operating margin improvement
from 2% in FY14 to 8-10%) over the next 2-3 years. It also bodes well for turnaround
possibilities, since CIE is well known for its intense cost focus and decentralised
management. The steps being undertaken are as follows:
Improve productivity: The company has increase productivity by 25-30% at MFE by
reducing machine setup time and the frequency of the machine setup
Power subsidy: High power cost (8% of sales) in Germany was one of the key
reasons for sharp jump in manufacturing costs. The govt has announced an annual
recurring power subsidy of EUR 5mn, which will lower costs by 150bps
Lowering employee cost: It intends to lower employee cost (~30% of sales) by
replacing temporary employees to increase automation and outsourcing of smaller
components
Marketing and sourcing benefits for the combined European operations
Demand/economic recovery in both Europe and India can enhance the earnings
leverage even further. Key global customers (Daimler, Volvo, Scania, etc) have
guided for flat to positive growth in 2014
India ops will offer new products from CIE for Indian PV OEMs. Further, it will
leverage CIEs present relationships with global OEMs in India to offer new products.
Phase 2: Future plans to scale operations
CIE intends to bring all its forging businesses (across Brazil, Mexico and China) under
Mahindra CIE.
The company plans to bring new products in the plastics and aluminium segments at
India operations
The company will also explore new geographies across Asia to expand its footprint in
the continent through both organic and inorganic routes
Outlook and valuation
Economic recovery in Europe can provide delta to operating performance in near term
leading to re-rating, the revenue profile however remains skewed to Europe which
contributes >65% to total revenues. Assuming domestic revenue growth of 10-12% CAGR,
MFE growth of 4-6% CAGR (Euro terms) and CIE Forgings of 6% CAGR (Euro terms)
over next two - three years, the company can achieve revenues and EBITDA of Rs 64.2bn
and Rs 7.0bn in FY16 from Rs 50bn and Rs 3.3bn last year. At CMP of Rs 112, stock is
trading at 0.9 FY14P EV/sales and 12.3FY14P EV/EBITDA and FY16E 0.6 EV/sales and
5.8 EV/EBITDA.
Note: Consolidated financials will be available post conclusion of the merger transaction
Mahindra CIE Automotive Visit Note


Emkay Research May 05, 2014 2
Exhibit 1: Mahindra Systech & CIE Automotive merger structure and combines entity

Source: Company
Exhibit 2: Combined forging segment product portfolio

Source: Company

Exhibit 3: Forgings contributed 65% of FY13 revenues

Composites
1%
Casting +
magnet
9%
Gears
10%
Stampings
15%
Forgings
65%

Source: Company
Exhibit 4: EBITDA contribution is ~50% due to lower contribution
from MFE (FY13)
Forgings
54%
Stampings
21%
Gears
16%
Casting +
magnet
8%
Composites
1%
Source: Company

Mahindra CIE Automotive Visit Note


Emkay Research May 05, 2014 3

Exhibit 5: Europe accounts for ~65% of revenues

0%
20%
40%
60%
80%
100%
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Global sales Domestic sales

Source: Company
Exhibit 6: High operating costs at MFE results in subdued EBITDA
margin performance
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15
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(%)

Source: Company
Exhibit 7: CIE Automotive focus on financial strength

Source: Company
Mahindra CIE Automotive Visit Note


Emkay Research May 05, 2014 4
Exhibit 8: Revenue & EBITDA Snapshot
FY13 FY16E Comment
Sales
M&M Forgings 22,164 29,758
MFE 17,921 24,997
4-6% CAGR in Euro terms driven by
revival in German HCV segment
MF India 4,243 4,762
10-12% CAGR driven by new
launches; upside in case of sharp
recovery in domestic PV segment
CIE 10,424 12,415 6% CAGR in Euro terms
Hinoday 4,788 5,899
Composites 503 620
Gears 1,061 1,331 New plant commissioned
Metalcastello 4,022 5,423
MUSCO 7,664 8,841
Total 50,626 64,287

EBITDA
M&M Forgings 430 3,119
MFE (68) 2,500
Expect margins to improve to 8%
from -ve in FY13
MF India 498 619
CIE 1,390 1,738 Margin to remain flat at 14%
Hinoday 257 354
Composites 19 31
Gears 99 160
Metalcastello 449 542
MUSCO 691 1,061 Improvement in operating profitability
Total 3,335 7,005

EBITDA margin (%)
M&M Forgings 1.9 10.5
MFE (0.4) 10.0
MF India 11.7 13.0
CIE 13.3 14.0
Hinoday 5.4 6.0
Composites 3.8 5.0
Gears 9.3 12.0
Metalcastello 11.2 10.0
MUSCO 9.0 12.0
Total 6.6 10.9
Source: Company, Emkay Research
Exhibit 9: Valuation summary
Sales EBITDA EV/EBITDA EV/Sales ROE ROCE
FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY15E
M&M CIE # 59,788 64,287 5,884 7,005 8.2 5.5 0.8 0.6 NA NA
Motherson Sumi 349,683 404,433 36,695 46,932 10.5 8.2 0.5 0.4 36.1 30.7
Apollo Tyres 141,838 158,414 18,408 20,542 5.4 4.9 0.7 0.6 18.3 19.7
Bosch * 98,636 115,827 15,776 19,532 19.2 15.5 3.1 2.6 15.8 19.3
Bharat Forge * 66,229 75,073 11,781 13,388 9.8 8.6 1.7 1.5 18.8 16.0
Exide 65,765 75,669 9,197 10,963 10.4 8.5 1.5 1.3 15.0 20.9
Amara Raja 41,071 48,446 6,590 7,770 10.8 9.4 1.8 1.5 27.7 35.0
Source: Company, Bloomberg, Emkay Research # - Not rated; * - Consensus estimate
Mahindra CIE Automotive Visit Note


Emkay Research May 05, 2014 5

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