Automobiles Sep 11, 2019

Mahindra CIE
India Research

Bloomberg: MACA IN
COMPANY UPDATE Reuters: MAHN.NS BUY
What is Holding Back MHCIE Stock? Recommendation
CMP: Rs157
The stock price of Mahindra CIE (MHCIE), MNC auto ancillary Company, has Target Price: Rs244
witnessed huge underperformance despite improvement in it’s A) Fundamentals Previous Target Price Rs244
(Higher Earnings, Lower leverage, improving Margins etc) B) MNC status and C) Upside (%) 55.4%

superior corporate governance. The stock is quoting at almost 50% discount to Stock Information
sectoral valuations. We are perplexed by the scenario and tried to analyze the Market Cap. (Rsbn / US$ mn) 60/830
reason behind the same in the present research note. 52-week High/Low (Rs) 302/135
3m ADV (Rsmn /US$ mn) 28/0
MHCIE which came into existence in December 2014 with strategic alliance Beta 1.1
between Mahindra & Mahindra and CIE Automotive Spain (CIE). Post merger, Sensex/ Nifty 37,145/11,003
MHCIE, has reported remarkable improvement in its financial performance over Share outstanding (mn) 379

FY15-CY18 which is as follows. Stock Performance (%)

1M 3M 12M YTD
Cumulative performance FY15-CY18 Absolute (8.5) (35.4) (45.6) (38.9)
Rel. to Sensex (7.4) (31.1) (43.8) (40.7)
 Sales up b y 44% (Rs 55.7bn to Rs80.3bn)
 EBITDA margins up by 518bps (7.9% to 13%) Performance
 PAT up by 271% (Rs 1.5bn to Rs5.5bn) Mahindra CIE
 ROE has improved from 11.6% to 13.7% 41,500 350
39,500
300
 Net Debt/ Equity down from 0.8 to 0.3 37,500
35,500 250
33,500
Despite a strong operating performance, MHCIE stock continues to attract low PE 200
31,500
multiple. We also believe, some of following unique advantages MHCIE carries 29,500 150
Aug-18

Aug-19
Mar-19
Nov-18
Dec-18
Oct-18

Feb-19

Apr-19
Jun-19
Jul-19
with itself is not being reflected in the current stock price.

MNC Parentage – MHCIE is subsidiary of the CIE Automotive group of Spain Sensex (LHS) Mahindra CIE

(56% stake). CIE is an European industrial group specialized in supplying auto Source: Bloomberg
components to the automotive market. It has presence across the globe and is listed
on the stock exchanges in Madrid and Bilbao.

Unique Product Portfolio in India – MHCIE is only auto Component Company in

India which has a presence across Forging, Casting, Stamping and Magnetic
Products. Recently it has also entered into Aluminum Die Casting and Machining
and also plans to enter into Plastic segment going forward.

Key Financials:
Y/E (Rs mn) CY16 CY17 CY18 CY19E CY20E
Net Sales 53,198 65,709 80,315 87,950 94,965
EBIDTA 5,311 9,648 10,510 11,416 12,610
EBIDTA Margin (%) 10.0 14.7 13.1 13.0 13.3
PAT 1,780 5,240 5,485 5,662 6,159
YoY (%) 15.2 194.4 4.7 3.2 8.8
EPS (Rs) 4.7 13.8 14.5 14.9 16.3 Analysts Contact
ROCE (%) 6.4 12.5 11.4 10.4 10.5 Mahesh Bendre
ROE (%) +91 22 6176 0828
6.8 15.0 13.7 12.4 11.9
mahesh.bendre@karvy.com
PE (x) 33.3 11.3 10.8 10.5 9.7
Source: Karvy Stock Broking

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 Sep 11, 2019

Mahindra CIE

Corporate governance: MHCIE has one of the best corporate governance practices in
terms of dealing with various stake holders (adequate disclosures and transparent
communications).

EV Beneficiary : CIE automotive is currently working with major international OEM’s

to develop their electric vehicles program (EV component - Battery module, Inverter
(DC/AC), Converter (DC/AC), Charger, Charging port, Battery cooling etc). We believe
MHCIE is well placed to benefit from CIE knowhow regarding the development of
new components for electric vehicles for the car market in India.

Consolidation Trigger: Also, CIE automotive plans to merge its other Forging Plants
based in ROW (China/Brazil/Mexico) to MHCIE India over the next 18 months.

Based on our own analysis and feedback from various institutional

investors, we gathered following Concerns emanating from investor
community:

Dependence on Europe and Mahindra Group – Many investors are concerned with
MHCIE’s high dependence on its European business (~55% of sales) and M&M Group
(~16% of sales).

Inorganic Growth Strategy – Investors are also apprehensive about inorganic growth
strategy adopted by MHCIE Management. Growth through acquisitions brings in
additional risk of integration related issues and Goodwill in the Balance sheet. High
goodwill on balance sheet restricts meaningful ROE and ROCE expansion in the
medium term.

Business Structure – CIE holds ~56% stake in the Company while M&M holds ~11%
stake. Despite CIE being a majority shareholder, many investors believe that M&M still
has lot more hold on the Company as it carries Mahindra Brand Name and top
hierarchy of the Management.

Non Payment of Dividend: Some investors have also raised the concerns on non-
payment of dividend by the Company.

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 Sep 11, 2019

Mahindra CIE

What we think…
Inorganic Growth Strategy: CIE, Parent company of MHCIE has grown through a
combination of organic and inorganic route. Since 1996, CIE has successfully done
more than 70 M&A in Europe, North America, South America and Asia. Even the
international investors have appreciated CIE’s efforts as CIE’s stock listed on Madrid
stock exchange has appreciated by 15% CAGR over the last five years. Meanwhile, in
India, MHCIE has also successfully integrated two acquisitions. Given the experience
and track record of CIE, we believe MHCIE is likely to be highly successful in its
strategy of growth through inorganic opportunity.

Dependence on Europe and Mahindra Group: Over the last three years, European
business contribution to MHCIE’s sales has fallen from ~68% to ~55%. We foresee this
contribution to decline further over the next 2-3 years as the Company scales up its
Indian operations through organic and inorganic route. Also M&M’s contribution to
MHCIE’s overall sales stands at ~16% and thus does not drive overall sales of MHCIE
in a major way.

Non Payment of Dividend: As per the Management, MHCIE needs significant funds
for its organic and inorganic growth plans in India. Present Indian FDI regulations do
not permit MHCIE (Indian Company owned by foreign majority) to acquire Indian
companies through domestic borrowing. Hence, MHCIE has not been able to pay any
dividend to shareholders. However, management is hopeful of finding solution to this
problem and is likely to become a dividend paying company in the medium term.

Business Structure: We understand, going by the CIE’s track record and its
Management intentions, there is a high probability that CIE is likely to take full control
of MHCIE in terms of Management bandwidth over the next 12-18 months.

Our View on Stock

Valuations Dearth Cheap: Recommend BUY

In spite of muted growth expectation of 8.7% sales CAGR and 6% PAT CAGR over
CY18-20, the MHCIE stock, based on CY20 estimates is quoting at attractive valuations
of PE of 9.7x, EV/EBITDA of 5.0x and P/B of 1x. The stock is quoting at almost 50%
discount to sectoral valuations (Refer page No.5) which we believe is unjustified. The
Company is expected to generate Rs19bn operating cash over CY18-20E. We believe,
the Company has completed its consolidation phase and likely to enter into growth
phase through organic and inorganic route. Given the stable business growth outlook,
improvement in balance sheet and decent return ratios, we believe stock is due for
rerating. We maintain our "BUY" rating on the stock with a price target of Rs. 244 (PE
of 15xCY20E earnings).

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 Sep 11, 2019

Mahindra CIE

Segment wise Revenue:

Business Division sales (Rs mn) CY19E Sales Contribution

A) Mahindra (India) 12,867 15%

a) Other Clients (Non India) 13,617
b) Bill Forge (Forging) 8,000
c) Aurangabad Electrical 6,440
B) Non Mahindra (India) 28,056 32%

C) European Operations 47,026 53%

Total Consolidated Sales 87,950

Stock Price Performance over the 3 years:

12500 350

11500
300
10500

9500 250

8500
200
7500

6500 150
06-Dec-17 06-Mar-18 06-Jun-18 06-Sep-18 06-Dec-18 06-Mar-19 06-Jun-19 06-Sep-19

Nifty Auto (LHS) Close Mahindra CIE Close

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 Sep 11, 2019

Mahindra CIE

Relative Valuation

Exhibit 1: Competitive Landscape

Stock Price Mkt Cap

Company (Rs) (Rs bn)

*Mahindra CIE 157 60

Minda Corp 98 22.1

Minda Industries 325 85.2

Amara Raja Batteries 640 109.2

Endurance Technologies 989 139.1

Exide Industries 181 154.1

Bharat Forge 400 186.3

Bosch 14,121 416.5

Source: Karvy Stock Broking, Bloomberg

Exhibit 2: Financial Matrix

Sales (Rs mn) EBITDA (%) PAT (Rs mn)

Company FY20E FY21E FY20E FY21E FY20E FY21E

*Mahindra CIE 87,950 94,965 13.0 13.3 5,662 6,159

Minda Corp 32,204 37,618 9.9 10 1,629 2,035

Minda Ind Industries 64,348 76,216 12.2 12.6 3,270 4,313

Amara Raja Batteries 72,839 80,552 15 15.1 5,543 6,203

Endurance Technologies 80,110 87,469 14.5 14.3 5,156 5,679

Exide Industries 1,32,531 1,41,467 12.2 12.4 9,198 9,862

Bharat Forge 58,150 66,995 27.8 28.0 8,331 9,978

Bosch 1,22,349 1,42,624 17.4 16.9 15,393 16,976

Source: Karvy Stock Broking, Bloomberg

Exhibit 3: Valuation Matrix

P/E (x) EV/EBITDA (x) P/B (x) ROE (%)

Company FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E

*Mahindra CIE 10.5 9.7 6.1 5.0 1.2 1.1 12.4 11.9

Minda Corp 13.4 10.5 7.5 6.4 1.7 1.5 13.5 15.0

Minda Industries 27.5 20.0 12.3 10.1 4.2 3.6 17.0 18.5

Amara Raja Batteries 19.7 17.6 10.0 8.9 2.9 2.6 15.6 15.6
Endurance Technologies 27.0 24.5 11.8 10.6 4.7 4.1 18.7 19.4

Exide Industries 17.2 15.8 8.68 8.05 2.3 2.1 14.1 13.9
Bharat Forge 22.4 18.7 12.6 10.6 3.0 2.7 14.5 15.2

Bosch 28.1 24.5 18.9 16.7 4.1 3.7 15.7 15.9

Average 20.7 17.7 11.0 9.5 3.0 2.7 15.2 15.7
Source: Karvy Stock Broking, Bloomberg
Note: * Calendar Year Company

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 Sep 11, 2019

Mahindra CIE

Exhibit 4: Jun’19 Quarterly Performance (Consolidated)

Quarterly Results (Rs Mn) Q2CY19 Q2CY18 YoY% Q1CY19 QoQ%
Net Sales 21,420 20,789 3.0% 21,744 -1.5%
Cost of materials consumed 10,004 9,988 0.2% 10,175 -1.7%
Changes in inventories (141) (616) -77.1% (30) 364.2%
Staff Cost 3,648 3,475 5.0% 3,559 2.5%
Other expenditure 5,293 5,120 3.4% 5,214 1.5%
Total Expenditure 18,804 17,967 4.7% 18,919 -0.6%
EBITDA 2,616 2,822 -7.3% 2,825 -7.4%
Depreciation 844 744 13.4% 740 14.0%
EBIT 1,772 2,078 -14.7% 2,085 -15.0%
Interest 115 239 -51.7% 103 12.1%
Other Income 78 87 -10.8% 148 -47.7%
PBT 1,734 1,926 -10.0% 2,130 -18.6%
Tax 472 537 -12.1% 593 -20.4%
PAT 1,262 1,389 -9.1% 1,537 -17.9%
Margins (%) Q2CY19 Q2CY18 YoY(bps) Q1CY19 QoQ(bps)
Gross Margins 54.0% 54.9% (96) 53.3% 61
EBITDA 12.2% 13.6% (136) 13.0% (78)
PAT 5.9% 6.7% (79) 7.1% (118)
Tax Rate 27.2% 27.9% (66) 27.8% (62)
Source: Company, Karvy Stock Broking

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 Sep 11, 2019

Mahindra CIE

Exhibit 5: Jun’19 Quarterly Performance (Consolidated)

Key Financials (Rs mn) Q2CY19 Q2CY18 YoY% Q1CY19 QoQ%
MHCIE India Sales 10,240 8,939 14.6% 9,105 12.5%
MHCIE Europe Sales 12,153 12,164 -0.1% 13,805 -12.0%

Subsidiaries Sales (Euro mn) 153 152 0.6% 172 -11.2%

Consolidate sales (Rs Mn) 22,393 21,103 6.1% 22,910 -2.3%

MHCIE India EBITDA 1,214 1,256 -3.3% 1,296 -6.3%

MHCIE Europe EBITDA 1,480 1,653 -10.5% 1,677 -11.7%
Consolidate EBITDA 2,694 2,909 -7.4% 2,973 -9.4%

MHCIE India EBITDA Margins 11.9% 14.1% (220) 14.2% (238)

MHCIE Europe EBITDA Margins 12.2% 13.6% (141) 12.1% 3
Consolidate EBITDA Margins 12.0% 13.8% (175) 13.0% (95)

MHCIE India EBIT 795 957 -17.0% 992 -19.9%

MHCIE Europe EBIT 1,055 1,216 -13.2% 1,241 -15.0%
Consolidated EBIT 1,850 2,173 -14.9% 2,233 -17.2%

MHCIE India EBIT Margin 7.8% 10.7% (295) 10.9% (313)

MHCIE Europe EBIT Margin 8.7% 10.0% (132) 9.0% (31)
Consolidated EBIT Margin 8.3% 10.3% (206) 9.8% (152)

MHCIE India EBT 773 842 -8.2% 990 -21.9%

MHCIE Europe EBT 961 1,102 -12.8% 1,141 -15.8%
Consolidated EBT 1,734 1,944 -10.8% 2,131 -18.6%

MHCIE India EBT Margin (%) 7.5% 9.4% (187) 10.9% (332)
MHCIE Europe EBT Margin (%) 7.9% 9.1% (115) 8.3% (36)
Consolidated EBT Margin (%) 7.8% 9.2% (149) 9.3% (158)
Source: Company, Karvy Stock Broking

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 Sep 11, 2019

Mahindra CIE

Financials
Exhibit 6: Profit & Loss Statement
Y/E Mar (Rs mn) CY16 CY17 CY18 CY19E CY20E
Net sales 53,198 65,709 80,315 87,950 94,965
YoY (%) 33.0 23.5 22.2 9.5 8.0
Raw Material 21,443 28,162 36,316 40,340 43,558
Employee Cost 11,025 11,527 13,297 14,435 15,397
SGA cost 15,419 16,372 20,192 21,760 23,400
Total Expenses 47,887 56,061 69,805 76,534 82,355
EBIDTA 5,311 9,648 10,510 11,416 12,610
EBIDTA Margin (%) 10.0 14.7 13.1 13.0 13.3
Depreciation 2,325 2,683 2,867 3,402 3,902
EBIT 2,986 6,965 7,643 8,014 8,708
Interest 594 510 502 436 347
Other Income 314 268 387 511 438
PBT 2,706 6,723 7,528 8,089 8,799
(-) Tax 926 1,483 2,043 2,427 2,640
Tax/ PBT 34.2 22.1 27.1 30.0 30.0
PAT 1,780 5,240 5,485 5,662 6,159
YoY (%) 15.2 194.4 4.7 3.2 8.8
Source: Company, Karvy Stock Broking

Exhibit 7: Balance sheet

Balance Sheet CY16 CY17 CY18 CY19E CY20E
Equity Capital 3,781 3,784 3,788 3,788 3,788
Reserves 28,882 33,372 39,103 44,765 50,925
Net worth 32,663 37,156 42,891 48,553 54,713
Total Loans 13,621 11,969 16,134 13,134 10,134
Def Tax Liability (1436) (1630) (1565) (1565) (1565)
Total Liabilities 44,848 47,495 57,459 60,122 63,281
Gross Block 23,458 27,600 31,294 40,047 43,547
Acc. Depreciation 5,778 8,586 11,454 14,855 18,757
Net Block 17,680 19,014 19,840 25,192 24,790
CWIP 967 602 960 960 960
Investments 1,045 2,006 8,428 2,428 2,428
Goodwill 27,055 28,489 29,212 32,715 32,715
Inventories 8,352 9,898 12,286 13,336 14,400
Debtors 5,219 5,984 7,414 7,336 7,921
Cash 981 719 1,127 515 4,212
Other Current Assets 1839 3487 1410 3064 3308
Loans and Advances 2,439 2,431 1,418 1,553 1,676
Current Assets 18,830 22,520 23,655 25,804 31,518
Current Liabilities 17,907 21,492 20,699 22,666 24,474
Provisions 2,821 3,644 3,937 4,311 4,655
Net Current Assets -1,899 -2,617 -981 -1,173 2,389
Total Assets 44,848 47,495 57,459 60,122 63,281
Source: Company, Karvy Stock Broking

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 Sep 11, 2019

Mahindra CIE

Exhibit 8: Cash Flow Statement

Y/E Mar (Rs mn) CY16 CY17 CY18 CY19E CY20E
Net profit 1,690 5,172 5,485 5,662 6,159
Depreciation 2,325 2,683 2,867 3,402 3,902
Deferred tax 180 217 144 0 0
Change in working cap -3,757 456 -1,228 -419 135
Cash from Operations 439 8,528 7,268 8,645 10,196
Capex -14,726 -5,497 -4,854 -12,256 -3,500
Investments 866 -961 -6,421 6,000 0
Cash from Investments -13,860 -6,459 -11,276 -6,256 -3,500
Free Cash Flow -14,287 3,031 2,413 -3,611 6,696
Equity 10,907 -679 251 0 0
Debt 2,994 -1,652 4,165 -3,000 -3,000
Cash from Financing 13,901 -2,331 4,415 -3,000 -3,000
Net change in cash 480 -262 407 -611 3,696
Opening cash 502 981 719 1,127 515
Closing cash 981 719 1,127 515 4,212
Source: Company, Karvy Stock Broking

Exhibit 9: Ratios
Key Ratios CY16 CY17 CY18 CY19E CY20E
EPS (Rs) 4.7 13.8 14.5 14.9 16.3
Book value (Rs/share) 86.4 98.2 113.2 128.2 144.4
P/E (x) 33.3 11.3 10.8 10.5 9.7
EV/EBDITA (x) 13.4 7.1 6.3 6.1 5.0
P/B (x) 1.8 1.6 1.4 1.2 1.1
EV/Sales (x) 1.3 1.0 0.8 0.8 0.7
ROCE (%) 6.4 12.5 11.4 10.4 10.5
ROE (%) 6.8 15.0 13.7 12.4 11.9
Debt-Equity (x) 0.4 0.3 0.3 0.3 0.1
Gross Asset Turnover (x) 2.7 2.6 2.7 2.5 2.3
Working Capital Days -33 -17 -12 -8 -7
W/C % of sales -5.4% -5.1% -2.6% -1.9% -2%
Source: Company, Karvy Stock Broking

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 Sep 11, 2019

Mahindra CIE

Stock Ratings Absolute Returns

Buy : > 15%
Hold : 5-15%
Sell : < 5%

For further enquiries please contact:

research@karvy.com
Tel: +91-22-61491500

Disclosures Appendix

Analyst certification
The following analyst(s), Mahesh Bendre, who is (are) primarily responsible for this report and whose name(s) is/are
mentioned therein, certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about
the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or
indirectly related to the specific recommendation(s) or views contained in this research report.

Disclaimer
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 Sep 11, 2019

Mahindra CIE

 Associates of KSBL might have managed or co-managed public offering of securities for the subject company or
might have been mandated by the subject
Stock company for any other
Ratings assignment
Absolute in the past twelve months.
Returns
Buy : > 15%
 Associates of KSBL might haveHold received compensation
: from the subject company mentioned in the report
5-15%
during the period preceding twelveSell months from the
: date of
< 5% report for investment banking or merchant
this
banking or brokerage services from the subject company in the past twelve months or for services rendered as
Registrar and Share Transfer Agent, Commodity Broker, Currency and forex broker, merchant banker and
underwriter, Investment Advisory services, insurance repository services, consultancy and advisory services,
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realty services, data processing, profiling enquiries
and related please
services contact:
or in any other capacity.
research@karvy.com
 KSBL encourages independence in research report
Tel: preparation and strives to minimize conflict in preparation
+91-22-61491500
of research report.

 Disclosures
Compensation of KSBL’s Research Analyst(s) Appendix
is not based on any specific merchant banking, investment
banking or brokerage service transactions.
Analyst certification

 KSBL
The following analyst(s),
generally Mahesh
prohibits its Bendre,
analysts,who is (are)
persons primarily
reporting toresponsible
analysts andfor their
this report andfrom
relatives whosemaintaining
name(s) is/are
a
mentioned therein, certify (ies) that the views expressed herein accurately reflect his (their)
financial interest in the securities or derivatives of any companies that the analysts cover. personal view(s) about
the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or
 KSBL related
indirectly to the specific
or its associates recommendation(s)
collectively or views do
or Research Analysts contained
not ownin 1%
thisor
research
more ofreport.
the equity securities of the
Company mentioned in the report as of the last day of the month preceding the publication of the research
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Office No. 701, 7 Floor, Hallmark Business Plaza, Opp.-Gurunanak
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Hospital, Mumbai 400 051 markets. Past
performance is No.31,
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FinancialForward-looking statements
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may be subject toKarvy Stock Broking
change withoutResearch
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from those set&forth
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