MOSL: MAHINDRA CIE (INITIATING COVERAGE)-All set for growth phase-Benefits of consolidation + operating leverage to drive ~29% EPS CAGR

​MAHINDRA CIE (INITIATING COVERAGE): All set for growth phase; Benefits of consolidation + operating leverage to drive ~29% EPS CAGR

(MACA IN, Mkt Cap USD1.5b, CMP INR250, TP INR297, 19% Upside, Buy)

• Mahindra CIE (MACA) is a multi-technology automotive components supplier, with annual revenue of INR53b in CY16. It is one of the top manufacturers of forging parts in India (leader in crankshafts and stub axles) and the EU. India contributes 38% of MACA’s overall business, while the EU contributes the rest. It caters to top customers like Maruti, M&M, Tata Motors and Hero Moto Corp in India. MACA acquired Bill Forge (BFL) in India at INR13b in 2016, enabling it to diversify further.
  
• MACA is all primed for a growth phase, after three years of consolidation. We believe all ingredients are in place for sustained growth: (a) India business high dependence on fast growing segments, (b) scope to add customers in Metalcastello and focus on value add at MFE, (c) limited growth capex, (d) supportive parent, and (e) focused M&A strategy.
  
• A strong, focused and disciplined parent, CIE has instilled financial discipline and high focus on delivering value-accretive growth. MACA would play an important role in CIE attaining its 2020 targets of doubling profits and RoNA of 20-25%.
  
• We estimate consolidated revenue CAGR of ~8% over CY17-19E, EBITDA margin expansion of ~260bp to ~15.1% by CY19E and EPS CAGR of ~29%. Strong earnings growth and limited capex (5-6% of sales) would drive improvement in capital efficiencies (RoEs to improve 630bp to 12.9%).
  
• We initiate coverage with a Buy rating and target price of INR297 (20x CY19E EPS), implying 19% upside.