MOSL: MAHINDRA CIE (Buy)-Weakness across businesses-expects stability in coming quarters
MAHINDRA CIE: Weakness across businesses; expects stability in coming quarters
(MACA IN, Mkt Cap USD1.1b, CMP INR195, TP INR262, 34% Upside, Buy)
- net sales grew ~3% YoY to ~INR21.4b (like-to-like decline of ~7% YoY) in 2QCY19, driven by consolidation of Aurangabad Electric (AEL). EBITDA margin shrank 140bp YoY (-80bp QoQ) to 12.2% (our estimate: ~13.2%). Adj. PAT declined ~9% YoY to ~INR1.3b (our estimate: ~INR1.5b).
- India business revenue grew ~12% YoY to INR9.7b, driven by AEL consolidation. On a like-to-like basis, revenue was down ~13% YoY compared to ~15% YoY production decline for key customers. PBIT margin contracted 280bp YoY (-340bp QoQ), partly due to AEL consolidation and operating deleverage.
- EU business revenue declined ~2% YoY to INR11.7b (flat growth on CC basis), impacted by lower EU PV and CV volumes. PBIT margin shrank ~110bp YoY (-30bp QoQ) to 9% due to operating deleverage.
- Key takeaways from the call: (a) MACA expects a recovery in India business margins, led by cost management and ramp-up at Bill Forge Mexico. (b) Impact of EVs on 2W/3W would be only on AEL (~10-15% of AEL revenue or ~3% of overall India revenue). (c) AEL's medium-term focus is on entering PV segment, exports, and expanding margins to ~15% (from ~11.2% in 2QCY19). (d) Capacity utilization at ~70% in India and 80-85% in EU. (e) Europe business focus is on maintaining profitability in a weak market environment. The company expects EU PV and CV volumes to stabilize at 2Q level.
- Valuation view: We cut our EPS estimate by 9-11% to factor in the weakness in both India and EU. Cyclical slowdown notwithstanding, MACA's growth story is on track, driven by its organic initiatives (new products/customers) and M&A focus. More importantly, under CIE's parentage, MACA has been able to improve its efficiencies, cut cost and improve profitability. The stock trades at 12.8x/11.1x CY19/20E consol. EPS. Maintain Buy.
Mahindra CIE Automotive Limited is an auto components supplier with presence in many technologies, which include forgings, castings, stampings, magnetic products and composites. The Company is focused on the automotive market, including cars, utility vehicles, commercial vehicles and tractors. The Company's Forgings business offers crankshafts, stub axles, forged and machined parts, front axle beams and steel pistons, flashless near nett forgings and forged steel parts; Stampings business offers sheet metal stampings, components and assemblies; Castings business offers turbocharger housings, axle and transmission parts; Magnetic Products business offers soft and hard magnets, and magnetic induction lighting; Composites business offers compounds, components, and products, and Gears business offers engine gears, timing gears, transmission gears, transmission drive shafts and crown wheel pinion. It operates in India, Italy, Spain, Lithuania, Germany and the United Kingdom.
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