Mahindra CIE’s (MACA) Q3CY16 results were below estimates due to muted revenue growth (-1% y-o-y) coupled with weak margin performance. Consolidated Ebitda margin at 11.1% (still below peak of 11.6%) was hit by higher costs on Jeco plant closure; the management expects benefits of the plant closure to reflect from CY17. At the analyst meet, the management highlighted its growth strategy to be executed under the new CEO. We turned positive on MACA post the recent acquisition of Bill Forge (a strategic fit). We largely maintain our Ebitda estimates and Buy rating with target price of R211 (10x June CY18E EV/E).
Takeaways from analyst meet
Growth strategy 2017-20: The company highlighted that 2014-16 was period of consolidation for MACA, and the growth strategy for next 4 years will focus on (i) introducing new products (aluminum, plastics); (ii) increasing exports from India; and (iii) capitalising on the synergies from acquisition of Bill Forge. The strategy will be executed under the new CEO Ander Arenaza, who comes with credible experience managing operations at CIE global. He believes that MACA operations are still running below expectation, and has already chalked out steps to improve productivity and reliability. CIE has outsourced certain supplies to MACA, which has led to new orders in exports.
Synergies from Bill Forge acquisition: The acquisition opens new customers for MACA — Hero in 2Ws, NSK in PVs and GKN in export markets. The new plant Bill Forge is setting up in Mexico can be supported from CIE Mexico and MACA’s existing facilities can be used by Bill Forge for expansion.
Merger of global forging plants is still some time away: CIE has indicated that it will put all the existing forging plants (Mexico, Brazil and China) under MACA to consolidate operations. However, the management indicated this will take some time.
India business (33% of CY15 revenue: Revenue at R4 bn (+2% y-o-y, flat q-o-q) was lower than estimate due to deflationary impact.
MFE (41% of CY15 revenue): On subdued revenue growth, the management has maintained its stance of focus on profitability over market share gains in the near term. MFE expects benefits of Jeco plant’s closure to reflect in Q1CY17.