‘Buy’ Mahindra CIE Automotive: Eighth straight quarter of a beat

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Published: February 26, 2019 12:37:18 AM

MACA India’s topline grew 15% y-o-y despite 2% y-o-y decline in production volumes of its key customers.

Volumes were the main driver of European business topline growth.

Mahindra CIE Automotive (MACA) has now clocked its eighth straight quarter of earnings beat, a far cry from the downbeat earnings of CY16. Investors have since rewarded MACA with 40% outperformance vis-à-vis the NSE Auto Index benchmark. However, with 5.6% trailing FCF yield, we still find this stock a compelling portfolio addition. Q4CY18 consolidated revenues grew 17% y-o-y to Rs 18.7 bn while consolidated Ebitda came in 80bps above our estimate at Rs 2.7 bn (17% y-o-y growth) with margin at 14.7% (flat y-o-y). India revenues grew 15% y-o-y to Rs 7.6 bn and margin at 14.9% was 242bps y-o-y higher owing to success in processes improvement initiatives.

Europe revenues grew 19% y-o-y (buoyed 7% y-o-y by forex translation impact) driven by ramp-ups in new plant in the company’s European gears entity (Metalcastello) even as the PV forgings segment was challenged by WLTP issues. Europe’s Ebitda margin surprised positively, increasing 220bps q-o-q to 14.2%. Overall, CY18 adjusted PAT grew 50% y-o-y to Rs 5.5 bn.

Investments to drive India growth
MACA India’s topline grew 15% y-o-y despite 2% y-o-y decline in production volumes of its key customers. Capacity utilisation in India is 80%; hence there is headroom for growth.

Europe business continues to deliver
Volumes were the main driver of European business topline growth. Heavy truck forgings business benefitted from key customer (Daimler) outperformance while the investment in Lithuania crankshaft line led to an increase in revenues.

Delivery makes valuation alluring
MACA’s earnings performance over last two years has been based on new customers and new products, improvement in plant efficiencies and seamless integration of acquired inorganic assets (Bill Forge). We believe, growth prospects remain strong both from organic and inorganic routes. MACA’s valuations could eventually start reflecting its MNC parentage as its performance consistency continues. The stock is available at FCF yields of 5.6/6.5% CY18/19E. We maintain our Buy rating and value stock at 18x CY20E EPS (earlier: 20x CY19E EPS) arriving at a target price of Rs 340/share (earlier Rs 344).

 

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