30% rise in Ebitda expected in FY20e from AEL buy; outlook is bright in medium term; ‘Buy’ maintained.
Mahindra CIE Automotive (MACA) has approved the purchase of a private company named Aurangabad Electricals (AEL), a tier-1 supplier of aluminium die-casted components for two-wheelers and passenger vehicles.
Our estimates (derived from MACA’s suggested deal multiple of 6.7x EV/Ebitda) suggest AEL acquisition is ~15-16x FY20e EPS. The AEL valuations thus appear reasonable to us considering the implied controlling premium for the transaction and the key technology addition AEL brings to MACA. On the balance sheet side, our initial workings suggest a likely creation of `4-bn goodwill, which is likely to depress RoCEs in initial years. We have not yet introduced financials from AEL in our model; MACA is available at an attractive FCF yield of 5.2% CY18. We maintain our Buy rating on the stock and value it at 18x CY20e EPS, arriving at a target price of `340/share.
Deal and funding highlights
MACA will pay a net equity consideration of Rs 8.3 bn on a cash basis. As per MACA, the deal is valued at 8.7x/6.7x EV/Ebitda FY19e/FY20e respectively. It implies an expectation of 30% y-o-y Ebitda increase from AEL in FY20e.
Highlights of AEL
AEL is a crucial supplier to a number of domestic and global two-wheeler and passenger car OEMs and tier-1 companies. It is likely to report revenues of `8.6 bn (up 34% y-o-y) in FY19. Its operating performance is reasonable with Ebitda margin at 12% in FY19e, RoCE at ~21% in FY18e.
MACA’s earnings performance over past two years has been based on new customers and new products while improving plant efficiencies along with seamless integration of acquired inorganic assets (earlier Bill Forge and now AEL). We believe growth prospects will remain strong over the medium to long term, aided via both organic and inorganic routes . MACA’s valuations could eventually start reflecting its MNC parentage as its performance consistency continues.