Mahindra CIE Q1 CY18 review: A worthy pick at reasonable valuations

Mahindra CIE, an auto component manufacturer, posted a strong set of numbers for the first quarter of 2018. On a YoY basis, the company posted healthy net revenue growth in domestic and European businesses and witnessed EBITDA margin expansion. New order inflow, strong demand outlook and reasonable valuations make it worthy pick at current levels.

Quarterly snapshot

On the topline front, consolidated net revenue grew 26.5 percent YoY on the back of strong growth in India and Europe and a favourable EUR:INR. Net revenue of the India business grew 26.2 percent YoY on the back of strong growth accruing from Bill Forge (BFL), castings, forgings and gears divisions and the 3-4 percent price hike undertaken by the company to pass on the rise in raw material (RM) cost. Revenue from its European business grew 26.6 percent YoY on the back of growth in Metalcastello (35 percent YoY), favourable EUR:INR (10%) and growth in forging revenues led by gain in market share.

Consolidated EBITDA margin expanded 98.3bps YoY led by 218.7bps margin expansion for its India business. The expansion was led by price hikes undertaken by the management to pass on RM inflation and reduction in employee and other costs. Its European business, however, witnessed flat margins as the company had to absorb RM inflation. The management expects this to be passed on subsequently.

Key growth drivers

Phase II growth on tract

Post the completion of its Phase I expansion, the company has embarked on Phase II strategy. Phase I strategy focused on consolidation and witnessed positive progress in areas like turnaround of the European business, optimising Indian operations and diversifying products and customers. Phase II now focuses on growth and improving profitability. In this phase, the company targets to achieve both organic and inorganic growth in its Indian business. It acquired BFL to diversify its segment, customer and reach. The management said it would invest selectively for driving growth in its European business.

In its earnings conference call, the management said it sees decent demand in the European market and that growth would recover gradually. Mahindra Forgings Europe (MFE) has gained market share from its competitors. They mentioned execution of new orders, ramp-up of existing orders, demand for crankshaft from its forging business would drive outperformance of the company in the European market.

Its Indian business is witnessing strong demand as is evident from the new orders that it is receiving. It received orders from TBK India for supplying gears, Ashok Leyland for supplying stampings and Hyundai for providing crankshafts. The company has also bagged new orders from Hyundai and Kia Motors which would add to its 2019 revenues.

The management sees strong demand in Mexico and receipt of new orders. It has added a second press line to cater to a new client, production for which would start from January next year. In light of the strong demand, the company plans to add a third press line in Mexico by December-end.

On a consolidated basis, the company is currently trading at 17.2 and 14.2 times CY18 and CY19 projected earnings, respectively, which we believe are at reasonable levels.