Highlights
- Mahindra CIE posted a sluggish set of numbers amid weakness in domestic and international markets- Net revenue witnessed low single-digit growth whereas operating margin contracted significantly
-The near-term outlook for domestic business is weak, hopeful of good monsoon and pre-buying ahead of BS VI implementation
- Europe business outlook for the near-term is also weak
-We are cautious on the company; accumulate for long term
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Mahindra CIE, an auto component manufacturer, posted a poor set of numbers in Q2 CY19. On a year-on-year (YoY) basis, revenues from both domestic (on a like to like basis) and Europe businesses declined and its EBITDA margin also contracted due to negative operating leverage.
We remain cautious on the company, primarily due to weak near-term outlook.
Quarterly snapshot
On a consolidated basis, the company witnessed a low single-digit year-on-year (YoY) growth of 3 percent in net sales led by weakness in India business. India business revenue grew 12 percent due to (Aurangabad Electric) AEL consolidation, but on a like-to-like basis it declined 13 percent. This was on the back of 15 percent production cut undertaken by its key customers.
The Europe business witnessed a marginal decline of 2.4 percent in its net revenue and flat growth in constant currency. Revenue was impacted by lower commercial vehicle (CV) and passenger vehicle (PV) volumes in the EU.
Earnings before interest, tax, depreciation and amortisation (EBITDA) declined 7.3 percent and EBITDA margin 136.2 bps. India and Europe businesses’ margin contracted by 286 bps and 112 bps, respectively. India business margin also got impacted by AEL consolidation.
Domestic demand outlookThe domestic market has been facing challenges on the back of weakening macroeconomic environment leading to muted sentiment for the automobile sector, including CV and PV segments. Subdued market sentiment is on account of liquidity problem, financing issues, and slowdown in economic activities. This is further aggravated by the lag impact of new axle load norms in the CV segment.
The management expects coming quarters to be challenging for domestic business. It, however, expects the upcoming BS VI emission norms to be the near-term driver for the company. This is expected to lead to pre-buying as new BS VI-compliant vehicles would be more expensive than the current ones. There is an expectation of good festive season as well.
The management highlighted that Bill Forge’s (subsidiary of Mahindra CIE is a supplier to a number of domestic and global two-wheeler and passenger car OEMs and tier I auto component companies) revenues remained flat with stable margin.
Overall, it expects recovery in India margins driven by cost control measures and ramp-up of Bill Forge.
Europe to recoverDuring the earnings call, the management highlighted that the performance got impacted by de-growth of CVs and PVs. However, the demand is recovering gradually.
MFE (Mahindra Forgings Europe) has been growing in the market. Metalcastello’s (subsidiary based out of Italy) revenue is also growing strongly and is expected to grow with the industry.
Valuation – at reasonable levelAmid high market volatility and weak outlook, the stock saw a 36 percent fall from its 52-week high.On a consolidated basis, the company is trading at 13.7 times and 11.9 times CY19 and CY20 projected earnings, which we believe are at reasonable levels and advise investors to accumulate for the long term.
