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Retail Equity Research (South India Focus)

Mahindra CIE Automotive Ltd Automobile– Auto Ancillaries

BSE CODE : 532756 NSE CODE: MAHINDCIE

BLOOMBERG CODE: MACA: IN SENSEX : 32,720

Accumulate

12M Investment Period Rating as per Small Cap

CMP Rs. 90 TARGET Rs. 103 RETURN 14% (Closing: 30.04.2020

30th April,2020

Q1CY20 RESULT UPDATE

Accumulate for long term Mahindra CIE (MCIE) is one of the top global forging players with a strong presence in both Europe and India. Currently 2/3rd of the revenue comes from Europe, while the rest is from India.

MCIE’s consolidated revenue and EBITDA came below our expectation at –23.5%YoY and -200bps, due to sharp contraction in the European end market. However, MCIE India witnessed a marginal decline of 5% owing to integration of AEL.

The European operation were mainly impacted by the weakness in the EU-CV market. (Production volume declined by 58%YoY).

Despite weak sales, new product contribution stands at 20% of overall sales and company has diversified its customer base with acquisition and 75% of all new business are non Mahindra in CY19.

Current order backlog from Europe and BS-6 enabled launches by key domestic customers in FY21, hopeful to drive revenue growth .

The near term headwinds, due to lower visibility in growth both in Europe and domestic to remain cautious. We value MCIE at 12x CY21E and recommend Accumulate rating.

Company Data

Market Cap (cr) Rs. 3430

Enterprise Value (cr) Rs. 4662

Outstanding Shares (cr) 37.9

Free Float 0.3

Dividend Yield 0.0

52 week high Rs. 256

52 week low Rs. 59

6m average volume (cr) 0.03

Beta 1.0

Face value 10.0

Shareholding (%) Q3CY19 Q4CY19 Q1CY20

Promoters 67.7 67.7 67.7

FII’s 10.5 14.0 14.0

MFs/Insti 7.0 6.6 6.8

Public 14.7 11.7 11.5

Total 100.0 100.0 100.0

Price Performance 3 month 6 Month 1 Year

Absolute Return -48.0% -40.0% -60.2%

Absolute Sensex -20.4% -18.9% -16.6%

Relative Return -27.6% -21.1% -43.7%

Over or under performance to benchmark index

Consolidated(cr) CY19A CY20E CY21E

Sales 7,908 6,317 6,856

Growth (%) -1.5 -20.1 8.5

EBITDA 968 726 891

EBITDA Margin(%) 12.2 11.5 13.0

PAT Adj. 363 172 325

Growth (%) -33.9 -52.5 88.2

Adj.EPS 9.6 4.6 8.6

Growth (%) -33.9 -52.5 88.2

P/E 9.4 19.7 10.5

P/B 0.7 0.7 0.7

EV/EBITDA 5.1 6.8 5.6

ROE (%) 8.1 3.6 6.5

D/E 0.3 0.3 0.3

Saji John

Research Analyst

KEY CHANGES: TARGET RATING EARNINGS

Revenue growth below estimates MCIE’s consolidated revenue and EBITDA came below our expectation at –23.5%YoY and -200bps, due to sharp contraction in the European end market. However, MCIE India witnessed a marginal decline of 5% owing to integration of AEL (Aurangabad Electricals ltd). The sales dropped substantially compared to Q1 CY19 on account of the double impact of the drop in demand due to COVID19 and the slowdown in the market. Despite 23% overall drop in EUR sales, European business margin was admirable comparing to its peers. EUR sales was primarily linked to CV forging business facing unanticipated production cut by key customer (Daimler, Renault Consolidated EBITDA margin contracted by 200bps and PAT de-grew by 86.5%YoY, dragged further by higher interest. Considering the unprecedented crisis we significantly lower our revenue and PAT estimate for CY20 by 31%/72% .

MCIE European business to slowdown The contribution from the European business to remain subdued for CY20. Margin contracted by 260bps during the quarter due to prolonged shutdown and negative Industry growth. Meanwhile, the second phase of Metalcastello projects for Caterpillar worth 16mn Euro and new crankshaft line in Lithuania for supply to Volkswagen with a revenue potential of ~Euro 8.9mn will provide some revenue visibility for the year. Currently, MCIE has plan to invest Rs7bn over the next two years (Primarily for MCIE India) which is positive for Indian business.

EBITDA margin to remain stable at 13-14% We expect the EBITDA margin to expand by CY21 owing to ramp up of Lithuania plant along with productivity improvement (closing UK subsidiary Stokes) and product rationalization in Mahindra Forging Europe business.. We believe improvement in the performance of new products share and pick up in the European car demand will lead to better utilization of the assets in the long term. Despite weak sales, new product contribution stands at 20% of overall sales and company has diversified its customer base with acquisition and 75% of all new business are non Mahindra in CY19.

Valuations Currently the industry is trading at its all time low in volume. MCIE holds a strong position in its balance sheet with a D/E ration of 0.3% and positive cash flow as on CY19. We expect any significant decline in margin to put pressure on the profitability in the near term. We believe that the large negativities have been factored in the price and looks for a revival once the industry comes to its normal capacity. We rollover our valuation to CY21 and derive at a target price of Rs103 (12x CY21) and recommend Accumulate rating at CMP.

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Change in Estimates

Old estimates New estimates Change %

Year / Rs cr CY20E CY21E CY20E CY21E FY20E FY21E

Revenue 9,170 - 6,317 - -31.1 -

EBITDA 1,230 - 726 - -41.0 -

Margins (%) 13.4 - 11.5 - -190bps -

Adj. PAT 623 - 172 - -72.4 -

EPS 16.5 - 4.6 - -72.4 -

Rs cr) Q1CY20 Q1CY19 YoY Growth % Q4CY19 YoY Growth %

Sales 1,663 2,174 -23.5 1,723 -3.5

EBITDA 182 282 -35.5 214 -15.0

EBITDA margins 11.0 13.0 -200bps 12.4 -140bps Depreciation 82 74 10.1 79 -3.7

EBIT 101 208 -51.7 135 -25.7 Interest 60 10 - 10.6 - Other Income 5 15 - 6.3 - Exceptional Items 0 0 - 122 - PBT 46 213 -78.6 121 -62.5

Tax 25 24 - 109 -77.3 Share of profit from Associate 0 0 - 0 -

Minority Interest 0 0 - 0 -

Reported PAT 21 44 -86.5 12.6 64.8

Adjustments - - - 10 -

Adj PAT 21 44 -86.5 22.3 -6.8

No. of Shares 37.9 37.9 - 37.9 -

EPS (Rs) 0.55 1.12 -86.5 0.59 -6.8

Quarterly Financials (Consolidated)

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27th December 2018

Consolidated Financials

PROFIT & LOSS BALANCE SHEET

RATIOS CASH FLOW

Y.E March (Rs Cr) CY17A CY18A CY19A CY20E CY21E

Sales 6,428 8,032 7,908 6,317 6,856

% change 20.8 24.9 -1.5 -20.1 8.5

EBITDA 814 1051 968 726 891

% change 149.5 29.1 -7.9 -24.9 22.7

Depreciation 268 277 305 310 350

EBIT 546 765 652 403 525

Interest 51 50 52 154 93

Other Income 27 39 33 25 34

PBT 515 753 637 274 467

% change 806.0 46.3 -15.4 -57.0 70.6

Tax 148 204 274 101 142

Tax Rate (%) 28.8 27.1 43.0 37.0 30.5

Reported PAT 367 549 363 172 325

Adj. -7 0 0 0 0

Adj. PAT 374 549 363 172 325

% change - 46.9 -33.9 -52.5 88.2

No. of shares (cr) 37.8 37.9 37.9 37.9 37.9

Adj EPS (Rs) 9.9 14.5 9.6 4.6 8.6

% change - 46.9 -33.9 -52.5 88.2

DPS (Rs) 0 0 0 0 0

Y.E March (Rs Cr) CY17A CY18A CY19A CY20E CY21E

Net inc. + Depn. 783 1040 953 597 833 Non-cash adj. -97 -210 -222 53 -50

Changes in W.C -100 116 -323 19 -3 C.F. Operation 586 945 408 670 780 Capital exp. -364 -395 -351 -315 -338 Change in inv. -16 -626 -110 96 -59 Other invest.CF -152 -82 -155 -155 -155 C.F - Investment -532 -1103 -616 -374 -553 Issue of equity 9 0 0 0 0 Issue/repay debt -165 346 0 0 0 Dividends paid 0 0 0 0 0 Other finance.CF 75 -50 -52 -154 -93 C.F - Finance -81 296 -53 -154 -93 Chg. in cash -27 138 -260 141 135

Closing cash 138 276 16 157 292

Y.E March CY17A CY18A CY19A CY20E CY21E

Profitab & Return

EBITDA margin (%) 6.1 12.7 13.1 13.4 13.4

EBIT margin (%) 1.8 8.5 9.5 9.4 9.5

Net profit mgn.(%) -0.5 5.8 6.8 6.7 6.8

ROE (%) -1.0 10.7 13.7 12.1 12.1

ROCE (%) -1.2 8.6 10.9 9.7 9.9

W.C & Liquidity

Receivables (days) 35.8 31.8 30.4 33.0 31.2

Inventory (days) 142.2 118.3 111.5 123.9 119.3

Payables (days) 104.7 88.0 74.0 80.0 80.4

Current ratio (x) 3.1 2.6 2.6 3.1 3.3

Quick ratio (x) 1.7 1.0 2.2 1.3 1.3

Turnover &Leverage

Gross asset T.O (x) 2.7 2.5 2.7 2.5 2.5

Total asset T.O (x) 0.9 0.9 1.0 0.9 0.9

Int. covge. ratio (x) 1.6 10.7 15.2 13.5 15.2

Adj. debt/equity (x) 0.4 0.3 0.4 0.3 0.3

Valuation

EV/Sales (x) 1.6 1.3 1.1 1.1 1.0

EV/EBITDA (x) 26.3 10.3 8.3 8.0 7.1

P/E (x) -271.0 19.3 13.2 13.1 11.6

P/BV (x) 2.2 1.9 1.7 1.5 1.3

Y.E March (Rs Cr) CY17A CY18A CY19A CY20E CY21E

Cash 138 276 16 157 292

Accounts Receivable 598 741 715 571 620

Inventories 990 1229 1294 1003 1096

Other Cur. Assets 487 283 593 474 514

Investments 55 681 791 695 754

Gross Fixed Assets 2742 3101 3487 3803 4141

Net Fixed Assets 1901 1984 2065 2071 2060 CWIP 60 96 60 60 60 Intangible Assets 13 10 9 5 -1

Def. Tax (Net) 120 176 176 176 176

Other Assets 0 0 0 0 0

Total Assets 7447 8534 9036 8621 9142

Current Liabilities 578 331 596 462 504

Provisions 365 694 412 329 357

Debt Funds 1197 1542 1542 1542 1542

Other Liabilities 1574 1684 1842 1471 1597

Equity Capital 378 379 379 379 379

Reserves & Surplus 3355 3904 4266 4439 4764

Shareholder’s Fund 3733 4282 4645 4817 5142

Total Liabilities 7447 8534 9036 8621 9142

BVPS 98 113 122 127 136

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Source: Bloomberg, Geojit Research.

27th December 2018

Dates Rating Target 21.07.2017 Buy 291 27.10.2017 Buy 304 25.04.2018 Buy 280 20.07.2018 Buy 281 22.10.2018 Hold 281 26.02.2019 Hold 243 14.05.2019 Accumulate 247

26.07.20.19 Reduce 182

30.04.2020 Accumulate 103

Large Cap Stocks; Buy - Upside is above 10%. Hold - Upside is between 0% - 10%. Reduce - Downside is more than 0%. Neutral - Not Applicable

Mid Cap and Small Cap; Buy - Upside is above 15%. Accumulate - Upside is between 10% - 15%. Hold - Upside is between 0% - 10%. Reduce/Sell - Downside is more than 0%. Neutral - Not Applicable

To satisfy regulatory requirements, we attribute ‘Accumulate’ as Buy and ‘Reduce’ as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being up-graded to BUY or downgraded to a HOLD, REDUCE or SELL. Neutral- The analyst has no investment opinion on the stock under review

General Disclosures and Disclaimers

Recommendation summary (Last 3 Years)

Investment Criteria

CERTIFICATION

I, Saji John, author of this Report, hereby certify that all the views expressed in this research report reflect our personal views about any or all of the subject issuer or securities. This report has been prepared by the Research Team of Geojit Financial Services Limited, hereinafter referred to as Geojit.

COMPANY OVERVIEW

Geojit Financial Services Limited (hereinafter Geojit), a publically listed company, is engaged in services of retail broking, depository services, portfolio manage-ment and marketing investment products including mutual funds, insurance and properties. Geojit is a SEBI registered Research Entity and as such prepares and shares research data and reports periodically with clients, investors, stake holders and general public in compliance with Securities and Exchange Board of India Act, 1992, Securities And Exchange Board Of India (Research Analysts) Regulations, 2014 and/or any other applicable directives, instructions or guidelines issued by the Regulators from time to time.

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GENERAL REPRESENTATION

The research reports do not constitute an offer or solicitation for the purchase or sale of any financial instruments, inducements, promise, guarantee, warranty, or as an official confirmation of any transaction or contractual obligations of any kind. This report is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied on as such. We have also reviewed the research report for any untrue statements of material facts or any false or misleading information. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so.

RISK DISCLOSURE

Geojit and/or its Affiliates and its officers, directors and employees including the analyst/authors shall not be in any way be responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Investors may lose his/her entire investment under certain market conditions so before acting on any advice or recommendation in these material, investors should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. This report does not take into account the specific investment objectives, financial situation/circumstances and the par-ticular needs of any specific person who may receive this document. The user assumes the entire risk of any use made of this information. Each recipient of this report should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this report (including the merits and risks involved). The price, volume and income of the investments referred to in this report may fluctuate and investors may realize losses that may exceed their original capital.

FUNDAMENTAL DISCLAIMER

We have prepared this report based on information believed to be reliable. The recommendations herein are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. The stocks always carry the risk of being upgraded to buy or downgraded to a hold, reduce or sell. The opinions expressed are subject to change but we have no obligation to tell our clients when our opinions or recommendations change. This report is non-inclusive and does not consider all the information that the .recipients may consider material to invest-ments. This report is issued by Geojit without any liability/undertaking/commitment on the part of itself or anyof its entities. We may have issued or may issue on the companies covered herein, reports, recommendations or information which is contrary to those contained in this report. The projections and forecasts described in this report should be evaluated keeping in mind the fact that these are based on estimates and assumptions and will vary from actual results over a period of time. The actual performance of the companies represented in the report may vary from those projected. These are not scientifically proven to guarantee certain intended results and hence, are not published as a warranty and do not carry any evidentiary value whatsoever. These are not to be relied on in or as contractual, legal or tax advice. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice.

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27th December 2018

JURISDICTION

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In compliance with the above mentioned SEBI Regulations, the following additional disclosures are also provided which may be considered by the reader before making an investment decision:

1. Disclosures regarding Ownership*:

Geojit confirms that: It/its associates have no financial interest or any other material conflict in relation to the subject company (ies) covered herein. It/its associates have no actual beneficial ownership greater than 1% in relation to the subject company (ies) covered herein.

Further, the Analyst confirms that: he, his associates and his relatives have no financial interest in the subject company (ies) covered herein, and they have no other material conflict in the subject com-

pany. he, his associates and his relatives have no actual/beneficial ownership greater than 1% in the subject company covered

2. Disclosures regarding Compensation:

During the past 12 months, Geojit or its Associates:

(a) Have not received any compensation from the subject company; (b) Have not managed or co-managed public offering of securities for the subject company (c) Have not * received any compensation for investment banking or merchant banking or brokerage services from the subject company. (d) Have not received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company (e) Have not received any compensation or other benefits from the subject company or third party in connection with the research report (f) The subject company is / was not a client during twelve months preceding the date of distribution of the research report.

3. Disclosure by Geojit regarding the compensation paid to its Research Analyst:

Geojit hereby confirms that no part of the compensation paid to the persons employed by it as Research Analysts is based on any specific brokerage services or transactions pertaining to trading in securities of companies contained in the Research Reports.

4. Disclosure regarding the Research Analyst’s connection with the subject company:

It is affirmed that the I Saji John Research Analyst(s) of Geojit have not served as an officer, director or employee of the subject company

5. Disclosure regarding Market Making activity:

Neither Geojit/its Analysts have engaged in market making activities for the subject company.

Please ensure that you have read the “Risk Disclosure Documents for Capital Market and Derivatives Segments” as prescribed by the Securities and Exchange board of India.

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