Mahindra and CIE Automotive reap dividends of partnership forged 5 yrs ago

Five years since Mahindra and Mahindra and CIE Automotive stitched a deal to create a large auto component firm with a global footprint, the strategy has paid off for both the companies in terms of operational and financial performance and market capitalisation. Having successfully integrated the businesses across the geographies, Mahindra CIE is now scouting for acquisition of auto component firms in India in a bid to plug some gaps in its product and customer portfolio said Hemant Luthra, non-executive chairman, Mahindra CIE.

While share prices of Mahindra CIE have risen 489 per cent, CIE Automotive has gained 515 per cent since Jun 2013. “We are enjoying the best of both worlds,” said Luthra. The biggest satisfaction for him he pointed out, is that CIE has made money by investing in Mahindra CIE and Mahindra made money investing in CIE and Mahindra CIE.

When Mahindra invested in CIE, the share price of the Spanish company was 6 Euros, it has climbed up to 32 Euros. Mahindra has seen its profit on this transaction soar to over $500 million from $100 million. CIE's market value has gone up substantially too – while some of it is related to the business here, some outside, said Luthra who has earned the moniker of an ace dealmaker both within and outside the Mahindra Group.

"Some of the gambles we took have been paying off," said Luthra, adding that the turnaround has involved some tough decisions including plat closures and lay-offs to arrive at a uniform cost structure across Mahindra and CIE's plants.

With most of the restructuring done, Mahindra CIE is now bracing up for acquisitions in growth markets like India. The idea behind these acquisitions said Luthra would be to serve the changing needs of auto companies. With most of them working towards light-weighting to meet the stricter fuel emissions and fuel efficiency norms and electric vehicles becoming a reality sooner than later, MCIE is looking to buyout a company that specialises in aluminium parts and composites. Also on the radar is a firm, that can make aggregates for electric vehicles. MCIE expects to close the deal by end of this calendar year, said Luthra.

In a significant departure from its previous mergers and acquisitions (M&A) strategy, in June 2013, Mahindra forged a global alliance with Spanish auto components maker CIE. The multi-layered deal involved a share swap as part of which M&M ceded control of its domestic components business to the Spanish company to ensure Mahindra’s component businesses gain global scale. Giving up control of a unit to another entity was rare for M&M, which had made 35 acquisitions in the past decade.

As part of the transaction, Mahindra merged all its auto components businesses which was then grouped under Mahindra Systech, into its listed entity Mahindra Forgings. The new company was renamed Mahindra CIE Automotive. CIE holds 51% of Mahindra CIE and Mahindra about 20 per cent, with the remaining owned by institutional and public shareholders. Mahindra also bought 12.5 per cent in the Spanish company becoming its second-largest shareholder.

In the first quarter that ended in March 2018, Mahindra CIE's revenue rose to Rs 6.18 billion from Rs 5.15 billion a year ago while its profit after tax have more than doubled to Rs 38.56 crore from Rs 16.63 crore a year ago. Mahindra CIE follows a January to December fiscal. The turnaround strategy of the Spanish parent company is based on two phases ---restructure the business by 2017, then focus on growth until 2020. Analysts have given thumbs up to its strategy with most of them upgrading the target price for the stock.

"We think it’s working well. MCIE doubled its EPS (earnings per share) in 2017 and is well-positioned to expand into new products, customers, and geographies. We forecast that earnings will grow at a 25% CAGR over CY17-20e, driven by automation, greater scale, and following the best practices of its parent company,” said HSBC in a note after Mahindra CIE’s first quarter earnings. The brokerage has a 'BUY' rating on the stock with a target price of Rs290. It expects the top line of the India business to grow at a 13% CAGR over calendar year 2017-20, with margins improving by nearly 200bps. The strong outlook it added will be led by the robust outlook for domestic demand, better performance by large customers, such as M&M and Tata Motors among other factors.

CIE has revised its sales and profit guidance upwards for calendar year 2020 after its first quarter results. Mahindra CIE which contributes 23% to CIE’s sales and is set to play a critical role in the upward revision in guidance. As per the revised projections, CIE expects it profit after tax to increase 2.5 times as against 2 times, from 118 million euro in 2015 and return on equity to grow from 16 per cent in 2015 to over 23 per cent from the earlier projected 20 per cent by 2020.