 "Mahindra CIE")
From its lows in mid-December, the stock of auto component maker, Mahindra CIE Automotive, is up over 13 per cent in trade. The gains are on expectations that a focus on profitability, steady growth in Indian operations and improving capital efficiency will improve its margin profile and return ratios.
Among the multiple steps the company has taken to improve its financials is the plan to sell its German commercial vehicle forging operation housed under CIE Forging Germany. The loss-making entity contributed about a fifth to consolidated revenues, with operating profit margins in low single digits. Its losses over the past four years have been over 22 million euros.
Say Shashank Kanodia and Raghvendra Goyal of ICICI Securities (Retail Equity Research), “Selling this part of the business bodes well for the company’s consolidated margin profile and capital efficiency matrix. Its Indian business clocks steady state margins of 15 per cent as compared to 10-12 per cent clocked at its European operations.”
While it will divest the commercial forging business, which was facing uncertainty due to geopolitical conflict and high energy prices, the sale will help it improve its focus on the forging parts supply to the European light vehicles industry from its plants and subsidiaries in Europe.
The light vehicles industry in Europe is witnessing a rapid transition to electric vehicles and the company is focused on managing this transition. The company also wants to benefit from the growth opportunities emerging in the Indian automotive industry, it highlighted in a recent press release.
“With volume growth on the anvil in Indian operations, overall sales are expected to grow at 14.7 per cent annually over the 2021 to 2024 calendar year (CY21-24), say Kanodia and Goyal.
They also expect margins to improve, given benign raw material prices and operating leverage.
A focus on profitable growth. as compared to higher sales growth, is also expected to translate into improving margins. The management, according to Motilal Oswal Research, reiterated its focus on profitable growth with an aim to achieve operating profit margin of over 15 per cent in the near term (vs about 12 per cent in CY21). To achieve this margin, the company will solely accept orders with the threshold margin level and is willing to let go of not so profitable opportunities.
Moreover, the company expects operating profit margin in the domestic market to expand to 17-18 per cent (without assuming raw material decline) over the next 2-3 years, as compared to 13 per cent in CY21, driven by increase in value added products and operating leverage. This would be supported by new orders coming at higher margins and higher return on investment, say analysts led by Jinesh Gandhi of the brokerage.
Further, with the sector moving towards elective vehicles, the company would be making 65 per cent of parts which are fuel agnostic while the rest would include battery related parts. With the stake of Spain-based promoter CIE Automotive Group moving up and Mahindra & Mahindra’s stake going down, the Board has decided to change the name to CIE Automotive India.
While the recent moves on divestment and focus on margins are positives, given the uncertain demand in Europe and its initiatives a work-in-progress, investors should await results on the ground and look out for better entry points before considering the stock.
