Automotive. It is an emerging global automotive ancillary...

Mahindra CIE Kaizen thesis Mahindra CIE (MACA) is now part of the CIE Automotive Group, Spain and will be formed by a merger of M&M’s Mahindra Systech and CIE Automotive. It is an emerging global automotive ancillary player with a high probability of asymmetric revenue and earnings growth, which will be driven by new products, customers, and technology addition as part of group synergy, and the financial turnaround of Mahindra entities in Europe. MACA will be the growth engine for Asian market for the group and will be among the top three automotive forging companies of the world. MACA is a business improvement story with four broad levers of sales and earnings growth over the next 5 years. We expect the stock to rerate as the belief on the business combination gathers pace. We believe the story will be partly immune to business and economic cycles due to the complementary nature of the alliance, which is focusing on customer and product additions and the turning around of its low-profitability businesses. Key growth drivers are strengthening content market share in product platform, adding products using CIE’s R&D prowess, and leveraging the global footprint of clients.

1. Margin improvements: Focus on low-hanging fruits by turning around strong and stable businesses through process improvement, automation, best production techniques using CIE’s expertise, and a focus on high-yielding products using limited capex.

2. Growth acceleration: Focus on leveraging CIE products and clients to strengthen existing India business. Shifting production of low-yielding forging products from Europe to India. Global sourcing and supply chain advantage. Reduction in corporate overheads and incentives aligned to plant-level profitability.

3. Building new capabilities: Bringing CIE’s existing technologies (such as aluminium products, plastic products, and vehicle-roof systems) to India and Asia and focus on achieving or even bettering CIE financial standards and goals.

4. Inorganic opportunities: Consolidation of CIE’s Mexico and Brazil forging units with MACA and looking for an alliance in South East Asia to penetrate Japanese OEMs without breaching financial discipline.

As most of these drivers are internal (emerging out of group synergy and productivity improvement), we expect geometric progression in growth and earnings over the next 5-6 years. Although we are conservative in our growth assumption at the beginning, we forecast FY14-18 revenue and EBITDA CAGR of 15% and 34%, respectively, and an earnings CAGR of 51%.

Priya Ranjan | [email protected] | + 9122 6667 9965

Phillip Kaizen

Presenting stocks with sustainable growth prospects generated by internal drivers.

改

善 Kaizen in Japanese stands for “continuous improvement” or “philosophy of improvement” derived from the words Kai, which means “change”, and Zen which means good. It involves all employees from the CEO to the assembly line workers. Kaizen was first implemented in several Japanese businesses after the Second World War, influenced in part by American business and quality management teachers who visited the country. It has since spread throughout the world and is now being implemented in environments outside of business and productivity.

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crease content pevenues. We expef MACA’s growth

uld improve 660bhindra Forging Etomation, plant eded products (C

gher operating levearlier margins o00bp — low-han

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s at 7x FY17 EV/Eits peers such

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Europe (MFE) andefficiency, and fixCIE’s portfolio),verage at plants. of 12% at MFE ging fruit; can be at MFE plants. ion/turnaround (6lity is unmatched% of EBITDA, EBn 3-4 years could

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FY18 due to its fogs visibility, and d

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ct base will ram4). While CIE’s wg CIE’s customersents and produc

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Price Performanc

Absolute

Rel to BSE

FY14P FY15E5,712 57,4044,151 5,628

-85 1,766(0.3) 5.4

800.5) 38.520.6 14.8

4.7 4.2(0.6) 10.9

137.0 109.7

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aradox | Mahindr

ttern (%)

p. Holdings :

ce (%)

1mth 3mth

4.4 34.4

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mber 10, 2014

e #1 Turnarot of its strategrofitability issues aally, low-hanging

CIE levels will taund in MFE (Euron. Early efforts ar

rnaround CIE’s expertise (CI

at turning aroudated margins aned 600bps due ton forging plant (costs after nuclea, and 4) lower die

n product pricingers, Daimler. We for power subsidy

BITDA margin tr

Q3'13 Q4'13

ound: Pluck y, CIE’s managat MACA’s plants

fruit. Wider groke a bit more timrope business) wre focused on:

E executives are nd its MFE busi

nd profitability. Sio: 1) process improas part of the gar power plant sh

e costs. Apart fromg — it recently believe that one

y — this will enhan

end

Q1'14 Q2'14

low-hangingement has bee, which will be the

owth and margin me and effort. It hawith better produ

now manning all ness, which has nce CIE’s takeoveovement, 2) € 5m

government’s effohutdown), 3) lowem plant-level imp

hiked the pricee more of its Germnce margins furth

Q3'14 Q4'14

g fruits n trying to adde fastest to addre

improvement toas partially achiev

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as recently receiveapprovals to supt 6-12 months in ing sales in FY16- uced cost of deb

st of the combinopean businesses

mpany has taken aet) to reduce lonrove combined p cess improvemeductivity across a

er CIE’s takeovercess improvemencess automation untenance of presslanking sheets. Thduct margins whelready commissio

outsourcing mawer (has cut 110 s) to improve thens to about 12% b

put from existingn maximising itsroughput and yieltimisation strateg

pertise without inc

ed orders from Repply to most new India. We expect -17.

bt by around 200ed entities’ debts (MFE, Metalcasadvantage of theng-term debt cosrofitability and ca

ent, automation all plants r, all MACA entnts such as reduusing robots (thisses, and bringinghis will not only imen the efforts arened and upcomin

Simpson’s Pa

ny of its low-vaemployees in thee profitability. Mby the end of FY1

g customers in Inbusiness by offeld from its existing

gy is to introduce curring major cape

enault India to suPV models that wthis will significan

0bps t (about € 200mstello, and CIE F

e low rate in Eurost by about 200sh flow.

and fixed-cost

tities have been ucing wastage, ims improves produg CIE plant practimprove plant prode successfully impng efforts:

aradox | Mahindr

alue-added servie last 9 months, ACA intends to

16 from 5.5% in 1

ndia ring value-additiog customer base. new products usiex.

upply crankshafts will be launched ntly boost MACA

mn) is in the booForging Europe) ope (using group 0bps to 3.5% —

t reduction to

focusing on plmproving througctivity by 15-20%ces such as size oductivity but also

plemented. Few i

ra CIE | 5

ces and currently improve HFY15.

on to its Another

ing CIE’s

and also over the

A’s Indian

oks of its and the balance this will

improve

ant-level ghput by %), timely or shape improve nstances

Novem

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mber 10, 2014

% reduction in mammissioning of rodiminish frequenton was taken on treasing die life anht-weighting of crtallation and comomated process

wering product rej

ion in corporate r early benefit wias multiple entitant in a combine

ate costs ares/profitability leves by 100bps in the

t rationalisation rove productivity executives) are wts that have a lo Across its busine

bility discipline. Tnents of MFE plability can’t be enhing and product

early stages, the cve little ramp-up p

npower in MFE aobots at its Pune at breakdown of pthe number of died enhancing procrankshafts to redu

mmissioning of big

jection and wasta

overheads ll be a reduction ies with individued single entity. <1% of sales)

er in the mid-tere next 2-3 years.

and mix optimisaand plant-level p

orking on a revamow yield and incesses and plants, oThe managemennts to India (with

hanced in Germarelocation can im

company is willingpossibility and a d

nd Metalcastello and Nashik stamppresses, whereveres cess flow to loweruce machining allogger reduce roll

age

in corporate-leveual support-servic

Following CIE’s) MACA willrm. We think it

ation profitability, MACmp plan across bucrease products one of CIE’s key mnt is looking at out any business ny/Europe. India

mprove MFE’s mag to even discontdrag on overall pr

ping plants r load exceeded

r cycle time owances with manipulator

el expenditure (Sces functions wiphilosophy (in whave an additcan improve EB

CA’s managementusinesses/plants tthat have a sup

mantras is adherinshifting few fordisruption) if prois a low-cost loc

argin and profitabtinue certain prodofitability.

90%,

rs for

SG&A ll be

which tional ITDA

t (led o cut

perior ng to rging oduct ation bility. ducts

StaProdThe forglike constheswheminiconsgain A fe•

•

•

•

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age #2: Focuducts cross-pollinmanagement’s sing and stampingEurope and Am

solidation and unse new product iere new products imum effort, at esolidation, which n penetration into

ew possible early pDiesel/gasoline eEurope and is threlationship with Cummins shouldsystem. Exhaust manifoldfrom Ford in IndiaOil pan systems topline ramp-up fLaunch of cross cnew business in sAdding turbo-boand Cummins. Launch of fuel inj

us on synergnation trategy of bringing that have produerica can improviversalisation is gintroductions arecan be introduce

existing locationsimproves supply OEMs/Tier-1 ven

product-cross-polengine-injection rahe key supplier tEuropean clients

d add significantly

d in casting businea. where CIE is a l

from this. car beam (used bstamping. ooster housing wi

ection system com

Simpson’s Pa

gy with CIE

ng CIE products iuct leadership in ve customer yieldgaining momentum likely in forginged without incurri. Another focus achain efficiency a

ndors due to glob

llination opportunail-forged producto Continental, Vin India along wi

y forging busines

ess as MACA has

eader; should se

below instrument

ith customer add

mpatible to powe

aradox | Mahindr

Automotive

nto India in areasthe existing CIE l

d significantly as m across OEMs. W

g, stamping, and ing major capex area for OEMs isnd is likely to hel

bal supply of CIE e

nities for MACA: ct where CIE is thVW, and PSA. Levth new customersss from the com

s recently receive

ee significant volu

t panels) in India

ditions such as Ho

ertrains used in Ind

ra CIE | 6

e

s such as locations platform We think

casting, and with s vendor p MACA entities.

he leader veraging s such as mon rail

d orders

ume and

can add

oneywell

dia.

Novem

CIE pro

Source: C

mber 10, 2014

oduct capabilities

Company, PhillipCapita

s – cross-pollinat

al India Research, oran

tion opportunitie

nge bubble points lea

es in India

adership product

SupBeinadvamatescatoversuppdire MarApaconsimpprodoutfacil LikewhicThe to mimpheadunlikexparedustamimpa

ply-chain efficienng part of the antages with imperial and supply-tered standaloner the next 2-3 yeaply-chain benefitct/indirect means

rgin accretion in rt from strengtsultation with CIErovement in stamduct-offering expawith detailed p

ities to achieve m

wise, gear produch will improve tcompany manag

meaningfully imprrovement and dcount). Althoughkely due to lack oansion in the neuction. Ramp-up mping facility at Zact on revenues a

ncy from global sCIE automotive

proved economie-chain costs for te operations. Thisars. Although the ts, we think a s is achievable.

non-forging opethening forging E’s team) is draw

mping/gears/castiansions. CIE’s tealant-level produc

margin accretion b

cts will see a lot the margins apargement has drawnove margin accreemployee ratio

h earlier peak maof high-margin deext 2-3 years th

of its Chakan Zaheerabad for Mand margins.

Simpson’s Pa

sourcing/value ce group brings es of scale. This he combined ents is likely to help

company has no20-25bps additi

eration: Stampingoperations, MA

wing up a blueprngs plants by proam and local prodctivity roadmapsby 2HFY16.

of value additionrt from generatinn a four-year businetion from <10% onalisation (arouargins of around efence orders, wehrough productiv

gear facility (Ta&M’s tractors/pic

aradox | Mahindr

hain MACA global will help rationatity compared toimprove EBITDA

ot quantified the eion to margins

g/Gears/CastingsACA’s managemrint for plant prooduct value addiduction teams are

by visiting each

(machined compg plant-level effiness plan at Metacurrently through

und 20% reduc20% at Metalcase expect a 400bpvity gains and fiata Motors/expock-ups will have a

ra CIE | 7

sourcing lise raw-

o its past A margin extent of through

s ment (in oductivity tion and

e coming h other’s

ponents), ciencies.

alcastello h process ction in stello are p margin xed-cost

orts) and positive

Novem

Stage New cliNew cliup betwclients Ford/GMvolumesOEMs additioncustomedependcustomeramp-up CIE+Sy

Source: C

New teBeing awith an

mber 10, 2014

e #3: Access

ient additions wient addition is anween FY16-18, b

in Europe/AmM/Renault/Fiat/VWs) provides a non-are focused on n requires a leaders to start accr

ding on the new er addition of Rep in FY16.

ystech client/prod


chnology additioa vehicle of growtn intention to b

sing CIE cust

th CIE’s help nother area wherebased on CIE’s lerica. Existing W/BMW (accoun-linear growth oplocalisation to b

time of about 1ruing towards thlaunches from th

enault (forging) an

duct synergy

al India Research

on in India using th in Asia, MACAuild new capabi

tomers/tech

e we will see signong-standing relrelationship wi

nting for aroundportunity in the mbecome compet8 months, we ex

he end of FY16he European/US Ond Ford (casting)

CIE’s portfolioA will have access

ilities (plastic pa

hnologies

nificant revenue raationships with tth OEMs such

d 20% of Indianmedium-term, as titive. Since custoxpect benefits of

or fully from FOEMs. However, will provide bus

to CIE’s technoloarts, aluminium p

amp-these h as n PV these omer f new FY17,

new siness

ogies parts,

painand alumtrenbusideve Gro

Sourc

We of Clightreasplasadddrive

‐

10

15

20

25

30

35

40

45

nting and roof syAsia. As globall

minium and plastd to improve eminess to start contelops these capab

wth from new pr


think plastics will CIE Automotive satweight. MACA insonable valuation)stic-parts businessition and paintiners for India starti

5

0

5

0

5

0

5

0

5

ystem) for the exiy OEMs are focu

tics in the vehiclemission standardstributing topline mbilities and appro

roduct technolog


be one of the keales) in the field antends to acquire) or use Mahindras, which has marg. We expect thng FY17-18.

FY17E

Simpson’s Pa

isting Systech anusing on light wee, we expect Inds and fuel mileameaningfully fromaches the OEMs w

gy in sales additi

ey growth areas gand incremental fe a plastic facilitya Composite’s facrgins of >14-15%is business to be

aradox | Mahindr

d CIE customers eight with greatedian OEMs to foge. We expect t

m FY17-18 as the cwith products.

on

given CIE’s expertfocus of OEMs foy in India (if availacility (plan B) to e

% if combined wie one of the key

FY18E

ra CIE | 8

in India er use of llow this this new company

tise (20% or vehicle able at a enter the ith value y growth

Novem

Althougwe thinkare aggthis trencurrentlbetwee• Prod

be a• Oil

be i• Alu

with• Com• Loo

numnea

FY14 co

Source: C

mber 10, 2014

gh it has gone slok it can be anothe

gressively using and can gather pacy unavailable withn FY15-18 and arducts like brake ba growth area. pans across multintroduced. minium stampingh few OEMs like Mmmon rail system oking at setting umber of OEMs arar client plant loca

onsolidated MAC


Gears10%

Stamping13%

CastiMa9

ow in aluminium cer growth driver fluminium parts toce in India as welh MACA to contriound 40% of the booster and gear

tiple technology l

g products like doM&M

forging ramp up p a greenfield stre setting up plaations.

CA sales break-u

al India Research

ing and agnet9%

PlasCompo

1%

components (aroufor MACA in the loo reduce vehicle l. We expect newibute about 10% annual growth byhousing where C

ike stamping, pla

oors where the c

from clients like Camping plant in Gnts due to the n

p (by business)

Forgi67%

tic osites%

und 10% of CIE song-term as PV Oweight/emissions

w products/technoof incremental to

y FY18. CIE has leadership

astic and aluminiu

company is unde

Cummins Gujarat where a

nature of the bus

ng%

ales), OEMs s and ology pline

p can

um to

r talk

large siness

FY1

Sourc CIE MACrate trackcomdiscRuss

8 consolidated M


philosophy of mCA is confident oin India, organica

k record in achiemfort on the strat

ipline (capital expsia aluminium plan

Gear10%

Stamping19%

Casting/Ma9%

Compot3

MACA sales brea


market plus growtof achieving a groally, through prodeving this (partly tegy and growth penditure only aftnt, about 75% pre

rs%

agnet

osite/Plastics3%

Aluminium3%

Simpson’s Pa

ak-up (by busines

Estimates

th – track-recordowth rate that is duct, technology a

through small aprospects. Its tra

ter sizable confirme-order) is also co

m Paintings1%

aradox | Mahindr

ss)

is consistent well ahead of theand client additioacquisitions too) ack record of inv

med orders like Momforting.

Forging55%

ra CIE | 9

e market ons. CIE’s provides vestment

Mexico or

g

Novem

CIE glo

Source: C CIE glo

Source: C

mber 10, 2014

obal sales growth


obal sales break-u

Company, Phillip Capit

Machining16%

Plastic20%

h – track-record i

al India Research

up (by business,

tal Research

casting4%

Roof syste4%

mpressive

Ex-MACA) Aluminium

10%

Stam28

em

Forging18%

mping8%

StaCIE 100%the brinyearentitdebfinansignmod Givearoufurthpresram Thro

Sourc

age #4: Inorhas kept its Brazi% subsidiary Autolatter’s current leg these units unrs given their statty — they will mt level improves.ncials improving —s of financial im

del).

en that these (Braund 16%, we expher increase groussure from OEMsping-up productio

oughput of Mexi


ganic growtl, Mexico and Chometal, with topleverage/financial nder MACA onceted objective of

merge few entitiesAdditional busin

— we see this as provements (tho

zil, Mexico, Chinapect the eventuaup synergies — Ms to start operatioon.

co capex (Forgin


Simpson’s Para

th – Within/oina forging units ine of € 110-120strength. Howev

e its financials imforging and Asias which have bee

ness combinationa very likely evenugh combination

a) forging units enl merger to be m

MACA’s forging uons in Mexico an

ng units to be me

adox | Mahindra

outside gro(currently owned mn) out of MACA

ver, the group inmprove over the

business under en kept out of Mis contingent to

nt in FY17-18 given not yet factore

njoying EBTIDA mmargin accretive units in Europe arnd Brazil, where

erged with MACA

a CIE | 10

up by CIE’s

A due to tends to next 2-3 this new

MACA as MACA’s

en visible d in our

margin of and will

re facing they are

A)

Novem

EBITDA

Source: C

‐

5.0

10.0

15.0

20.0

25.0

mber 10, 2014

A margin of Auto


2009

ometal group (for

al India Research Estim

2010

Autometal EBITDA

rging units to me

mates

2011 201

A margin (Ex MACA

erge with MACA)

12 2013

)

)

InoGiveJapato pJapastratthe MAC CIE

Sourc

organic oppoen the limited panese OEMs, MApursue inorganic anese OEMs. Althtegy to penetrateIndia business givCA’s managemen

sales by geogra


ortunity in Spenetration of boACA’s manageme

opportunities inhough nothing hae Japanese OEMsven the OEM’s w

nt has hinted at th

phy before Mahi


Simpson’s Para

South East Aoth CIE group ant in consultation

n South East Asis been yet finalise

s may bring additiwell-entrenched pr

is in various medi

indra CIE and sta

Estimates

adox | Mahindra

Asia nd Mahindra Sy

n with CIE group a, an emerging ed on this front soional non-linear gresence in India aia interaction.

ated goals by 20

a CIE | 11

stech to is willing hub for

o far, the growth to and Asia.

017

Novem

FinanWe expdriven bWe havforging at a CAassumpadditionand bra While tadditionramp-uplaunchebusineswill be while dutilisatio We expto contnew bubusines We estiFY18 (loutperfowill impexpertiseach plWe thinleverage

mber 10, 2014

ncials pect a revenue CAby a 50% growthe assumed modeunits). We expec

AGR of 33% andtion is based onn like forged/macke booster.

the domestic fornal vehicle platforp from existing

ed from CIE’s pses to grow at Cled by the new

domestic gear/traon of the Chakan

pect future busineribute about 10%

usiness/customer/s by FY18.

imate EBITDA mower than the ormance here as prove blended Ese) has already dant level and to nk our margin ase (15% additiona

AGR of 15% overh addition from nerate 5% CAGR foct India forging and 49% respectivn new client adchined common

rging business wrms, composite/pcustomers and t

portfolio. We estCAGRs of 26% an

facility and prodansmission businfacility and a stro

sses such as plast% of additional replatform to contr

argin to improveCIE target of 1only its MFE bus

EBITDA by 300brawn a clear roadbring overall marssumption is not al volume) at do

r FY14-18 to toucnew customers anor European entitind composite/plavely between FY1dition like Renaurail injection, cro

will be driven byplastic segment gthe new plastic ptimate stamping d 22%, respectiv

ducts (such as oilness growth willng order book.

tics parts, aluminievenue by FY18. ribute around 50

by a conservativ6%) — howeversiness returning tbps. MACA’s madmap for producrgin to CIE’s expeaggressive at al

omestic forging b

ch to Rs 96bn in nd products/platfes (both MFE andstics business to 14-FY18. Our grult/Ford and pro

oss-car beam, oil

y new customers rowth will be led products that wi

and domestic vely. Stamping gr pan, brake boo be led by gr

um parts and paiIn totality, we ex

0% of the increm

ve 660bps to 14%r, there is scopeo its earlier 12% anagement (withctivity improvemeected levels (15-1l since just operbusiness can imp

FY18 form. d CIE grow rowth oduct pans

and by a ll be gear

rowth oster), eater

nting xpect ental

% by e for level CIE

ent at 16%). ating

prove

margstamdue mac Rev

Sour

2

4

6

8

10

12

gin by >300bp. mping/gear segm

to fixed-cost achining can improv

enue break-up –

rce: Company, PhillipC

‐

20,000

40,000

60,000

80,000

00,000

20,000

FY14

ForgCastPain

Similarly, sales ments will improve

addition. Similarve margins (aka C

– product catego


P FY15E

gingting/Magnetntings

Simpson’s Para

ramp-up from e margins of therly, product valuCIE/Bharat Forge)

ry wise

h Estimates

FY16E

GearsComposite/Plastic

adox | Mahindra

new plants in dese businesses bue engineering .

FY17E FY1

Stampingcs Aluminium

a CIE | 12

domestic y 200bp such as

8E

Novem

Revenu

EBITDA

Source: C

2000

4000

6000

8000

10000

12000

‐

2,000

4,000

6,000

8,000

10,00

12,00

14,00

16,00

mber 10, 2014

e and revenue g

A margins to imp


0

00

00

00

00

00

00

FY14P

0

0

0

0

0

0

0

0

FY14P

growth

prove 660bp by F


FY15E FY1

Revenue

FY15E FY16

EBITDA EBIT

FY18

mates

16E FY17E

Growth (%) (rhs)

6E FY17E

TDA Margin (%) (rh

0

5

10

15

20

25

FY18E

‐

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

FY18E

hs)

Con

Earn

Sourc

0

5

0

5

0

0

0

0

(1

1

2

3

4

5

6

7

8

ntribution to 660

nings CAGR of ~


Metalcastello5%

Stamping3%

India Gears5%

Global Sourcing3%

India 1

1,000)

‐

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

FY14P

bp EBITDA marg

51% over FY15-


Forging12%

FY15E

Ad

Simpson’s Para

gin expansion

18

Estimates

MFE45%

Corporate Overhead

15%

Im

FY16E FY

justed PAT

adox | Mahindra

mprovement from Rest

12%

Y17E FY18E

a CIE | 13

Novem

Marginssuch ascompouto Rs7.3 LeveragWith a significanet deb Net deb

Source: C

FinanciIf MACA16%, EB>20%) assump

0

4,000

8,000

12,000

16,000

20,000

mber 10, 2014

s in new value-adds plastic productsund businesses. O3bn between FY15

ge to come downsignificant impro

ant fall in leveragebt going down 50%

bt to come down


al goals set by CA achieves CIE coBIT margin >11%over 3-4 years, ttions. Financial g

0

0

0

0

0

0

FY14P

N

ded products in es are typically hi

Overall, we expec5-18 from a loss i

n sharply ovement in profe and debt servic% from current lev

n by 50%


CIE provides upsiovenants (Asia bus%, net debt <1.5xthere will be ups

goals are very imp

FY15E FY1

Net Debt N

existing operationigher than plain ct profits to increan the combined e

fitability and case coverage ratio vel by FY18.

mates

ide risk siness size at € 1bx, FCF at 50% ofside risk to our gportant for CIE’s m

16E FY17E

Net Debt/EBITDA (x)

ns and new businevanilla stamping

ase at a CAGR of entity in FY14.

h flow, we expeover FY15-18. We

bn), EBITDA margf EBITDA, and ROgrowth/margins/remanagement bec

0

1

2

3

4

5

FY18E

) (rhs)

esses and

f 51%

ect a e see

gin of OI of eturn cause

theydece

VaBacksignconsbalavalu At iassigat aassusubsassuwith ValuRs mnNet SaEBIDTNet PrEPS, RPER, xEV/EBP/BV, ROE, %

Sourc

0

1

2

3

4

5

y don’t want to sentralised with em

luations ked by CIE’s techificant scalabilitysolidation and gance sheet, MNC ations.

ts current markegned a FY17 PER price target of R

umptions are cosidiary. However,umptions as businh a BUY rating.

uation Summaryn ales TA rofit Rs x

BIDTA, x x

%


stretch the balancmphasis on plant p

hnology, product y to MACA’s bglobal vehicle p

parentage, and

t price, the stocR of 20x (based oRs 340. Given tha

onservative vs. C, we expect MAC

ness and strategy

F5

(8


Simpson’s Para

ce sheet of any profitability and in

portfolio, and gbusiness in theplatform. Attractiv

a scalable mode

ck trades at 12x on 10% discount tat this is a busineCIE Automotive’sCA’s financial pestart delivering. W

FY14P FY15E5,712 57,4044,151 5,628

-85 1,766(0.3) 5.4

800.5) 38.520.6 14.8

4.7 4.2(0.6) 10.9

Estimates

adox | Mahindra

entity as their woncentives.

lobal client base,current age of

ve return ratiosl will help the co

our FY17 EPS. Wto peer average) ess turnaround sts expectation frerformance to beWe are initiating c

FY16E 66,781

8,003 3,585

11.0 19.0 10.0

3.4 18.2

a CIE | 14

orking is

, there is vendor

, strong ompany’s

We have to arrive tory, our rom this etter our coverage

FY17E 80,217 10,836

5,568 17.1 12.2

7.3 2.8

22.7

Novem

Compa BHFC MSS IN WIL IN BOS IN SKF IN Indian AveGlobal parCIE SM WBC US SKFB SS Multiples SKF IN WIL IN

Source: B

Key ITurnaroCurrentFY16-17cultural As a recompan IntegraPotentiaentities,reflecterecur w

mber 10, 2014

rable Valuation S____FY1

129

192215

rage 16rent of India subsidiarie

610

7premium/discount of M

10082

loomberg, PhillipCap

nvestment Round time and quly, MACA expects7. However, this differences. Also

esult, financials mny’s own.

tion issues relateal roadblocks in , which may creatd in the financiaith the new CIE m

Sheet __EV/EBITDA____ 16E FY17E 2.4 10.5 9.1 7.4 9.5 13.9 2.6 18.8 5.6 13.2 6.1 13.3 es 6.0 5.5 0.7 9.6 7.8 7.1

MNC listed subsidiaries0.0 85.1 2.2 44.8

ital India Research

Risks uantum may not s a meaningful tumay take longer , the productivitymay fail to achi

ed to cultural valintegration couldte hurdles — this l deterioration o

management. How

______PER______FY16E FY17E

22.4 17.921.8 16.329.9 20.733.4 29.524.2 20.227.3 22.4

12.6 10.715.5 13.211.5 10.1

s in India 110.4 100.0

92.9 56.8

meet internal bernaround of low-ythan that due to

y improvement maeve our expecta

ues d be the different

in turn can impaf MFE after M&Mwever, given that

_ ____EV/SalesE FY16E9 2.43 1.07 3.75 3.92 2.14 2.6

7 0.82 1.9

1.2

0 76.58 97.9

enchmark yielding businesse internal resistancay fall short of tarations as well as

t work cultures inct productivity. TM’s takeover anda year of trouble

s____FY17E

2.10.92.83.41.82.2

0.71.71.1

57.961.8

es by ce or rgets. s the

n the This is d can e-free

coopissue ShaManfinanentitIndiageo RegOnebusiJapacomgove ManCIE’domIndiabusiHowof thexec

perative integraties cropping up is

rp slowdown in Eny of the problemncial crisis as theties. We are buila over our forgraphies may imp

ulation related re of the key reinesses was a shuanese tsunami of

mpanies significanernment directive

nagement attritio’s strategy of lig

mestic managers aa or Mahindra Syiness plans given

wever, from what his happening as cutives through ad

ion has already pvery low.

Europe and Indiams in the MFE bus

prolonged downding in a mild rerecast period. pact the financials

isks easons for finanutdown of the nuf 2011. This has tly (heavy power-

es in other geogra

on after consolidght corporate oand senior executystech entities. Tlong-term customwe know of CIE’smanagement ha

dequate compen

Simpson’s Para

passed, the poss

a may impact tursiness have emergnturn impacted thecovery in EuropeEconomic deters of new entities.

cial deteriorationuclear power plaincreased power-consuming indusaphies may impac

ation may impacoverheads may ctives — this may

This in turn may imer relationshipss turnaround trackas anticipated thissation such as sto

adox | Mahindra

sibility of new int

rnaround ged after the 200he financials of Ee and decent recrioration in bot

n of Germany’s nts in Germany a

r costs if Germanstry). Similar reguct the business ma

ct Indian businescause discontentlead to higher atimpact short to mof the existing mk record, we see s and tried to rewock options.

a CIE | 15

tegration

08 global European covery in h these

forging after the

n forging ulation or aterially.

s t among ttrition in mid-term anagers. little risk

ward key

Novem

CompMahindcomponSpain-b(formalitbe amobe formCIE’s EuCIE bupresenccastings

MACA Automoits globcustomeFY18.

Sales: 5

Capac

MahindC

Sales: E1

Capaci

mber 10, 2014

pany Backgrra CIE Automonent player, whic

based automotive ties pending), MA

ong the top three med by merging uropean forging bsinesses in Asia

ce in India, Spain,s, gears, and stam

will emerge as a otive group with abal forging operater accretion shou

MFEEUR252mnPlantscity: 185k T

S

dra Hinoday ‐CastingEUR46.3mnPlantsity: 70k TPA

M

S

C

round otive (MACA) isch will be formed

component majoACA (which will bautomotive forgiMahindra Systec

business. The newand for its glo

, Germany, UK, Itmpings.

large global autoa focus on Asia ations. The likely ld drive MACA’s

India ForgingSales: EUR55mn

1 PlantsCapacity: 85k T

ahindra Hinoday ‐Magnetics

ales: EUR13.8mn1 Plants

Capacity: 7.2k TPA

Mahind

s an emergingd by the alliance or), and M&M Systbe a subsidiary ofng companies of

ch’s listed/non-listw entity will be thebal forging opetaly, and Lithuani

omotive ancillary across all of CIE’ssynergy in terms topline by around

CIE Forging ‐EuropeSales: EUR150mn

3 PlantsCapacity: 110k T

Mahindra Composites Sales: EUR6.3mn

2 PlantsCapacity: 1k SMC & 4k

DMC

ra CIE

g global automof CIE Automotitech. After the mef CIE Automotivethe world. MACA

ted auto entities e growth engine fration. It will haa, supplying forg

player within theproduct verticalsof new business

d 69% (15% CAG

MUSCO StampSales: EUR100

5 PlantsCapacity: 100

Metal castelSales: EUR49m

1 PlantsCapacity: 3mgears/annum

otive ve (a erger e) will A will

with for all ave a gings,

e CIE s and s and R) by

Key compain

Sourc

ping 0mn

0k T

lomn

m m

product lines of mposites; 5) castinnting (to be launch

ce: Company

MUSCO MahiCompo

Mahindra GeTransmission Indi

Mahindra Forgi(Europe)

M&M

‐20%

the new entity wng and magnets; hed from CIE’s po

Mahindra CIE A

ndra osites

Mahindra Investments

(India)

ears & a Ltd (India)

ings

Mahindra CIE AuLimited*

2

53%

Simpson’s Para

will be 1) forging; and 5) plastic, alu

ortfolio in India).

utomotive is create

s MahindraGears

International

Metalcastello(Italy)

*Erstwhi

PIA 2(Spain)

utomotive *

MERGER

12.1%

28%

72%

adox | Mahindra

2) stamping; 3) guminium sheet m

ed

Mahindra Hinoday P

CIE Forgin

ile Mahindra Forgings Lim

CIE Automotiv

Autometel

99.9%

a CIE | 16

gears; 4) metal and

PIA 3

ngs

mited

ve

%

Novem

Source: C

Merger

Company

Mahindra

Mahindra

Mahindra

Mahindra

MUSCO

CIE Forgin

Source: C

Forgi

Ca

mber 10, 2014

Company

r and share swapy

a Hinoday

a Composites

a Gears Europe

a Gears India

ngs

Company

ngs Composites

Stamstings + MPD

Mahindra CAutomotive Lim

M&M

Mahindra Systec

Indicates transaction

Indicates merger

Listed company

ratio

I

Gears

mpings

IE mited

ch

12.1% ‐ 2nd largest s

*CSp

CIE Au

Forgings

Machining

Stampings

Aluminium

Plastics

Bio‐fuels

nf. & Comm. Tech

A

shareholder

>50%

CIE forgings plants in pain & Lithuania

Swap

utomotive

Brazil

Mexico

USA

China

Autometal

Forgings, macasting, stamplastics, pain

Aluminium, fomachining, splastics, pain

Plastics

Forgings

p ratio

1.10

0.90

0.17

0.20

2.84

1.05

Mah

CIE CIE comAutoMorand in thcom Throsectsust

chining, mpings, nting

orgings, tampings, nting

hindra CIE globa

Automotive: BacAutomotive is a

mponents and subomotive group, rocco, Czech RepMexico. CIE Aut

he auto componemponent manufact

ough its subsidiartor, providing tainability, transpo

l footprint

ckground a Spain-incorpora

b-assemblies for thwhich operates

ublic, Romania, Btomotive has emeent space and raturers by sales.

ies, it is present intechnological soort, and communi

Simpson’s Para

ated company, whe auto industry. in Spain, Port

Brazil, Argentina, Cerged as one of tnks among the t

n bio-fuels and tholutions to the cations sectors.

adox | Mahindra

which makes autIt is the parent of

tugal, France, LChina, Russia, Guhe leading globatop-75 global aut

he information techealthcare, ed

a CIE | 17

tomotive f the CIE

Lithuania, atemala,

al players tomotive

chnology ducation,

Novem

CIE Aut

mber 10, 2014

tomotive: Busineess/operational s

tructure

Simpson’s Paraadox | Mahindraa CIE | 18

Novem

CIE pro

Source: C

mber 10, 2014

oduct portfolio in


n functional area

al India Research

picture

Tec

Proce

Stamp

Forgin

Gears

Plasti

Alum

Castin

Painti

Roof S

Comp

Magn

Sourc

hnology integrat

ess

pings

ngs

s / Machining

cs

inium

ngs

ing

Sys.

posites

nets


ted worldwide

EU NAF


Simpson’s Para

FTA Brazil R

adox | Mahindra

Russia India

a CIE | 19

China

Novem

CIE ACIE’s Rautomofocus ovehicle Focus a

Source: C

mber 10, 2014

Automotive:&D is focused o

otive industry. Its an emerging powcomfort.

areas for R&D on

Company: PhillipCapita

Products alon providing soluannual R&D expe

wertrain/gearbox,

n emerging indus

al India Research

ligned with utions for the emenditure is aroundlight-weights, em

stry trends

sector drivemerging trends od 2.2% of its salesmission reduction,

ers f the

s with , and

CIE

Sourc

product portfoli

ce: Company: PhillipC

o

Capital India Research;

Simpson’s Para

; orange bubble point

adox | Mahindra

ts leadership product

a CIE | 20

Novem

R&D foGloballyshort prpace wconsolidwith thegroup, old MAR&D inv Techno

Source: C

aads

ThasseindehaGRin

mber 10, 2014

cus of CIE to hely, the automotivroduct lifecycles. T

with OEMs to redation in the Inde OEMs investmeMACA will benefCA entities may nvestments to rema

ologies focus on w

Company: PhillipCapita

he product ssociated with the ector drivers are creasingly emanded thereforeave HIGHER ROWTH than the dustry average

lp MACA in longe industry is seeTherefore, auto cmain relevant —ustry (size and bnts on new technfit from its parentnot have had theain relevant.

winning product

al India Research

e

sfsdf

Particulartrends affPOWERTR(ENGINE AGREABOXpart wherAutometasignificanand therecommitmfuture

g-term eing rapid technoomponent manuf

— this is the mabalance sheet is nologies). Being a t’s technological financial strength

s

rly these fect the RAIN AND X), a vehicle re al has a very t presence, e is a clear ment to the

asfsd

ological changesfacturers need to in reason for veneeded to keep part of the globaprowess; many oh to sustain long-

These trends are global but largelydriven by EUROPas a PIONEER tre

s and keep

endor pace

al CIE of the -term

CIE To specprod

Sourc

y PE, nds

CoemCO•Fumsy

•EnTusy

•Adu

•WCoalcost

focus on winninggrow faster thancialised in differeducts with fastest

ce: PhillipCapital India

onsumption and mission reduction oO2/NOxuil engine and oil management: fuel injectiystem and oil panngines reduction: urbuchargers and EGR ystems (gas recirculationutomatic transmission: ual clutch, 8/9/10 speed

Weight reduction: omponents based on uminium, plastics and omposites. Electric poweteering components

g technology/pron its peers, CIE ent products withgrowth in the sec

a Research, Industry

of

on

n)CVT, ds

er

Greater s•Active andImpact absnew gener

Simpson’s Para

oducts has positioned ih an aim at gettctor.

sscurityd Passive Safety: sorption and airbags rations

adox | Mahindra

itself in such a wting a pie of the

Greater comfort•Refueling systems: C•Thermal and acoustmanagement: EncapEngine and Underbo(aerodynamic syste

•Interior work: Persothrough new materprocesses

a CIE | 21

way and e winner

Caplesstic psulation ody m)onalization ials and

Novem

MahinMahindthroughpresencof the MahindItaly, anand com Mahind

mber 10, 2014

ndra Systecra Systech foraye

h a series of locace across the autolargest Indian aura Systech scaled

nd the UK. Its keymposites. It emplo

dra Systech: Corp

h ed into the auto cl and internationa

o-industry value chuto component d up with manufy product areas aoys around 9,000

porate Structure

components indusal acquisitions wihain. Over the yeagroup. After a sfacturing units acre forgings, castipeople across va

stry in the early 2th an aim to buiars, it emerged asseries of acquisitcross India, Germngs, gears, stamp

arious companies.

2000s ld its s one tions, many, pings

Simpson’s Paraadox | Mahindraa CIE | 22

Novem

Finan Profit &As at 31st

Net sales

Growth, %

Other incom

Total incom

Raw mater

Employee e

Other Oper

EBITDA (Co

Growth, %

Margin, %

Depreciatio

EBIT

Growth, %

Margin, %

Interest pa

Other Non-

Non-recurr

Pre-tax pro

Tax provide

Profit afte

Net Profit

Growth, %

Net Profit

Unadj. sha

Wtd avg sh

Source: P

mber 10, 2014

ncials

& Loss Mar, Rs mn

me

me

ial expenses

expenses

rating expenses

ore)

on

id

-Operating Income

ing Items

ofit

ed

r tax

(adjusted)

res (m)

hares (m)

hillipCapital India Ressearch, Company

FY14 FY15E

55,712 57,404

3

137 156

55,848 57,559

-28,293 -29,329

-10,791 -10,335

-12,614 -12,267

4,151 5,628

35.6

7.5 9.8

-2,684 -2,853

1,467 2,774

89.1

2.6 4.8

-1,322 -855

395 435

1,750 0

2,290 2,354

-1,010 -589

1,280 1,766

1,280 1,766

(2,177.4)

(85) 1,766

326 326

326 326

FY16E

66,781 8

16

168

66,949 8

-34,401 -4

-11,102 -1

-13,443 -1

8,003 1

42.2

12.0

-3,005

4,998

80.1

7.5

-696

478

0

4,780

-1,195

3,585

3,585

103.1

3,585

326

326

FY17E

80,217

20

182

80,399

41,857

12,377

15,328

0,836

35.4

13.5

-3,309

7,527

50.6

9.4

-629

526

0

7,424

-1,856

5,568

5,568

55.3

5,568

326

326

Cas

Y/E M

Pre-ta

Depre

Chg in

Total t

Cash

Capita

Chg in

Cash

Free c

Equity

Debt r

Cash

Net ch

Sourc

h Flow

Mar, Rs mn

ax profit

eciation

n working capital

tax paid

flow from operating ac

al expenditure

n investments

flow from investing act

cash flow

y raised/(repaid)

raised/(repaid)

flow from financing act

hg in cash


ctivities

tivities

tivities

a Research, Company

Simpson’s Para

FY14 FY

2,290 2

2,684 2

6,213

-1,759

9,427 5,

-33,822 -3

-712

-34,534 -3,

-25,107 2

14,374 1

14,115 -2

28,488 -

3,382 1

adox | Mahindra

Y15E FY16E

,354 4,780

,853 3,005

491 87

-589 -1,195

,110 6,678

3,000 -4,000

0 0

,000 -4,000

,110 2,678

,766 3,585

,000 -2,000

-234 1,585

,876 4,263

a CIE | 23

FY17E

7,424

3,309

1,134

-1,856

10,012

-8,000

0

-8,000

2,012

4,806

-1,000

3,044

5,056

Novem

BalanceAs at 31st

Cash & ban

Debtors

Inventory

Loans & ad

Other curre

Total curren

Investment

Gross fixed

Less: Depre

Add: Capita

Net fixed a

Total asset

Current lia

Provisions

Total curren

Non-curren

Total liabili

Paid-up cap

Reserves &

Shareholde

Total equit

Source: P

mber 10, 2014

e Sheet Mar, Rs mn

nk

vances

ent assets

nt assets

ts

d assets

eciation

al WIP

ssets

ts

bilities

nt liabilities

nt liabilities

ities

pital

& surplus

ers’ equity

ty & liabilities

hillipCapital India Ressearch, Company

FY14 FY15E

2,102 2,212

6,160 6,150

7,885 8,035

2,340 2,134

580 598

19,068 19,130

712 712

72,090 75,090

-41,499 -44,352

547 547

31,138 31,285

52,422 52,630

20,146 20,575

2,995 3,009

23,141 23,584

14,907 12,907

38,048 36,491

326 326

14,048 15,814

14,374 16,140

52,422 52,630

E FY16E

2,890

6,787

9,425 1

2,422

695

22,219 2

712

79,090 8

-47,357 -5

547

32,279 3

56,714 6

22,667 2

3,415

26,082 3

10,907

36,989 4

326

19,399 2

19,725 2

56,714 6

FY17E

3,140

7,709

11,468

2,859

835

26,010

712

87,090

50,667

547

36,970

65,196

26,728

4,030

30,758

9,907

40,665

326

24,205

24,531

65,196

ProfY/E MPer SEPS (IGrowtBook FDEPSCEPSCFPS ReturReturReturReturTurnoAsset Sales/Sales/WorkiReceivWorkiLiquidCurreQuickIntereTotal dNet deValuaPER (xPEG (xPrice/EV/NeEV/EBEV/EB

Sourc

fitability, ProductMar, Rs mn

hare data NR) th, % NAV/share (INR) S (INR) (INR) (INR)

rn ratios n on assets (%) n on equity (%) n on capital employed (%over ratios turnover (x) /Total assets (x) /Net FA (x) ing capital/Sales (x) vable days ing capital days dity ratios nt ratio (x)

k ratio (x) est cover (x) debt/Equity (%) ebt/Equity (%) ation x) x) - y-o-y growth Book (x)

et sales (x) BITDA (x) BIT (x)


tivity, Liquidity a

%)

a Research, Company

Simpson’s Para

and Valuation RatFY14 F

(0.3)

(2,17 44.2

(0.3) 2.6 10.6

8.1 (0.6) 13.2

3.3 2.1 3.6 (0.1) 40.4

(20.8) (2

0.9 0.6 1.1 137.0 1 122.4

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adox | Mahindra

tios FY15E FY16E

5.4 11.0 77.4) 103.1 49.6 60.6 5.4 11.0 14.2 20.2 14.4 20.6

4.4 7.4 10.9 18.2 7.2 12.2

1.7 2.0 1.1 1.2 1.8 2.1 (0.1) (0.0) 39.1 37.1

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0.9 1.0 0.5 0.6 3.2 7.2 09.7 77.1 96.0 62.4

38.5 19.0 (0.0) 0.2 4.2 3.4 1.5 1.2 14.8 10.0 30.1 16.1

a CIE | 24

FY17E

17.1 55.3 75.4 17.1 27.3 28.4

9.8 22.7 16.4

2.2 1.3 2.3 (0.0) 35.1

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1.0 0.5 12.0 58.9 46.1

12.2 0.2 2.8 1.0 7.3 10.5

Novem

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