Owing to weak demand, near-term pressures to remain for Mahindra CIE

Auto component maker Mahindra CIE was the worst-performing stock among the larger auto component companies in calendar year 2019 (CY19). The stock, which shed 34 per cent in CY19, has been underperforming its peers on the back of weak demand from automakers in its key markets of India and the European Union (EU), internal restructuring, and integration of acquired entities.

The near term could see some pressure, especially in the European business. While the passenger vehicle market, which has recovered somewhat, is a positive, the large decline in European commercial vehicle business is likely to continue, given the demand contraction.

Further, the company’s decision to forego some of the small volume and unprofitable products across its German plants is also expected to impact revenue. Analysts at Antique Stock Broking expect the European business to grow at -3 per cent in 2020 (CY20), as business loss in commercial vehicles would be partly offset by passenger vehicles and gears business. About 55 per cent of its revenue comes from the EU market.

Analysts at Ambit Capital say a higher mix of stable passenger vehicles and two-wheelers will enhance scale and return on capital employed (RoCE) while derisking the company from exposure to cyclical segments, such as commercial vehicles and tractors.

Higher business from its parent CIE and recent acquisitions (Bill Forge, Aurangabad Electricals) are expected to enhance the operating profit and margins over the next couple of years. The India revenue mix, too, is expected to move towards higher RoCE businesses.

As was the case with the last two buys, analysts expect the company to deploy generated cash to acquire higher RoCE assets, thereby bolstering earnings without diluting equity or increasing leverage. Going ahead, the key growth target for the company would be to expand into Association of Southeast Asian Nations markets, focus on lightweighting components, and purchase assets from CIE.

To address risk on transition to electric vehicles, the company is identifying and developing capabilities in existing segments, such as gears and magnets. While there are near-term challenges, analysts expect growth to come back from 2021 (CY21) on new product business and improvement in the operating performance.

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