Mahindra & Mahindra - Global alliance helps unlock shareholder value; maintain Add - BRICS

M&M has planned to form global alliance for its auto component business (Mahindra Systech) by offering stake to CIE Automotive (CIE), Spain. Both M&M and CIE will invest in each other and will form a new company. M&M will buy a 13.5% stake (economic interest of 25%) in CIE for Euro96.2mn. We assess that M&M has unlocked value for shareholders of smaller companies under Mahindra Systech - like Mahindra Ugine, Mahindra Forging, Mahindra Composites. We believe the deal has marginal impact on our SOTP value (less than 1%). We maintain Add rating with target price of Rs1,090.

M&M will invest Euro96.2mn in CIE and CIE's Brazil-listed subsidiary - Autometal will invest in Mahindra Systech's autocomponent business. CIE through one of its subsidiaries (PIA) will acquire a stake in listed and unlisted companies under Mahindra Systech - Automotive Component business, from Mahindra Group. CIE will contribute its forging businesses in Spain and Lithuania and all companies will be consolidated under Mahindra Forgings, which will then be rechristened as Mahindra CIE.

Mahindra CIE will continue to be listed on Indian exchanges. Steel (part of Mahindra Ugine), engineering services and aerospace will not be part of the said deal. The deal is likely to be completed within the next 12 months. Estimated revenue (based on FY13) for Mahindra CIE Automotive will be Rs50.7bn of which Rs40bn revenue will be attributable to Mahindra Systech and Rs10bn to CIE Forging companies. The new company will operate in segments like forgings (65% of total), castings and magnets (9%), composites (1%), gears (10%) and stampings (15%). Mahindra CIE will be benefited from clients of Mahindra Systech, based in India and Europe, and CIE, based in Europe and USA. Additionally it will also benefit from Mahindra Systech's low cost operational model, which is likely to help it to improve margin in future (CIE margin 14%).

Outlook and valuation

Due to the slowdown in the tractor industry, M&M's dependence on the auto segment has increased significantly (72% of revenue in Q4FY13 vs. 66% in Q1FY13). Last year, due to several launches in the UV segment, the market also expanded and M&M performed well in the UV category. However, considering the slowdown in the overall economy and rising diesel prices, we expect the growth in auto to decline to 14% in FY14. M&M plans to launch 3-4 variants in FY14, which will help the company further improve its positioning within the segment.

We expect the tractor market to continue witnessing demand pressures in FY14, due to lower MSPs in several food commodities, higher interest cost and economic slowdown, and report a growth of only 4%. We expect the tractor industry to record a higher growth (9%) in FY15, as we expect an improvement in economic conditions and the agri sector.

M&M trades at 14.5x FY14E and 12.4x and FY15E standalone earnings. We value its core business at Rs708/share at 12x FY14 standalone EPS, a 15% discount to its 5-year average, and its subsidiaries and other investments at Rs383/share (after applying a holding company discount of 20%), to arrive at our SOTP-based target price of Rs1,090. Maintain Add.

Source : Equity Bulls

Keywords