Mahindra CIE Automotive’s (MACA) Q1 results were marginally below our expectations as European subsidiaries missed our revenue and margin estimates due to inventory correction undertaken by the company. Domestic division surprised positively and posted an operating profit margin expansion of 152 bps q-o-q, as it benefited from lower raw material prices. We maintain that MACA will be a major beneficiary of the recovery in domestic and global passenger vehicle/CV sales. With initial fruits of synergy already visible, we believe the partnership will deliver much more.
Over FY15-17, we expect a 14 per cent CAGR in revenues and strong margin expansion in its European (MFE and Metalcastello) and domestic business, leading to an EPS CAGR of over 40 per cent. Higher margins and improved cash flow would lead to D/E declining to 0.3x and ROCE (post tax) improving to 15 per cent+ by FY17.
Maintain estimates and reiterate ‘Buy’ with a target price of ₹308 (unchanged) implying a valuation of 20x FY17.
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