Mahindra CIE shares jump over 3% as Motilal Oswal indicates a 15% upside

Automotive component manufacturer Mahindra CIE gained over 3 percent intraday over the board’s decision to sell off its German CV forging operational segment.

Domestic brokerage firm Motilal Oswal Financial Services believes this is a step in the right direction and has a ‘buy’ rating on the stock with a target price of Rs 360. This indicates an upside of 15 percent from Monday’s close of Rs 313.

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Motilal Oswal believes that the sale of the German forging operations – housed in Mahindra Forgings Europe AG MFE – will help it improve its consolidated financials. The German operations have consistently been in the red with the cumulative losses rising to a €22.6 million over 2018-21.

The brokerage house also believes that the sale of the German business will help the company step up its focus on the light vehicle industry, which is rapidly leaning towards a EV transition. In its report, Motilal Oswal pointed out that the sale of the German operations will reduce the net debt by Rs 440 crore from the Rs 680 crore this fiscal.

“Assuming this transaction goes through, our CY23/CY24 consolidated revenue/EBITDA/PAT will see a downgrade of 16 percent/7 percent/3 percent, whereas EBITDA margins will be higher by 160 basis points to 14.7 percent in CY23E. Also, consolidated RoE will see substantial improvement, though benefit will depend on sale consideration.” the brokerage house said in its report.

Considering the strong demand in India, Mahindra CIE is prioritising domestic demand over exports. It has a good order book and strong traction in new order wins, the report stated, and is confident of outperforming the domestic auto industry by 10 percent.

The company reiterated its capex guidance of 5 percent of consolidated revenue, with large allocation to the Indian business. It has also won new orders in certain EV specific components and is receiving strong demand for its gear and stamping division.

Mahindra CIE is in the business of manufacturing and supplying of engine and chassis forged components for commercial and passenger vehicles, such as crankshafts, steering knuckles, stabilizer bars, gear blanks, front axle beams, levers, flanges, control arms, camshafts, connecting rods, pitman arms and piston rods and other non-automotive products.

The company has 11 subsidiaries overseas, out of which Schöneweiss, a German subsidiary, is one of the leading axle beam manufacturers in the world.