Mahindra CIE: Why does Street see further upside in the stock?

Strong domestic demand and hope of improvement in margins in the European market have perhaps kept the Street optimistic about Mahindra CIE, despite volatility seen recently. The company’s revenue come largely from two geographies – India (64 percent) and Europe (36 percent).

Analysts’ target prices are set even 19 percent higher than the current market price of around Rs 420, even as the stock fell as far as 7 percent on February 27 from the previous close, after zooming up by 16 percent three days earlier.

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At ICICI Securities, analysts expect the stock price to gain another 19 percent on strong demand, besides operational efficiencies and improving return ratios.

They estimated the company’s sales to average 12.4 percent annual growth over 2022-24, thanks to “healthy business” from its domestic clients like M&M, Tata, Maruti Suzuki and growth in passenger-vehicle vertical in the European market. Around 75 percent of the European revenues come from PVs.

At Motilal Oswal, too, the analysts highlighted strong domestic demand. “The India business outperformed the European business, driven by strong domestic demand, while Europe demand showed signs of improvement, on the back of cost pass-through and easing chip shortages,” wrote analysts at Motilal Oswal, in their recent report.

With prices of commodities falling and the company able to pass on energy costs to customers partially, the brokerage’s analysts believe the margins in both geographies are set to improve. They have increased their CY23/CY24 earnings estimate by 4 percent/1 percent to reflect improvement in the EU business, and have reiterated their Buy call on the stock with a target price of Rs 450.

Its December quarter results had good numbers with net profit rising 153 percent year-on-year (YoY) to Rs 195 crore, revenue going up 35 percent YoY to Rs 2,247 crore and Ebitda margin expanding by 221bps YoY to 13.01 percent. The bottomline was affected by two exceptional items, from a one-time payment made to employees who opted for a voluntary retirement scheme (VRS) and from sale of land in Pune.

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Improving bottomline

Mahindra CIE’s Germany forging business, Mahindra Forgings Europe or MFE, and the December quarter (Q4FY22 for the company) was the first quarter that did not include the subsidiary’s numbers. In a December 2022 filing, the company had informed the exchanges that the European business has been put on the block.

Besides the ability of the company to pass through costs to clients, the removal of this subsidiary from the picture is expected to improve the company’s margins. “Mahindra With o/p (operating) leverage at play and efforts on operational efficiencies post sale of German forging business, margins are seen improving to 14.1 percent by CY24,” wrote ICICI Securities’ analysts.

The brokerage’s analysts are expecting “superlative” cash flow from operations (CFO) and free-cash flow (FCF) growth of around 7 percent and 5 percent, respectively, over CY22-24. This, they expected will improve the return ratios – RoE and RoCE to improve to 15 percent and 17 percent, respectively.

The company has been diversifying its product portfolio to adapt to the electrification trend, especially in its crucial European market. In the new orders won in 2022 and that totalled to Rs 1,000 crore, a third or Rs 300 came from new EV orders.

If there are significant order wins in this vertical, the stock could be re-rated, noted MOSL’s analysts.