Mahindra CIE: Is M&M paring its holding substantially a cause for concern?

Automotive component manufacturer Mahindra CIE continues its downward dive on the stock market after Mahindra & Mahindra’s stake-sale announcement on March 13. M&M has reduced its holding from 9.25 per cent to 3.19 per cent at Rs 357.39 per share.

The stock had hit a 52-week high on February 24, following its December quarter results. In Q4CY22, its net profit had tripled year on year (YoY) to Rs 195 crore and its revenue had risen 35 per cent YoY to Rs 2,247 crore, which buoyed market sentiment. But a few days later, when M&M reduced its holding by more than half, the stock plunged nearly 10 per cent and is falling since.

Is there reason to worry for public shareholders as one of the promoter entities has reduced its holding by nearly 65 per cent?

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Pratik Kothari, a buy-side analyst with Unique Asset Management, said he was surprised that the stake sale was done at a 10 per cent discount to the market rate as against the usual 3 to 5 per cent. But he does not read much into it.

Why is M&M selling?

“M&M has said, even a couple of years back, after the new CEO came in, that it would be exiting its non-core assets and (as part of that) they have been exiting Mahindra CIE for a while… which is reflected in the name change as well,” said Kothari. In December 2022, Mahindra CIE’s board approved the change of name of the company to CIE Automotive India Ltd.

“Until now M&M used to sell and the other promoter CIE would buy but CIE has exhausted the 5 per cent (stake buy ceiling) allowed for this fiscal and therefore M&M would have sold it in the open market,” he added. CIE holds a 65.71 per cent stake as of December 2022.

Abhishek Gaoshinde, Deputy Vice President of Research at Sharekhan by BNP Paribas, believes that it is better for M&M to sell the minority stake in the company and allocate the funds to other structural areas for long-term fundamental growth. He does not think that the operational performance of the company will be affected by this partial exit by M&M. In fact, Gaoshinde felt that CIE’s increased shareholding will be good for the company’s bottom line.

“It is assumed that now Mahindra CIE is more of a CIE group company. CIE group delivers better EBIDTA margin than Mahindra CIE and it is expected that Mahindra CIE will adopt the CIE group’s business practices for margin improvement,” he said.

The sharp correction in the stock prices was because of the bulk deal and the muted market sentiment, he said, adding that the larger business strategies (of Mahindra CIE) appear to be in place.

Growth trajectory

Mahindra CIE’s growth prospects still look promising to both analysts on improving market share and strong order book. Gaoshinde also sees the “judicious” capacity building that aligns with the order book schedule and visibility as another positive.

Mahindra CIE’s European business shot up by 43 per cent YoY to Rs 1,323.1 crore in the December quarter, which was almost equal to its India revenues of Rs 1,407 crore (nearly 22 per cent YoY rise). Analysts believe that margins of the European operations are now set to increase significantly because of various reasons.

Kothari pointed to metal and energy costs coming down; electricity price in Europe is at EUR 140/MW versus EUR 400/MW at the peak. He added that the company is aiming to increase the operating margins from 13-14 per cent now to 18-19 per cent.

Gaoshinde said that margins in the European business will improve thanks to the sale of its German forging business, an increase in focus on the passenger-vehicle business including EVs and a reduction in energy prices.

Mahindra CIE also seems to be adapting well to the cleaner mobility trend. “Electric vehicles (battery and hybrid for European markets) make up 30 per cent of the company’s turnover and 30 per cent of its order book,” said Kothari, listing it as one of the positives in the company.

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Risks involved

The risks to the company, Kothari said, could come from the persistence of semiconductor shortage, sharp raw-material price volatility and recession-led delays in auto-sector pick-up.

Gaoshinde also sees raw-material cost volatility as a risk and geopolitical troubles and adverse macroeconomic conditions as other challenges that could emerge.