Jun 17, 2013, 12.11 PM IST | Source: CNBC-TV18

Deal with CIE a marriage made in heaven, says M&M's Luthra

Hemant Luthra, president, Mahindra Systech, said the deal will help the two companies grow into new geographies. The product range as well as geographical presence of the two firms will complement each other since CIE is present in Latin America, where Mahindra is not and in India Mahindra has a strong presence, while CIE does not, he said.

The biggest advantage that CIE has is that they provide forgings to the passenger car market, we provide forgings to the truck market

Hemant Luthra

Chairman

Mahindra Sanyo Special Steels

The deal inked with Spain's automotive component maker CIE SA is like a marriage made in heaven, Hemant Luthra, president of Mahindra & Mahindra 's Systech Sector said on Monday.

M&M will merge all its auto components businesses into Mahindra Forgings, as per the deal announced on Saturday . Mahindra Forgings will be renamed Mahindra CIE Automotive, where the Spanish auto components maker will hold 51.1 percent and Mahindra 20.2 percent. T1he remaining stake will be with shareholders.

Mahindra will use the proceeds from the stake sale in its subsidiaries to buy 13.5 percent stake in CIE, at 6 euro a share, a small premium to its Friday's close of 5.57 euro.

Also Read: Mahindra Ugine, Forgings hit 52-wk high on deal with CIE

Luthra told CNBC-TV18 that Mahindra had been looking at consolidating the Systech business into one unit for some time now and CIE was interested in all of Systech.

"...It was all about the complementarity of their product range in Europe, the fact that they are in Latin America, which we are not and the fact that we are in India, which they are not," he said.

Below is the verbatim transcript of Hemant Luthra's interview on CNBC-TV18

Q: Can you just start by taking us through why you wanted to do this deal with CIE in the first place? What are the strategic benefits?

A: We have been looking at consolidating Systech into one entity. If you look at what is happening to the Original Equipment Manufacturer (OEM) market in the last 50 years you have seen a 50 percent drop of OEMs. In the supplier market you have seen everybody rationalising the number of suppliers and they have fallen from 30,000 suppliers to less than 10,000 suppliers today in the last 25 years. So consolidation was essential. We wanted to save cost.

We wanted to reduce overhead and we had a number of suitors who loved Mahindra, the quality of management, the governance and so on, but all of them wanted it in specific vertical. It was CIE which said that they are interested in all of Systech and depending on how much you want me to say at this point of time and how many follow-up questions you have got it was all about the complementarities of their product range in Europe, the fact that they are in Latin America which we are not and the fact that we are in India which they are not, so it was a marriage made in heaven so to speak.

Q: Do you think they will be able to affect a significant and swift turnaround in something like a Mahindra Forgings which reported a loss in FY13?

A: You have to break it up into two pieces. Mahindra Forgings has had a spectacular result in India and in India the profitability and EBITDA has gone from Rs 410 million to Rs 690 million. Mahindra Forgings in India does not have a problem.

Mahindra Stamping in India does not have a problem. Mahindra Gears in India does not have a problem and Mahindra Castings in India has had almost a 300 percent increase in Q1 over Q3 and I am not going to make forecast about the Futures because now the unlisted company is going to be a part of a listed company. In Europe what has happened is that we did an EBITDA of about 22 million in FY11. FY12 was also pretty good. It was the second half of FY13 that caught us on the wrong foot.

The advantage of CIE is that they have seen what we are doing in terms of turning Europe around. They do not have a different prescriptive medicine. The biggest advantage that CIE has is that they provide forgings to the passenger car market, we provide forgings to the truck market. There are some products that can be moved logically in terms of cost from Germany to India, there are other products that can be moved from Germany to Eastern Europe and Spain. So I do not think there is any magic that they are proscribing that we could not have done. It is just that in FY13 Mahindra Forgings in Europe was on the wrong foot.

Q: Could you just talk a little bit about the valuations that have been struck for the deal? How M&M chose to value CIE and whether or not from M&M's point of view this has been a lucrative deal in the sense that it has been a cheap deal that you have been able to strike?

A: I do not think we should talk about deals being cheap, particularly when there are partners. The CIE price is about 5.65 euro today and we have said that we will buy it at 6 euro. They have looked at the Mahindra Systech companies and if am allowed to refer to my notes, Mahindra Hinoday which is the casting business, they priced it at about 20 times EBITDA and FY13, Mahindra Castings about 22 times and Mahindra Gears at about 9 times, Mahindra Stamping about 10 times and therefore we think the valuations are fair given the fact that they are getting 51 percent.

As far as the deal itself is concerned I think it is interesting to look at the numbers. CIE owns 75 percent of Automatal which is their subsidiary in Brazil. Automatal has a market cap of 1 billion euro. 75 percent of that means that 750 million euro of value should be sitting on CIE's books and CIE itself is valued at 700 million euro. So we think that even though in Europe they are making an EBITDA of 100 million euro we think at present valuations at which we are entering CIE is seriously undervalued. I think this deal is very good for both M&M and CIE.

Q: What kind of growth potential do you see for Mahindra Forgings though given the kind of canvas that CIE has, the markets it has access to and the kind of clients as well?

A: What actually triggered this was that because our customers in Europe have been very satisfied customers, long time customers and they said that the growth market are no longer Europe and the growth markets are going to be Latin America. Some of our customers said can you follow us to Mexico and can you follow us to Brazil and if we had done that we would have potent capacity which would have been sub-optimal in terms of Return on Capital (ROC). CIE already had that capacity in Mexico and then they turned around some of CIE's customers who are the passenger customers said that can you put up capacity in India and CIE looked at us and said we can use capacity here. So I think the complementarity means that you can grow volume without having to put a capex and therefore get a higher ROC.

The other thing that can happen in terms of complementarity is that CIE has not had the bandwidth to look at Indonesia and Thailand which are two big markets. I think we will go at those markets. Honestly between CIE and ourselves we have also identified a couple of other targets in India which could provide growth in the sectors that we have not looked at yet. We are in composites, they are in plastics. We are in castings of grey iron and ductile iron and they are in castings of aluminium. Some of those companies that we never looked at before; we are now in a position to look at them all over again.

M&M stock price

On April 23, 2014, Mahindra and Mahindra closed at Rs 1036.75, up Rs 12.45, or 1.22 percent. The 52-week high of the share was Rs 1054.00 and the 52-week low was Rs 741.50.


The company's trailing 12-month (TTM) EPS was at Rs 60.90 per share as per the quarter ended December 2013. The stock's price-to-earnings (P/E) ratio was 17.02. The latest book value of the company is Rs 238.22 per share. At current value, the price-to-book value of the company is 4.35.

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