Market experts SP Tulsian of sptulsian.com, Umesh Karne of Brics Securities, Mitul Shah of Karvy Stock Broking and Amit Kasat of StanChart concur, on CNBC-TV18, that the deal will mutually benefit both companies in terms of synergies and geographical reach.
Mahindra & Mahindra (M&M) announced that it has inked a mega global alliance with Spanish auto component company CIE Auto on Saturday at a board meeting.
Market experts SP Tulsian of sptulsian.com, Umesh Karne of Brics Securities, Mitul Shah of Karvy Stock Broking and Amit Kasat of StanChart concur, on CNBC-TV18, that the deal will mutually benefit both companies in terms of synergies and geographical reach. However, the experts add that further details of the agreement, which are awaited, will provide a clearer picture for investors and the auto industry as a whole.
Below is an edited transcript of the discussion on CNBC-TV18
In his reaction to the deal SP Tulsian of sptulsian.com says that the structure of the deal limits cash outflows. "Mahindra and Mahindra’s transfer of its 52.65-percent stake in Mahindra Forgings and 64.96-percent stake in Mahindra Hinoday will create a larger entity that will emerge with CIE Automotive to afford Mahindra and Mahindra a minority stake of 13.5 percent in CIE Automotive," he adds.
Tulsian further clarifies his view that M&M eventually will hold all those stakes in CIE Automotive. "M&M has clubbed its entire auto ancillary business into one company called Mahindra Forgings which has been used to acquire a 13.5-percent stake in CIE Auto."
On the possible benefits for the auto giant, the reaction of the stock market and the new synergies, Tulsian explains, "M&M held majority stakes in a slew of companies that were unable to grow to optimum levels or offer the advantages of economies of scale or geographical reach. So, the auto giant has clubbed all its majority stakes in these businesses which are miniscule globally for a minority stake in an internationally larger auto company."
Commenting on the development Umesh Karne of Brics Securities says the deal is very positive for M&M. "The stake in CIE Automotive will definitely help M&M expand its footprint globally and offer a client base consisting of Volkswagen, Suzuki and PSA."
According to the agreement, M&M will sell 52.65 percent of Mahindra Forgings to CIE for Rs 393 crore. Karne explains that he awaits further details that will reveal the impact on M&M.
Mitul Shah of Karvy Stock Broking views the deal as positive as it would afford strong synergies for both companies. "Slowly Europe is recovering from the slowdown, the US is witnessing reasonable growth, especially in the automobile sector, where the passenger- and commercial-vehicle segments also improved drastically. These positive trends will offer financial and synergetic benefits for M&M."
Regarding the impact on the M&M stock, Shah adds that the only when the full details of the agreement are available, will it be possible to form an estimate of the impact on the stock.
Mitul Shah points out that the agreement will not cause any cash outflow from M&M.. "The deal is a bit complex and we are not in a position to judge immediately. But prima facie it appears that there will not be any cash flows."
Amit Kasat of StanChart explains that the deal will offer M&M benefits of synergies and increase its presence within the country and overseas. "The deal is mutually beneficial and fulfils CIE’s plans of establishing a footprint in India."
On the possible impact on M&M, M&M Forgings as well as Mahindra Ugine at the bourses on Monday, Kasat estimates that the reaction on the stock market will definitely be positive. "The market has been reacting positively to Mahindra Forgings for the last month. From levels of Rs 35, it has almost crossed Rs 65. Investors in Mahindra Forgings and other M&M companies will definitely get to reap the benefits of this deal."
M&M stock price
On September 19, 2014, Mahindra and Mahindra closed at Rs 1375.30, down Rs 16.5, or 1.19 percent. The 52-week high of the share was Rs 1421.00 and the 52-week low was Rs 815.50.
The company's trailing 12-month (TTM) EPS was at Rs 59.61 per share as per the quarter ended June 2014. The stock's price-to-earnings (P/E) ratio was 23.07. The latest book value of the company is Rs 270.60 per share. At current value, the price-to-book value of the company is 5.08.
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