Bill Forge acquisition to improve margins: Mahindra CIE

Auto component supplier Mahindra CIE Automotive will acquire 100 percent of Bengaluru-based forging firm Bill Forge for Rs 1,331 crore. The acquisition or “partnership” as MCIE management terms it, is expected to help both parties improve synergies.

The deal gives Mahindra CIE gives headroom for future buyouts and going forward margins for both the companies will improve due to synergies, said Hemant Luthra, Chairman of Mahindra CIE.

The acquisition brings a bigger opportunity in the commercial vehicles and utility vehicles market, besides giving Mahindra CIE an increased presence in north and south India, he told CNBC-TV18. He added that because of improved syngeries it would be surprising if growth for the two companies doesn’t accelerate.Below is the verbatim transcript of Hemant Luthra's interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.Sonia: Can you tell us what the blended margins for the company could look like post the acquisition getting completed because Bill Forge is sitting with healthy margins of about 20 percent while Mahindra CIE itself has margins of almost around 9.8-10 percent. So post acquisition, what kind of operational performance can we expect?A: I do not like the word acquisition, we like the word partnership because in all of the stuff that we have done in Mahindra CIE, nothing has ever been acquired within inverted commas. In an auction we have always invited the promoters of the company that we are making an investment in to invest in the parent, which is what is happening here. So while we are acquiring 100 percent shares of the company, they are investing 50 percent of the proceeds back into Mahindra CIE. So it is an alliance.As far as margins are concerned, Mahindra CIE has got a little short of 10 percent, it is now about 11 -- Bill Forge is running at 20 and both margins are expected to improve because some of the stuff that we have been doing in Germany, which required taking one time charges to shut down plants, move stuff to different locations, get through new approvals, all of that is pretty much behind us. So, margins will improve.The other reason margins will improve is the synergy because Bill Forge is running at full capacity because they service the two-wheeler and the passenger car market. We have got some capacity headroom now and so we are going to start moving stuff that Bill Forge did not take orders of and we are going to move it to Mahindra Forging. So margins won't improve all around.Latha: Does Bill Forge bring other kinds of synergies in terms of being able to mine your clients better?A: We never fell out of love with this company and when we met the promoters, we feel even deeper in love, if I may use the word.The synergies that we are talking about are -- one is we serve the UV and the CV market. We don’t serve the passenger car market as much as we like to, we don’t serve the two-wheeler market as much as we like to and Bill Forge does all of that.The second synergy is that Mahindra CIE is pretty much based in Pune belt whereas Bill Forge has got both north and south.The third is the customer mix, our top two customers take about 55 percent of our turnover whereas Bill Forge top 60 percent of turnover comes from 10 different customers. So there is a huge synergy and we are very pleased to have this partnership.Sonia: Can you help us with some more clarity on what the growth for Bill Forge would be over the next couple of years because so far the growth has been very healthy, it is sitting on a turnover of Rs 580 crore as on FY16, which is a growth of almost 17 percent compared to what they did in the previous year, is this a run-rate that we can expect?A: I don’t like to make forward looking statements because I will get you and me in to trouble but yes, I would be surprised if the growth did not accelerate both for Bill Forge and for Mahindra CIE and the margins would improve.Latha: When we spoke last time, you had told us that you have set aside money for acquisitions. One has come, should we expect more?A: Why not? If you see the structure that we have announced to the stock exchange is that we buy into the company, we had a choice of buying into the company or merging the company and I will be completely frank with you and our shareholders, merger would have meant that we would have been pretty much prohibited from making any changes in the capital structure for 12 months and we did not want to be locked into that syndrome. So we bought into the company, they have invested back in us. If we ever had to do anything more, there is no restriction because there are no filings before the court.We are looking at bolstering the structure of the company in terms of equity structure as it is just now our debt in Mahindra CIE is only about 1.2 or 1.3 times EBITDA. With this combined thing, we will be still running about that much and we have also had QIP issue -- the timing of which will be appropriate, pricing will be something that will be determined on timing. So we are collecting the power and maybe Governor Rajan has done all of us a favour by putting non-performing assets on alert and many of those non-performing assets could come to the market but we have only one philosophy, which is that any acquisition has to be earnings accretive and the other philosophy is that we must have management that will continue same values, same culture, same clean governance and we are happy on those counts. Not many companies will meet that criteria but yes we are on the lookout for more acquisitions.Sonia: Bill Forge also has an exposure to the export market and the export market numbers have grown very well, 2.5 times over the last two years, what kind of leverage do you see from the Bill Forge's exposure to exports and how could it impact your own numbers over the next two years or so?A: I have told you that Bill Forge has been growing at 20 percent, should continue that growth. We have had some excess capacity in Mahindra CIE, we have got about 30 percent headroom so they should be able to service those markets. As far as exports is concerned, you may have been a little bit disappointed about how long it has taken but what has happened is that when you deal with different people across different cultures, you have to be absolutely sure that there is one set of rules that defines everything.So between Mahindra CIE Germany and Spain and all these places, we have unified the costing systems where everybody knows who makes what profit. Therefore, nobody gets possessive about their own particular plants. Once that is in place and the Bill Forge will follow the same philosophy then you move stuff around to maximise the profitability, so Germany does not have to do low-end work, which can be done in India and low-end is relative speaking. So that should help us with margins, just now our own exports are about 13 percent and Bill Forge is running a little better than that 16-18 percent and both are going to go up.Sonia: You said that you will be looking to raise funds through the qualitative institutional placement (QIP) route as well to the tune of Rs 700 crore. Should we expect anything before the end of this calendar year?A: I don’t know -- the idea is that if you don’t have a target, you don’t want to increase the capital and therefore reduce the earnings per share.So, we will do what we can do. It depends on what the target is and what is required but we don’t want to unnecessary bloat the capital because as it is we are sitting quite comfortably -- I don’t think we are in any rush to do something unless we have a target.