Brokerage firm Kotak Institutional Equities has upgraded Mahindra CIE Automotive Ltd to 'add' from 'sell' and increased the target price by 40.74 percent to Rs 380 a share.
Kotak has upgraded the stock due to the company's enhanced performance, particularly in its India operations. Strong order wins in both ICE and EV segments, an increase in market share with existing customers, and the acquisition of new customers are expected to drive the company's outperformance of the domestic automotive industry, Kotak expects.
The company's decision to exit Europe's truck forging business is expected to boost profitability and capital efficiency. The growing trend towards electrification poses a potential threat to the company's EU business, it believes.
Kotak expects Mahindra CIE's India business is expected to maintain its outperformance of the automotive industry's growth, propelled by several factors. First, the company has secured strong order wins in 2022, amounting to Rs 1,000 crore annually. Second, the company has won orders worth Rs 300 crore in the EV segment from various OEMs.
Third, the company is increasing its business share with existing customers, such as M&M, Maruti, and Bajaj Auto, and has also added new customers, including Bosch, Royal Enfield, PSA, and more. Fourth, the company is expanding its capacities across forging, stamping, machining, and magnetic segments, which is expected to drive revenue growth.
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Although the automotive industry faces several challenges in the near term, Kotak believes that Mahindra CIE is well-positioned to outperform the industry over the coming years.
"We have raised our 2024 consolidated EPS estimates by 6 percent, primarily driven by an increase in revenue and EBITDA margin assumptions for the India business, partly offset by lower revenue/EBITDA assumptions for the EU business after the exit from the truck forging business. Lower dependence on the EU business (30 percent of EBITDA; 50 percent earlier), strong order book and improved profitability of its India business drive our upgrade to ADD (from SELL earlier)," Kotak report said to its investors.
The company has recently decided to sell its truck forging business to concentrate on expanding its India business and managing the risk of electrification in its EU PV business. The truck forging business accounted for 23 percent of the company's consolidated revenue and achieved breakeven at the net profit level. Kotak believes that this move is beneficial for the EU business's profitability and return ratio profile.
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