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Last Updated : Jun 02, 2016 03:42 PM IST | Source: CNBC-TV18

Targeting 15-17% EBIDTA margins in FY17: Mahindra CIE

A strict control on costs and a strong monsoon, if it pans out, should help Mahindra CIE expand EBITDA margin to about 15-17 percent in fiscal year 2016-17, says Chairman Hemant Luthra.

A strict control on costs and a strong monsoon, if it pans out, should help Mahindra CIE expand EBITDA margin to about 15-17 percent in fiscal year 2016-17, says Chairman Hemant Luthra.

In an interview with CNBC-TV18, Luthra said he expects the company's utilisation levels will improve in the year as the LCV (light commercial vehicle) industry is gaining traction.

Besides, diversification of customer base and demand will also help the company increase its capacity utilisation, he added.

On standalone basis in Q4FY16, Mahindra CIE's revenue went up 2 percent to Rs 404.2 crore, while EBIDTA surged 31 percent to Rs 38.1 crore and profit after tax (PAT) stood at Rs 15.2 crore.

Below is the verbatim transcript of Hemant Luthra’s interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy.

Latha: Like many companies the fourth quarter has been a story of improved margins and improved earnings before interest, taxes, depreciation and amortisation (EBITDA) and revenues largely flat. How should we understand the year ahead, should we expect that we continue to see further improvement in margins or is the raw material advantage over?

A: What has happened is that we have cut our costs and therefore if there is what we expect a good monsoon Mahindra seems to have done well, one of our principal customers. Tata seems to have done well. There is no reason why volumes want to go up with the monsoon and because we have cut our cost to the bone hoping that margins will go up too. The only thing I cannot promise is that in the standalone results the margin went up quarter-on-quarter (Q-o-Q) by two percent for standalone, and the subsidy went up by 3 percent. I can't promise that Q-o-Q.

Latha: NMDC has cut its fines prices by further Rs 200 per tonne. That is a 12 percent cut from Rs 1,460. This is the second month in a row that they are cutting fines prices. So, one should expect logically that steel prices also could see a little bit of discount. That will be good new isn't it? The raw material advantage seems to continue. That is why I am asking what is the reasonable expectation. Nobody expects Q-o-Q you can improve your margins by 200 bps. But for the year as a whole is another 200-300 bps improvement in margins a legitimate expectation?

A: You are asking forward looking stuff and I am going to get killed by everybody, all the regulators if I keep forecasting that. What I only want to look at it CIE has just declared its results. They have had an analysts conference and CIE works to 14-15 percent EBITDA. There is a nice healthy competition between us in India and our counterparts in Spain. Therefore we have to keep targeting to improve the margins and they target to improve their margins further and in this happy race all the shareholders win. So, my row will not let my margins to slip too far behind what CIE is running at.

Sonia: I was just asking about a bit of ground check on whether things are improved because we are seeing higher sales for M&M's products, higher tractor sales as well. Have your utilisation levels gone up in the last quarter and do you expect them to improve further?

A: Our utilisation levels we certainly expect to improve further because as I said you have seen M&M, you have seen light commercial vehicle (LCV) coming back. Also you have seen that we keep trying to diversify our customer base and with that diversification of customers we try and pick up some model from Maruti Suzuki, some more from Hyundai and all across the board. So, the capacity utilisation should certainly go up in coming quarters.

Latha: What was the capacity utilisation in FY16?

A: We have still got 30 percent or thereabouts capacity in forging something similar and headroom in casting. So, even if we had a 30 percent increase we would not need to incur any capital expenditure (capex) but our customers are saying that let us not get flatfooted like some people got during the Lehmann crisis when they thought India would get affected as badly as the rest of the world and it didn't. So, we keep an eye and the thing that we are trying to do now is instead of increasing capacity in the same old way you do increase capacity in the value addition. So, we will do much more machining. So, if you are doing 30-50 percent machining depending on which products you are talking about we will go further up on machining. If you are doing stamping and we are doing B&C class stamping we will try and do products and A class stamping. So, value addition will go up and therefore margins should go up.

Sonia: What about in the European business now that the Jeco plant closure has taken place when will the full benefit of that come through in terms of higher efficiencies etc and in general how had demand been in Europe?

A: The demand is Europe is looking good and the CIE results have shown that their topline has increased significantly. Their EBITDA margins have increased and a lot of their business comes from Europe and Mexico which has improved. So, I don't see any concerns for us in our forging plants in Europe. The only thing is that when you shut a plant down and you have to move the product from one plant to the other that new place where you have to go has to be certified by customers and that certification process takes time and we hope that that certification process is now down for many parts and as more parts gets certified by the same customer from a different plant or with a different technology we should be starting to look at being able to sustain the improvement that we have seen in our subsidiaries.

Latha: You said there is still some spare capacity. Looking at the diversification of demand that you have already embarked on do you think you will use up that capacity in the current year and considering that defence is a space that is opening up and that will also be something which will require forgings is there a capex happening in FY18?

A: I don't see too much capex other than the one that we talked about machining because there is enough headroom as I said and when you asked the question about defence it is a little bit paradoxical. Everybody believes that the defence business is going to be strong and you are going to get great input but if the Government of India hasn't yet ordered stuff we therefore cannot take advantage of offsets. We have seen that so many orders that the Government of India has placed has got held up. Then it takes a while.

Secondly, defence equipment requires different types of capex and while we certainly look at non-auto as a market we are keeping an eye on what is going on but I don't see any new defence business being serviced out of Mahindra in the current calendar year which is the same thing as our fiscal year. There is enough going in the automotive and tractor business.

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First Published on Jun 2, 2016 10:55 am
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