Shares of Mahindra CIE Automotive were locked in 5 percent upper circuit at Rs 81.60 on April 27 despite the company reporting dismal performance in January-March quarter. Motilal Oswal has maintained buy call on the stock, expecting 40 percent potential upside.
Profit during the first quarter of CY20 fell around 86 percent YoY to Rs 20.8 crore as on the operating front, earnings before interest, tax, depreciation and amortisation (EBITDA) declined 35.5 percent YoY to around Rs 180 crore due to negative operating leverage.
Forex loss for the quarter stood at Rs 45.4 crore due to impact of a sharp depreciation in Peso on $26 million loan at Bill Forge Mexico.
Consolidated revenue dropped around 23.5 percent year-on-year to Rs 1,660 crore, impacted by around 34 percent decline in the European Union-EU business and around 8 percent decline in the India business (due to AEL consolidation and around 30 percent decline excluding AEL).
The company follows January-December as its financial year.
"Mahindra CIE's Q1CY20 operating performance was in line as the India business surprised positively; on the other hand, the EU business was below estimates. Impact of COVID-19 is expected to delay the benefits of company's efforts to diversify the India business and cost-cutting," said Motilal Oswal while maintaining buy call with a target price at Rs 109 due to very cheap valuations.
However, the brokerage downgraded its CY20/CY21 EPS estimates by around 56/6 percent to factor in the impact of COVID-19 in India and EU, as well as the forex loss in CY20.
India business declined around 8 percent YoY to Rs 78 crore and EU business fell 34 percent YoY to Rs 88 crore.
The multi-technology automotive components supplier expects business to normalise in Q3CY20 in India and Q4CY20 in EU.
In EU, Mahindra CEI expects government support of 3-4 million euro in Q2CY20 for reducing the burden of labour cost during the lockdown period. The company expects the Italian government to pay around 80 percent of the labour cost, while the governments in Germany/ Spain are expected to pay around 70/30 percent.
The company said net debt was stable QoQ at around Rs 1,150 crore as the company had committed to capex of around Rs 90 crore in Q1CY20. Management has indicated that it has adequate liquidity and undrawn lines to sustain any further extension in the lockdown.
The company is focused on controlling capex, drawing down inventory, reducing cost (including labour) and improving efficiencies.
ICICI Direct expects company's sales, EBITDA and PAT to grow at a CAGR of (-3 percent), (-5.4 percent), and 3.5 percent, respectively, in CY19-21.
The brokerage feels the current market price baked in much of the negatives and present valuations looked attractive from a medium to long term standpoint. Accordingly, it upgraded Mahindra CIE to buy with a revised target price of Rs 100, valuing it at 5.5x CY21E EV/EBITDA (implied 10x P/E of CY21E EPS).
"The company's track record of consistent cash flow from operations (CFO) and free cash flow (FCF) generation combined with strong MNC parentage and purchase of additional 0.03 percent stake by parent group CIE lend us additional comfort in our stance," ICICI Direct said.
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