Mahindra CIE is looking for more acquisitions

Bombay: The ink is not yet dry on Mahindra CIE Automotive Ltd’s (MCIE) takeover of Bill Forge Ltd, but its CEO Hemant Luthra, 66, is already looking for more companies to buy out or partner with.

Anton Pradera, president of CIE Automotive SA, which controls MCIE, tasked Luthra with rapidly growing the company, both in terms of revenues and profits.

“Given the excellent operating team led by CEO Ander Arenaza Alvarez and supported by the M&A teams in Mumbai and Bilbao, we will be disappointed if we fail to double profits through organic growth and increased margins and triple them through a merger strategy and acquisitions to increase profits in our strategy plan for 2015–2020,” Luthra told Mint in an interview.

“We seem to be on the right track so far,” he added.

Under the agreement announced on September 12, Mahindra CIE will pay Rs 1,331.2 crore and issue 31.99 million shares to Bill Forge shareholders. It will also issue another 22.5 million shares to CIE, resulting in a total equity dilution of 16.8%. After this transaction, Mahindra’s share decreases to 17.26%.

Mahindra CIE’s consolidated revenue was Rs 2,706.2 crore in the first half of calendar year 2016, down 1.34% from the previous year, according to a presentation sent to stock exchanges. Consolidated net profit was Rs 125.2 crore, down 65.2%. The acquisition of Bill Forge will add Rs 582 crore to revenue and Rs 51.4 crore to net profit (as of FY16).

“Their (CIE) expectations of what Mahindra CIE can do are very high. Confidence in India is very high,” Luthra said. “The rate at which they want to grow is faster than the rate at which the team and I can locate targets that meet CIE’s criteria for squeaky clean management and performance.”

CIE is not the only auto parts maker considering a takeover. The rise in consumer spending is reviving interest in sales and investment in the Indian automotive sector. For example, passenger car sales increased for the 13th consecutive month in August. The automaker’s lobby, the Association of Indian Automobile Manufacturers, expects passenger car sales to grow 11-13% this year from an earlier forecast of 6-8%.

“They (Mahindra CIE) are doing the right thing. This is a good time for shopping,” said Chandresh Ruparel, managing director at merchant bank Rothschild India Pvt. Ltd.

But identifying companies that meet MCIE’s criteria of scale, corporate governance and willingness to give up majority ownership to facilitate a consolidated entity is a challenge, Luthra said.

He added that of the over 3,000 auto parts companies in India, perhaps only 10 would meet all the criteria and would be willing to sell.

“All the 14-15 deals we have done have been done by convincing people – sometimes for two years, sometimes for three, sometimes longer, never through auction,” he said.

Mahindra entered into partnership with CIE in 2013 in a multi-layered equity swap transaction that resulted in CIE becoming MCIE’s largest shareholder and M&M becoming CIE’s second-largest shareholder

Mahindra has ceded control of its domestic components business, grouped under Mahindra Systech, to the Spanish company to ensure the company achieves global scale. As part of the transaction, Mahindra merged its entire auto components business into a listed company, Mahindra Forgings Ltd, and renamed it Mahindra CIE Automotive. Mahindra Group holds 20.17% and CIE 53.09%.

Over the first three years of operations, the joint venture focused on increasing the efficiency of operations in India, improving the situation in Europe, while controlling capital expenditure and reducing debt. MCIE’s consolidated debt declined to Rs 961.2 crore at the end of December 2015 compared to Rs 1,410.5 crore nine months earlier.

The company is currently focusing on expansion in India and the Association of Southeast Asian Nations (Asean) region to reduce dependence on Europe and introduce plastic and aluminum products.

The buyout earlier this month of Bill Forge, whose clients include leading Indian two-wheeler manufacturers, is the first step in this direction.

The model adopted by the partners of the agreement with Bill Forge is correct, said Rothschild’s Ruparel. The owner retains a stake and remains committed to the business, which shows confidence and trust in the model, he said.

“They are more practical in terms of how they create synergies and value in the business,” Ruparel added.