Mumbai: The ink hasn’t dried yet on Mahindra CIE Automotive Ltd’s (MCIE) acquisition of Bill Forge Ltd, but its chairman Hemant Luthra, 66, is already on the lookout for more companies for buyouts or partnerships.
Anton Pradera, chairman of CIE Automotive S.A. that controls MCIE, has charged Luthra with growing the company fast, both in terms of revenues and profits.
“Given an excellent operating team, we will be disappointed if we can’t double profits through organic growth and increase margins and triple them with earnings accretive M&A strategy in our plan period of 2015-20,” Luthra told Mint in an interview.
“We seem to be on track so far,” he added.
Under the deal announced on 12 September, Mahindra CIE is paying Rs1,331.2 crore and issuing 31.99 million shares to Bill Forge shareholders. It is also issuing another 22.5 million shares to a CIE firm, leading to a total equity dilution of 16.8%. Mahindra’s stake falls to 17.26% after this transaction.
In the first half of the calendar year 2016, Mahindra CIE’s consolidated revenues were Rs2,706.2 crore, down 1.34% from a year ago, according to a presentation it sent to stock exchanges. Consolidated net profit was Rs125.2 crore, down by 65.2%. The acquisition of Bill Forge will add Rs582 crore to revenues and Rs51.4 crore net profit (going by its numbers for fiscal 2016).
“Their (CIE’s) expectation from what Mahindra CIE can do is very high. The confidence in India is very high,” said Luthra. “The rate at which they want to grow is faster than at which the team and I can locate targets that meet the CIE criteria of squeaky clean governance and performance record.”
CIE is not the only auto parts maker scouting for acquisitions. A pick-up in consumer spending is reviving sales and investment interest in India’s automotive sector. Passenger vehicle sales, for instance, expanded for the 13th straight month in August. The automaker lobby, the Society of Indian Automobile Manufacturers, expects passenger vehicle sales to grow 11-13% this year from an earlier projected 6-8%.
“They (Mahindra CIE) are doing the right thing. It is a good time to shop around,” said Chandresh Ruparel, managing director at Rothschild India Pvt. Ltd, a merchant bank.
But identifying firms that meet MCIE’s criteria of scale, corporate governance and most importantly those that are ready to cede control, is a challenge, said Luthra.
Of the 3,000-odd auto component firms in India, perhaps only 10 will tick all the right boxes and are willing to be sold, he added.
“All the 14 to 15 deals we have done, has been done through persuading people—sometimes for two years, sometimes for three, sometimes longer, never through auctions,” he said.
Mahindra entered into a partnership with CIE in 2013 in a multi-layered deal involving a share swap. Mahindra ceded control of its domestic components business, grouped under Mahindra Systech, to the Spanish company to ensure the business gains global scale. As part of the transaction, Mahindra merged all its auto components businesses into its listed entity called Mahindra Forgings Ltd and renamed it Mahindra CIE Automotive. The Mahindra group owns 20.17% and CIE 53.09%.
In its first three years of operations, the joint venture focused on making the India operations more efficient, turning around in Europe while controlling capital spending and reducing debt. MCIE’s consolidated debt dropped to Rs961.2 crore at the end of December 2015, compared to Rs1410.5 crore nine months earlier.
Now, the company is focusing on expanding in India and the Association of Southeast Asian Nations (Asean) region to reduce dependence on Europe and introduce plastic and aluminum products.
The buyout of Bill Forge, which counts India’s top two-wheeler makers as its clients, earlier this month is the first step in that direction.
The model adopted by the partners for the Bill Forge deal is an appropriate one, said Rothschild’s Ruparel. The owner gets to retain a stake and remains involved in the business—which demonstrates conviction and confidence in the model, he said.
“They are being more practical in terms of the way they can create synergy and value in the business,” Ruparel added.
