Stock Pick From The Auto Ancillaries

HERE IS WHY:

• Synergy benefits from CIE alliance expected to turn MCL profitable
• Its export is expected to increase exponentially from a current 10 per cent
• MCL’s performance is expected to improve with expected economic revival

Most of the global economies are already started showing early signs of the economic revival. Further, there are expectations about demand swings in the automobile sector in the near future. Hence demand for auto ancillaries derived from original equipment manufacturers (OEM) as well as the replacement market also is expected to pick simultaneously.

Here is one such technologically advanced auto ancillary, Mahindra Composites (MCL).  MCL is one of the leading polymer composite manufacturers in India. The company manufactures polymer composite compounds, polymer composite components and moulds catering to the industries such as automotive, electrical, infrastructure, alternate energy and defence. The company manufactured composites are used as replacement for conventional materials such as steel, aluminium and plastics for a range of applications. More importantly, the company is promoted by the Mahindra & Mahindra group.

In a significant development last year, Mahindra & Mahindra group and CIE Automotive S. A. (Spain) (CIE) have signed a global alliance agreement between Mahindra's automotive component businesses (held under its Systech Sector) and CIE Automotive (involving its subsidiary Autometal). The rationales behind this global alliance are ensuring a larger product and technology portfolio, creating larger and diversified auto component business predominantly across key emerging markets, client servicing synergy between CIE clients in India and Mahindra clients in other countries.

On financial front, the companies sales in FY13 was lower by 11 per cent on yearly basis due to continuing domestic economic slowdown impacting both the compound and component sales. Despite of this, MCL managed to hold its overall market share in the industry, majorly because of last year’s investment to increase product range. After increasing investment by CIE in MCL, its export is expected to increase from the current level of just 10 per cent in FY13. To prevent from rupee fluctuation, the company reduced its raw material imports to 18 per cent in FY13 against 21 per cent in FY12. The company booked loss of Rs 1 crore in FY13. With the synergy benefits from CIE alliance, we are expecting MCL to book profit in next one year.

CIE has strong presence in North and South America along with Brazil, Mexico and Europe with major focus on passenger vehicles. Lower labour costs give Indian auto ancillary companies an absolute cost advantage. Taking this sole aim, the CIE is planning to make MCL as a global outsourcing unit in near future. The open offer in MCL is now completed at Rs 74.70 offer price and now the promoters holding has increased to 71.16 per cent as of 31st December 2013 against 44.78 per cent as of 30th September 2013. MCL’s stock has shown a strong run up of more than 50 per cent in one month. We are of the opinion that this stock has further upside in coming one year. Hence we recommend buying this stock to our readers considering its improved fundamentals and early recovery signs in the economy.