Mahindra CIE (MCI) is ready to embark on its Phase 2 (2017-20) growth strategy, which mainly focuses on expansion. The company is looking to expand into newer geographies (expand within India & Asean countries) and segments (entry into plastics & aluminium products). It is also redefining its product portfolio and optimising plant locations. Its Phase 1 (2014-17) strategy of consolidation has made good progress in areas of optimising operations, turnaround of various segments, controlling capex, reducing debt, among others. MCI’s announcement on acquiring 100% stake in Bill Forge Pvt Ltd (BFPL) for | 1,331.2 crore is its first step as a part of its Phase 2 strategy. BFPL is a precision forging & machining with focus on 2-W & PV auto components, primarily for steering, transmission & wheelrelated assemblies.

It has six manufacturing plants across India with capabilities in cold & warm forging in addition to hot forging. In FY12-16, BFPL’s revenue, EBITDA, PAT registered CAGR of 13%, 30%, 29%, respectively. As of FY16, its net debt was at | 75 crore while the deal is valued at 11x FY16 EV/EBITDA multiple, which we believe is fairly valued.The acquisition of BFPL is largely positive thereby diversifying its concentration risk (hence increasing our CY17E revenue & PAT by 11% & 18%). However there would be equity dilution of 17%. Thus, we continue to value MCI at 11x CY17E EV/EBITDA & maintain our target of | 225 with BUY rating.