If you are feeling jittery about buying a stock that has run up in the short term, you have to take a cue from Sankaran Naren, the CIO of ICICI MF.
Sankaran Naren’s latest stock pick is Mahindra CIE Automotive. On 21st January 2015, ICICI MF bought 40L shares of this small cap stock at Rs. 235 each.
There is no better way to understand the merits of Mahindra CIE than to peruse the initiating coverage report issued by ICICI-Direct.
In a report dated 7th April 2014, Nishant Vass and Venil Shah of ICICI-D, waxed eloquent about the prospects of Mahindra CIE. They advocated a buy on the basis that Mahindra CIE provides a “rare, unique Indian auto component play, which has a global footprint with global promoters along with massive turnaround possibilities”. They added that an improvement in the financials on the back of cost rationalisation and demand growth could lead to a re-rating for Mahindra CIE.
The analysis by the duo is brilliant because Mahindra CIE was then available at a throwaway price of Rs. 81. Today, about 9 months later, the stock is quoting at Rs. 239, meaning that gains of nearly 200% are on the table.
Mahindra CIE Automotive Valuation Summary (Source: Kotak Instl Equities)
| Forecasts/Valuations | 2015 | 2016E | 2017E |
| EPS (Rs) | 1.2 | 5 .0 | 9 .6 |
| EPS growth (%) | (63.1) | 305 .0 | 90 .5 |
| P/E (X) | 195 .7 | 48.3 | 25.4 |
| Sales (Rs bn) | 55 .4 | 60 .9 | 67.4 |
| Net profits (Rs bn) | 0 .4 | 1.6 | 3.1 |
| EBITDA (Rs bn) | 4.8 | 6.4 | 8.4 |
| EV/EBITDA (X) | 8 .4 | 5 .8 | 4.0 |
| ROE (%) | 2.9 | 10 .9 | 17.9 |
| Div. Yield (%) | 0.0 | 0 .0 | 0 .0 |
The best part is that it may still not be late to tuck into Mahindra CIE because the savvy investors are still making a bee-line for the stock.
Apart from Sankaran Naren, who is known to strike a hard bargain when it comes to valuations, the Singapore government acquired 50 lakh shares of Mahindra CIE Automotive on 19th January at Rs 230 each. The total investment is about Rs 115 crore.
Kotak Institutional Equities has also issued an “Initiating coverage” report on Mahindra CIE and recommended a buy on the basis that it is “the making of a global auto-component player”.
In a crisp note, Kotak says:
“We initiate coverage on Mahindra CIE with a BUY rating and target price of Rs. 280. Mahindra CIE will become a global auto-component powerhouse with the scale of business in India and merger of CIE Automotive’s global forgings business. We expect the company to deliver strong earnings growth over the next few years, led by an operational turnaround in Mahindra’s European forgings business and strong growth in the Indian business”.
It is added that “The company is in the nascent stage of scaling up its business and hence comparing its valuations to any Indian component player may not give the correct picture of the stock’s steady-state trading multiple. We believe the stock will trade at premium valuations in the near term due to depressed earnings versus other large global auto component players“.
Now, the onus is on you to carefully ponder over the information and take an informed decision in the matter.
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