Mahindra CIE – Rare combination of Opportunistic and Long Term bet

I have analysed the company and made the following observations. Will be happy to hear what other forum members think about the issues highlighted.

1. Week RoE profile in the past, indicating unattractive economics of the business, especially of the European operations which has a lot of verticals struggling to stay profitable.
2. A lot of existing business is related to traditional powertrains. This includes crankshafts, gears, ICE components such as pistons, transmission components etc. With a global shift towards hybrid vehicles in short term and pure battery EVs in the long term, a significant chunk of the company’s revenue is likely to be under threat – particularly in Europe and other global markets. It remains to be seen how the company tackles this structural change, builds capabilities in the EV space and manages to post healthy growth with improvement in return ratios. A tall ask.
3. The OEM industry itself is very cyclical and has been struggling to keep pace with changing technologies and emission norms year after year. Don’t see a lot of value creation from OEM players.
4. The impression from concall transcripts is that the ability to pass on raw material price, energy price and labour cost escalation to the OEMs is limited. Again the European operations will be the main drag here because inflation will have a more pronounced effect there.

Conclusion: The company doesn’t seem to be one with a lot of pricing power and is going to face the above mentioned challenges. Considering the above, I don’t see the company crossing the 15% RoE mark or posting a growth of more than 12% growth in residual earnings. Even with those assumptions and expected returns of just 14%, the valuation of the company comes out to be less than 7800 cr, which is lower than the 11,000cr market cap it currently has. Can be looked at after a 30-40% correction.