With its next acquisition, Mahindra CIE Ltd. is looking to equip itself to supply parts for electric vehicles when the trend catches on in India.
The company is looking at acquisitions largely in the aluminium space, Chairman Hemant Luthra told BloombergQuint in an interview. “Electrical vehicles will have to be of lighter weight. So we are already looking at acquisitions, which probably could be in the space of aluminium and not in steel,” he added.
Prime Minister Narendra Modi has backed an initiative for most, if not all, vehicles in India to be powered with electricity by 2030. While Luthra does not rule out disruptions in the automobile industry due to this, he said his company is well-equipped and ready to capitalise on possible opportunities.
Watch Hemant Luthra’s full interview here:
Here are the edited excerpts of the interview:
Where do you see auto sales head from hereon? What is your outlook?
We are optimistic because we had a great quarter. The year-on-year growth has been 52 percent in the consolidated business in India. We have seen 87 percent growth in revenue and 64 percent growth in Ebitda. We think that this momentum will continue.
Mahindra is doing well; tractor demand is holding up. Tata is doing well. Europe is doing fine.
M&M itself improved its growth outlook for the farm equipment segment from 10-12 percent to 12-14 percent. What kind of traction does that mean for your company?
If you look at Mahindra CIE business on a consolidated basis, M&M is less than 15 percent of our total revenue and likewise for Tata. Between the two of them, they don’t add up to more than 20 percent. Having said that, they are both very important customers. We are seeing stamping business is getting greater demand where we supply bodies for Balero and other cars.
The gears demand from Mahindra and Tata has shot through the roof. As a result, we are investing more capacity. So, I can’t complain at all. Fortunately, we are also hedged by whatever is happening in the two-wheeler industry because of the growth in demand that is feeding the Bill Forge subsidiary.
Which geography is looking strong and what will drive growth over the next couple of quarters?
We are seeing growth which is both organic and from India. The gear growth in Italy is strong because we are supplying to Caterpillars and others. The truck market in Europe has come back. We are hedged in both truck and passenger. So, maybe the volume growth many not happen that much in Europe -- at 3-6 percent, which may be still considered pretty good. But we will like to see much more on that.
We will see that in India, we expect the two-wheeler industry to grow 12 percent, heavy commercial vehicles (MHCV) and the CV industry is growing nicely. So, I don’t see any clouds on the horizon. In fact, we see great opportunities because there is a new law saying that the company that is have not had fiscal prudent management, many are up for sale. So, customers are getting nervous and those customers are moving their product to us, both in India and Europe.
Are you referring to Amtek?
I am not referring to anybody specifically. But, yes, there are more than one who are in trouble. We are seeing their customers divert their orders to us.
Would it be a string of pearls strategy that you will have, or will you be looking at substantially large acquisitions?
Substantially large means what because if you look at it and say “last one [Bill Forge] was at $200 million, then the next will be $300 million?” We have already promised the market to ensure the high degree of corporate governance that is expected from us. We folded all our forging operations in Europe and India into the CIE, forge the operation and put it in Mahindra CIE corporate group.
We have told the market that as soon as the Brazil, Mexico and China is stable of forging are back in the fold, we will put them in under the Mahindra CIE. So, that could be either organic or inorganic. There are many more bill forgers around this world at this time. There are entrepreneur who are owned partially by private equity which sees great opportunity that Mahindra CIE will acquire them 100 percent and will give them stock in the parent. They will participate in the growth of the parent and we invite the promoter to have skin in the game and continue to manage the operations.
There are 4-5 of those people who we are looking at. There are some distressed assets that we are looking at and the organic growth is happening nicely. I can’t complain about the prospects.
How are you positioning yourself for the electric vehicle revolution? What does it mean for your company? Is that a space you are looking at with a degree of excitement or trepidation?
Not trepidation at all because while I admire the vision of all cars on roads by 2030 being electric, there is a lot of collateral work to be done. I’ve just came back from Scandinavia after taking a look at how they are managing their migration to electric vehicles. One-third of all parking stations on roads and parking lots need to have charging [stations]. Every port has got a standard charging in Denmark, but those ports are not standard across the world. Some are 48 volts, and some are 64 Volts. There is no standardisation there.
To generate that much electricity, you also need coal. In the case of Denmark and Sweden, they don’t have that problem. They have got enough hydroelectric power. But having said that, we endorse push to electric. We don’t worry about it all because less than 9 percent of Mahindra CIE’s domestic sales go into internal combustion engine in our total portfolio.
People forget that even electric vehicles will need transmission and other body parts. If you look at Mahindra CIE global, it is less than 20 percent which goes into internal combustion.
We are the only player of this size and with multi-technology. We moved to composite and plastic when we found forging where getting too heavy. We wanted to be light-weight so we used tubular structures to replace forging.
There is a huge benefit that we have because of our technology centre in Spain and India. We don’t worry about this because it constitutes the fraction of our turnover and I don’t see that changing very much. Having said that, CIE has already started selling components to Tesla. Today has not been a good news day for Tesla. Its Tesla 3 is not taking off as they would have liked it.
But let’s see whether China can go electric vehicles by 2030 and India can do everything by 2020. These are good statements of intent. We are prepared for anything.
Do you see electrical vehicles as an opportunity to your business?
Absolutely. Electrical vehicles will have to be of lighter weight. So, we are already looking at acquisitions, which probably could be in the space of aluminium and not in steel. Because of their lighter weight, there has not been much to be done in composites. We do supply composite parts to the tractor business. Maybe the quality needs to be up to be acceptable—quality for A class services of cars. So, we are consciously finding new opportunities where the electric vehicle business will take us.
So, it’s aluminium, plastics, composites. It is a migration away from the dependence on engine parts. So, our next forging acquisition may not happen unless those forged components are going into wheels, hubs and transmissions. It will not focus on crank shafts and connecting rods that will go in internal combustion engines. We are due to announce our strategic plan by the end of this year. I would say that you may not see the 67 percent growth that you have seen the Ebitda but the 20 percent organic growth is not going away.
Would this be disruptive for the auto companies or it may be slightly bigger from what people may be thinking right now? Or companies by and large may adapt to the electrical vehicles surge?
I don’t know about the ability of other organisations to adapt. People who are building to print—meaning the designs are provided by OEMs—is not going to make it. You should have design and build. It has been our philosophy from the beginning. We have our own R&D and capabilities to forged with aluminium products of plastics and composites to substitute for stamping.
It will depend on the ability to innovate. It will depend on your ability to improve margins by having control over the intellectual property because most of the car manufacturers are struggling to do the macro stuff, which is change the design of the car or change the transmission of the car or change the drive of the car from internal combustion.
I see hybrid coming before electric. So, they will be looking to farm out more and more R&D and IP development to suppliers and that’s why you will also see consolidation of suppliers who have the ability to do all of that.