 "M&M and CIE are looking to expand their partnership: Hemant Luthra")
About 16 months ago, M&M ceded its control in the auto component division, Systech, to Spanish CIE in a complex share swap deal. The deal that involved merger of CIE's European forging business into Systech's operations made the new entity Mahindra CIE a global major in auto component manufacture. Hemant Luthra, chairman Mahindra CIE, tells Abhineet Kumar how both the entities are now planning to expand their partnership. Edited excerpts:
How has M&M benefited with ceding control in Systech to CIE?
We have together created a footprint across three continents and become one of the leading auto component players in the world. This has helped bring down cost footprint with plants in Mexico, Brazil, Spain and India. It was a complex structuring but with very elegant strategic simplicity. We were in Europe and India, and CIE was in Europe and Latin America. Europe was slowing down. Our customers suggested that we follow them to Latin America. CIE's customers suggested that CIE should follow them to India. Their Latin American capacity was under-utilised, so was our in India. Neither invests extra money to grow the business till the markets recover. Finally, in markets where we were competing, we can now collaborate. It has been a win-win situation for both of us with CIE and Mahindra CIE share price, respectively, doubling and tripling, as the deal was announced a year ago. If some analysts still wish to focus on loss of control, that is their call.
How has M&M benefited with ceding control in Systech to CIE?
We have together created a footprint across three continents and become one of the leading auto component players in the world. This has helped bring down cost footprint with plants in Mexico, Brazil, Spain and India. It was a complex structuring but with very elegant strategic simplicity. We were in Europe and India, and CIE was in Europe and Latin America. Europe was slowing down. Our customers suggested that we follow them to Latin America. CIE's customers suggested that CIE should follow them to India. Their Latin American capacity was under-utilised, so was our in India. Neither invests extra money to grow the business till the markets recover. Finally, in markets where we were competing, we can now collaborate. It has been a win-win situation for both of us with CIE and Mahindra CIE share price, respectively, doubling and tripling, as the deal was announced a year ago. If some analysts still wish to focus on loss of control, that is their call.
The usual merger pain has been absent in Mahindra CIE. What is the winning formula?
CIE has got some mantras. It targets Ebitda (earnings before interest, tax, depreciation and amortisation) at five per cent; EBIT 10 per cent. Net debt should be less than two times, Ebitda and free cash flow should be more than 50 per cent Ebitda. That is the formula they have leveraged to create value in the past and as part of that larger family, we will do it too.
Also, a lot of effort has gone in terms of harmonising the accounts and figuring out what the true costs are in different parts of the world. Both sides spent three years doing the deal and we have come to know each other very well. The investment on pre-merger integration is paying dividends and the post merger pain is negligible.
What is the growth outlook for the India business?
CIE’s current turnover is €2 billion, which is expected to grow to €4 billion by 2017. In a couple of years, CIE plans to have one-third of its revenue from each of the three regions: Asia, Europe and Latin America. Mahindra CIE’s current turnover is Rs 5,500 crore, out of this India business is about Rs 4,000 crore.
So, the Asia business, including India should get to Rs 10,000 crore by 2017, if we want to be consistent with CIE's game plan.
Do you plan to achieve this organically or inorganic expansions are a part of the growth strategy as well?
Let us see what we can do in Asia because we are not present adequately here. Thailand, Indonesia and Malaysia are obvious geographies to look for growth.
What is next for Mahindra CIE?
This month, we have the principal shareholders getting together in India to see how this partnership can be expanded. This includes, but is not limited to what associated companies like Tech Mahindra in IT services and CIE's Dominion in IT infrastructure can work together across different geographies. There are other possibilities in non-conventional energy, where one of CIE’s principal shareholders has a complementary interest with Mahindra Solar.
What is the synergy between Tech Mahindra and Dominion?
CIE provides EPC (engineering, procurement and construction) services of the kind that create the infrastructure for the “internet of things” around big data but they stop short of providing supporting IT services like Tech Mahindra does.
Therefore, these two are complementary as well. The vertical Dominion addresses are telecom, hospitals, energy management, meteorological services and has back-to-back arrangements with hardware suppliers such as GE. Tech Mahindra as an IT Services provider is working with Dominion to examine synergy and joint go-to-market strategies.