I-direct Instinct - Minda Corporation

Minda Corporation (MCL) is the flagship company of the Spark Minda group and is a leading auto ancillary player supplying key auto components to domestic & global OEMs. Post its restructuring i.e. hive off of the European business, it has a well-diversified presence across segments with 2-W, CV, PV and aftermarket constituting ~53%, 23%, 10%, 14% of its sales (FY20), respectively. In terms of geographies, it realises ~85% of sales from India and rest ~15% from overseas. In terms of customer profile, the company counts all leading OEMs in India as its clients with top clients being Bajaj Auto, Ashok Leyland, TVS Motors, Suzuki Motors and M&M among others.

Triggers

Getting strategic intent right

MCL had a noticeable presence in the European market through its entity Minda KTSN, which was primarily involved in manufacturing of plastic body parts (interior) for PV segment with VW group as its anchor client. This division was struggling in the past with ~Rs. 600 crore of sales in FY20 with corresponding EBITDA and PBT at ~Rs. 4 crore and negative Rs. 46 crore, respectively, and was a big drag on consolidated financials (dragging down margins by ~2% and RoCE by ~5%). With no recovery in sight, the company pulled the plug on this entity, thereby stopping its funding as well as letting it go for liquidation under the application laws. We believe MCL has taken a hard call by letting off go the capital inefficient business that bodes well for minority shareholders over the long term. Separately, MCL has recently engaged with Phi Capital as its strategic investor (~5% stake). Given the rich auto industry experience at Phi Capital, we believe MCL will benefit with clear strategic future growth plans going forward.

Base business - minimal EV risk, premiumisation at play

Post its restructuring exercise, MCL realises ~55% of its consolidated sales ~Rs. 1,200 crore from the Mechatronics division while it realises rest ~45% from Information & Connected System (wiring harness). In mechatronics segment, MCL is primarily in lock & key assembly for 2-W (22-25% of sales), die-casting (12-15% of sales), aftermarket sales (13-14% of sales) and starter motor/alternator for tractors (3% of sales). It realises ~15% EBITDA margins in this segment. In the lock & key assembly segment, Minda Corp commands market share of ~33-35% with content per vehicle in this sub-segment at ~Rs. 400-450 per vehicle. Transition towards premium products like smart key is the fundamental driver for this division. In wiring harness segment, MCL is one of the leading wiring harness players with ~30%+ market share domestically. Total ~50% revenue of this segment comes from 2-Ws that have seen content increase to the tune of ~2-2.2x due to BS-VI transition. Rest ~40% revenues of this segment comes from CV space, which is on the cusp of a cyclical recovery while the rest ~10% is constituted by tractors. The present margin trajectory in this segment is in the range of ~7% with import content at ~30%. Increasing electronic content in automobiles and localisation of raw material are key fundamental drivers for this division.

Valuation & Outlook

With a history of capital efficient operations, net debt free B/S (September 2020) and presence across new model launches like Mahindra Thar & Bajaj Chetak, we believe the risk-reward is favourable at MCL. Hence, we assign a BUY rating. We value it at Rs. 105 i.e. 15x P/E on FY22E-23E average EPS of Rs. 7.0. We are enthused by MCL's intent to clock ~12% margins & ~20%+ RoIC in future and would closely monitor its forward journey, consistency in performance for any further upgrades in our fair value calculation.

For details, click on the link below: https://www.icicidirect.com/mailimages/IDirectInstinct_MindaCorp_Dec20.pdf

Shares of Minda Corporation Ltd was last trading in BSE at Rs.88.2 as compared to the previous close of Rs. 85.45. The total number of shares traded during the day was 112118 in over 1146 trades.

The stock hit an intraday high of Rs. 89.65 and intraday low of 86.05. The net turnover during the day was Rs. 9911485.

Source : Equity Bulls

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