Nitin Agrawal Moneycontrol Research
Minda Corp (Minda) is a well-diversified auto-component manufacturer catering to passenger vehicles, three-wheelers, two-wheelers and commercial vehicle segments. On the face of it, the company merits attention owing to a number of reasons. It has marquee clients in its kitty and an even spread of clientele. It is putting a premium on its R&D work to develop technologically advanced products and bring a turnaround at its joint venture Minda Furukawa.
The Business
Minda Corp has a major presence in the auto-component industry with a diversified product portfolio ranging from security systems, wiring harnesses, couplers & terminals, instrument clusters, sensors, die casting, interiors, and keys & key duplicating machines that caters to all major two, three, four wheeler & off-road vehicles manufacturer in India & overseas. The products of the company have been well received by both OEMs and after-market.
Group Structure
The below table gives an overview of the company’s main segments, product portfolio, and the customers it caters to:
Diversified products portfolio
Minda has a well-diversified product portfolio with 47 percent of the revenues coming from driver information and telematics segment (products like wiring harness, steering roll connectors, device to record driving information such as number of miles, speed etc.), followed by safety, security and restraint (products like locks, latches, keys and door handles), which accounts for 39 percent, and interior systems, which accounts for 14 percent of the total revenues.
Moreover, the company is diversified across all segments of the automobile industry. Passenger vehicles contributes 36 percent, 2 and 3 wheelers contribute 31 percent, CVs & off-highway vehicles contributes 23 percent and after-market contributes 10 percent to the total revenues.
Strong clientele, low client concentration
Minda boasts of its strong client base which include auto majors such as Maruti Suzuki, Bajaj Auto, Mahindra and Mahindra, Hero MotoCorp, Royal Enfield, Volkswagen to name a few.
Minda’s largest client is Maruti Suzuki which contributes 10 percent to its revenues and top five clients contribute only 37 percent of the revenues. Therefore, the company does not have the risk of client concentration.
Focus on research and development (R&D) – Next leg of growth
The company has been focusing and investing a lot on R&D and the management believes that the next leg of growth for the company would come from higher demand for electronics and advanced products such as EFI/EMS systems (electronic fuel injection, engine management systems), ABS, EGT/EGRT sensors (exhaust gas temperature sensors), connected cars and soot sensors.
To develop technologically advanced products, it has established a technical centre Spark Minda Technical Centre (SMIT) in Pune. This will serve as a hub for all future innovation for automotive electronics and mechatronics. The unit will also help the company develop products meeting the requirements for the changing emission norms to BSVI.
Additionally, the Indian government’s focus on electric vehicle (EVs) would also provide growth opportunity for this auto-ancillary company. The company has a product portfolio which would be least affected by the move towards EVs. In fact, the management has indicated that they are engaged with all EV manufacturers in developing the products that would serve EVs better.
Acquisition of EI Labs – another pointer towards the focus on R&D
Recently, Minda acquired EI Labs for an enterprise value of Rs 6.5 crore – underscoring its focus towards R&D.
The objective of the deal was to gain access to the technological prowess of EI Labs. The acquisition will enable Minda to enhance expertise in connected mobility and IoT (Internet of Things). Additionally, this will help the company use EI Labs’ technology to add value to the existing products.
Significant expansion
The company has significant expansion plans for the future. It has started its greenfield plant at Mexico in April 2017 to supply plastic interiors to the Volkswagen Group.
It has also set up the third die casting plant in Pune which is expected to be operational in FY18. The company has existing production capacity of 4,600 MT per annum and has a target to bring that capacity up to 9,600 MT per annum by FY20.
Turning around Minda Furukawa
The company is focusing on turning Minda Furukawa around, which has been non-profitable for the group. The management has chalked out plans for the same and its efforts have witnessed positive outcome as is evident from Minda Furukawa turning marginally positive in 1QFY18.
A turnaround in Minda Furukawa would help the company to command double-digit margin at the consolidated level.
Financial performance
From the financials perspective, revenues have posted a growth of 22 percent compounded annually over FY14-17 and EBITDA margin averages around 9.1 percent over the same period.
Moreover, the company has consistently reduced the debt and debt-to-equity ratio has come down to 0.97 in FY17 from 1.53 in FY14.
In terms of return ratios, the company has given average RoE and RoCE of 18.6 percent and 14.2 percent, respectively, over FY14-17.
The company’s margin and returns were under pressure in the last two years partly because of higher expenses on R&D. The company spent 2.96 percent of total turnover on R&D in FY17, up from 0.83 percent in FY15.
Apart from the R&D expenses, the underperformance was due to Minda Furukawa, which, as mentioned above, is being turned around. The management indicated that the company would be able to have double-digit EBITDA margin by the end of FY18.
In terms of valuation, the company is trading at 18.8 and 17.1 times FY18 and FY19 projected earnings.
Peer analysis
Peer analysis suggests that Minda is currently trading at a discount compared to the average multiple of its peers.
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