Minda Industries Ltd – A future Bosch in the making?


Company Name – Minda Industries Ltd (Minda)

Current Share Price – INR 896 (June 13, 2022)


Market Cap – INR 25,583 cr


 

1. What is interesting about the stock?

In an ever-evolving world of the digital age, automakers have a guillotine hanging over their heads to entice customers and automobile enthusiasts with newer vehicle models each year. To develop an entirely new vehicle from scratch takes at least 6 years for an OEM, hence time is of the essence. Before the early 2000s when customer needs and aspirations were not frequently changing, OEMs made every part of a vehicle all by themselves, thereby severely constricting their resource allocation while increasing the costs. This changed upon the entry of suppliers into the automotive industry who helped OEMs achieve economies of scale and massive cost savings. A Maruti Suzuki 800 of 1997 model, which cost around INR 2.5 lakhs, costs almost the same even today in 2022. So what changed in the past 25 years? The answer lies in how the Indian auto suppliers went from starting small enterprises to managing huge business empires across the globe today.


We are going to discuss one such accomplished Indian supplier - Minda Industries Ltd. Minda started its business with manufacturing components (casting, lighting & switching products) but now has slowly reduced its dependencies and is trying to focus on supplying complete systems to OEMs. They are trying to enter new technology markets with Wireless Chargers, Telematics Units, EV Chargers, Electronic Seats, etc.

With the advent of heavy digitalization inside a vehicle, the market requires smart, connected, and high-tech solutions and this is where Minda wants to cash the opportunity. They are funding R&D projects involving autonomous driving, embedded electronics, electrification, software & new materials. Company is taking great pride in displaying Intellectual Properties (Patents, Trademarks) filed in recent years to strengthen localization in India.

Revenue split across segments and geography


Segment-wise, they earn 53% of revenues from 4-wheelers & 47% from 2-wheelers. Minda has strong customer relations with TVS Motors, Honda, Toyota, Mahindra, Force Motors, Tata Motors, etc. It has capitalized on creating large-scale localization of auto components by forging collaborations; it has 13 Joint Venture Partners, and 3 Technical License Agreements. Apart from this, it has merged & acquired 6 companies under its leadership. One key automotive trend – “Voluntary Vehicle Rating” which will allow OEMs to provide safety ratings to their Passenger Vehicles (PV) is going to be quite beneficial to the Company. GOI issued a notification on January 14th, 2022 proposing to make it mandatory for car OEMs to have a minimum of 6 airbags in the PVs from October 1st, 2022. This safety measure can create potential industry sales of around INR 3,000 cr in the next 5 years. It was already mandatory for all cars to have a minimum of two airbags for the driver & co-driver. Minda has a 15% market share and they aim to take it to 20-25% in the next 4-5 years. This demands increased capacities; hence, it has earmarked INR 400 cr capex for FY22-23.


Key Strengths

  • Excellent project execution capabilities, and skilled engineers, with over 15 R&D & Product Engineering Centers, and 71 manufacturing units established across different locations of the world.

  • Orders won with an aggregate annual peak sales value of more than INR 400 cr from new-age EV OEMs. Peak sales value expected in FY 25. Joint Venture with Friwo enhancing the already impressive EV product portfolio.

  • It has absolute dominance over Acoustics, Switching & Seating (ranked #1) Product Segments in India & is in the top 3 in the world in Acoustics & Lighting segments.

Key Weaknesses

  • Capacity Enhancement of 2W alloy wheel by 2.0 mn & that of 4W alloy wheel by 0.36 mn. R&D projects & setting up new product lines require considerable investments and hence Minda is taking up more debt. The Company’s current ROCE has nearly halved from 23% in FY18.

2. Key Historical Financials

  • Minda revenue was broadly stagnant in FY20 and FY21 – due to COVID-19 and chip shortage. Growth revived in FY22

  • EBITDA margin fell in FY22 due to sustained pricing pressure

  • Cash Flow convertibility (CFO/EBITDA) has been poor in FY21 and FY22 owing to an increase in cash conversion cycle (working capital)

  • ROCE/ROE in FY22 was at 14%/13%

3. What is my view on company valuation?


Minda has outperformed its peers by a wide margin owing to strong order inflows from Electric Vehicle OEMs. It has given a stellar 260% return since the crash of March 2020. It currently trades at a TTM P/E of 72x having a ROCE of 14% while Lumax Industries trades a TTM P/E of 22x and has a ROCE of 11%. Endurance Technologies Ltd trades at a TTM P/E of 36x & ROCE of 15%.


The stock has seen a decent correction of around 30% YTD. Investors who are willing to invest in the long term can start taking small positions at lower levels depending on their risk appetite. Due to the ongoing interest rate hike cycles by Central Banks all over the world and fears of a high-inflationary environment, the possibility of further correction in the stock cannot be avoided.


4. What are the risks to the investment analysis?


Key risks to investment analysis are:

  • The industry continues to face strong headwinds in form of increasing raw material prices and input costs over the last few quarters due to the Russia-Ukraine war. The major inputs used in the production across the diverse product portfolio are Aluminum, Copper, Nylon, and Brass sheets.

  • Semiconductor shortage has impacted the entire Automotive Industry value chain and is expected to persist for 2-3 quarters more.

 

About the Author


I have over 7 years of work experience in the Automobile Industry & Technology Sector in India. Currently, I am working as a Research & Development Engineer at a Global Automobile major helping them scale their Electric Vehicles ambitions.


I hold Master’s & Bachelor’s degrees in Engineering from the Indian Institute of Technology, Madras (IITM).


I am an insignificant public investor & have an avid interest in Trekking, Photography, and Cybersecurity.


Disclosure


I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purposes and not to be construed as investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.




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