Minda Industries Ltd (MIL) is a diversified auto ancillary supplier, manufacturing
products such as switches, horns, lights, fuel caps, and cylinder valves. It is the
market leader in the switch segment with a market share of 67%, and also the
horn segment where it has a market share of 47%.
New product introductions and increased sourcing from clients
to enable company outpace the automotive industry
MIL has historically outpaced the automotive industry growth by consistently
introducing new high value products which enhance the kit value per vehicle. The
company has forged alliances with global technology players and has also taken
the acquisition route to introduce high value products. Given its focus on
innovation and its varied product range, the company has gained access to new
platforms of clients, thus enabling it to gain market share. Over the next two
years, MIL aims to introduce alloy wheels in JV with Kosei, launch electronic
horns, and manufacture batteries with Panasonic as its technology partner, in the
domestic market. This will enable it to further move up the value chain and
enhance the content per vehicle to the customers. Also, MIL aims to enhance
supplies to its existing clientele such as Hero Motocorp, Honda Motorcycles and
Scooters India (HMSI) and Hyundai India by securing supply contracts for their
new platforms. We believe MIL is well poised to outgrow the automotive industry
and expect it to post a CAGR of 14% in revenue over FY2015-17.
Subsidiaries’ turnaround and better capacity utilization to
augment margins
MIL is aiming to enhance its subsidiaries’ profitability, which account for about
35% of the consolidated turnover. FY2015 marked a turnaround in its
subsidiaries’ performance, with them reporting a profit of Rs5cr as against a loss
of Rs19cr in FY2014. Going ahead, better capacity utilization coupled with
increased sourcing from low cost domestic units will help its key subsidiaries –
Clarton Horns and Minda Kyoraku – to post an improvement in margins. Similarly,
operating leverage on back of double digit top-line growth would also enhance overall
margins. We estimate MIL’s margins to improve by 140bp over the next two years.
Outlook and valuation: MIL has evolved from being a switch player to an
ancillary supplier having a diverse product range viz switches, horns, lightings,
fuel caps, and cylinder valves. The company is aiming to further enhance the
product range and move up the value chain by introducing new products like
alloy wheels and electronic horns. We expect MIL to clock a robust 14% top-line
growth over the next two years. Further, operating leverage and improvement
in margin of subsidiaries would lead to a CAGR of 25% in earnings over
FY2015-17. MIL is a well diversified Tier 1 ancillary player, available at an
attractive valuation. We initiate coverage on the stock with a Buy recommendation
and target price of Rs652 (based on 12x FY2017 earnings).

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