Minda Industries Ltd.

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2 Recommendation BUY Riding On Growth!!! CMP 810 Target Price 1,193 Sector Stock Details Auto Parts & Equipment BSE Code NSE Code Bloomberg Code MINDAIND MNDA IN Market Cap (Rs cr) 1,284 Free Float (%) 29.10% 52- wk High/Low (Rs.) 996/475 Avg. volume BSE+NSE ( 000) 44,540 Face Value (Rs.) 10 Dividend (FY 15) 60% Shares o/s (Crs) 1.59 Relative Performance 1Mth 3Mth 1Yr Minda Ind -6.4% 58.6% 31.4% Sensex -1.5% -7.5% -9.4% Shareholding Pattern 30 th Sept 2015 Indian Promoters Holding 70.90% Institutional (Incl. FII) 2.87% Corporate Bodies 7.56% Public and others 18.67% Anupam Bafna Research Analyst anupam.bafna@nirmalbang.com ( ) Sunil Jain HOR Retail sunil.jain@nirmalbang.com ( ) Minda Industries Limited (MIL) is the leading supplier of auto ancillary to Indian OEMs and has a well established its presence in abroad as well. Its major product includes switches, horns and lightings for 2/3/4 wheeler manufacturers. Headquartered in Delhi, it has operations across globe with more than 25 plants and 3 R&D centers. Investment Rationale: Supplies more than 20 products, major being Switches, Horns, Lighting, Alloy wheels, Low pressure Die casting, Gas kits, Blow molds, Fuel caps and Batteries. Presently switch, lighting and horns account for 46%/ 19%/ 17% resp. of the total turnover. Geographically, 83% & 17% from domestic and international market respectively. MIL enjoys a market share of more than 67% in switches and 47% in horns in India. Diversified customer base in domestic and International market and a key supplier to major Indian OEMs including Bajaj, Hero Motcorp, TVS and Maruti Suzuki. Global presence with supplies to reputed OEMs like Yamaha, Suzuki, Kawasaki and Hyundai. Innovation in existing products viz. switches; making it more illuminated for 2wheelers and lever combination for off road vehicles etc. will give MIL competitive advantage. A new plant in Mexico will be operational by April 2016 for manufacturing horns on specific demand of the customer. Entered into a joint venture with Kosei of Japan, for manufacturing Alloy wheels commencing production in For Batteries, it has tied up with Panasonic and aspires to be leading player there also. Increasing share in aftermarket sales with well managed supply chain. Currently, aftermarket sales contribute 19% of the total turnover. MIL s sales stood at Rs Cr in FY15 grown from Rs. 936 Cr in FY11 at a 23.8% CAGR over the 4 years. Valuation and Recommendation: We expect the MIL s top line to grow at a CAGR of 18% over FY15-FY17E led by product innovation, growing customer base and upcoming ventures. With the better capacity utilization and benefit of operating leverage, the EBIDTA margins will inch upwards to ~10.4% supporting the net earnings of the company. At CMP of Rs. 810, Minda Industries is trading at a PE of 12.6/8.8x on FY16E/FY17E earnings resp. We initiate coverage with a BUY rating on Minda Industries Limited with target price of Rs. 1,193 (13x FY17E) implying an upside of 47% from current levels. Year Net Sales (Rs. Cr) Growth (%) EBIDTA (Rs. Cr) EBIDTAM (%) A. PAT (Rs. Cr) Adj. PATM (%) Adj. EPS (Rs) P/E (x) EV/EBITDA (x) Adj. ROE (%) FY % % % % FY % % % % FY16E % % % % FY17E % % % % 2 P a g e

3 Company Background Founded in 1958, Minda Industries Limited (MIL) is a well established auto ancillary supplier to OEMs with presence in Indian as well as international market. Its key products include switches and horns where it is no. 1 player in both for 2W/3W/4W in India. It has also presence in lighting, alloy wheel, low pressure aluminum die casting, gas kits, blow molds, fuel caps and batteries. Its Fuel cap division manufactures fuel tank cap for four wheelers. The Auto gas division of the company manufactures LPG/CNG kits and components for OEMs, as well as for aftermarkets. MIL has a wide clientele covering major automobile manufacturers in India as well as abroad. With the new acquisitions and ventures, it is adding advanced and technology enabled products to its present portfolio and also gaining its market share. Headquartered in Delhi, MIL has more than 25 manufacturing plants globally and 3 R&D offices in India. Minda has partnered with 9 Global Technology players. Till date, it has more than 100 product patents and 120 design registrations. It has strong presence in after market also, where it has well established distribution network, it is aiming to create a service network across the country within the next two years. Currently aftermarket contributes 19% of the total turnover. Currently, it has 8000 selling points currently pan India registering a rapid growth from 2000 selling points three years back. A journey of growth over 5 decades Year Milestones Achived 1958 Started with manufacturing of Ammeter for Royal Enfield 1960 Started with manufacturing of Automotive Switches 1980 Entered into Automotive Lighting manufacturing 1993 Expanded into Automotive Horns manufacturing 2001 Set-up Kit Integration of CNG/LPG Kits 2007 Started with manufacturing of Battery 2008 Started with manufacturing of Blow Moulding 2010 Started with manufacturing of Aluminium Die Casting 2013 Acquired Spain based ClartonHorns 2014 Entered into JV with Panasonic for Battery business 2014 Entered in manufacturing of Fuel Caps Source: Company & Nirmal Bang Research, FY15, Rs cr 2015 Entered into JV with Kosei Minda for Alloy Wheels 3 P a g e

4 Rs. Cr Investment Rationale Strong growth going forward Over the last four years, MIL s sales have grown at a 23.8% CAGR well ahead of the industry growth. In the forthcoming years, MIL plans to introduce electronic horns and alloy wheels for which it has entered a JV with Kosei group of Japan and for batteries partnering with Panasonic for technology. Currently, demand for alloy wheels exceeds supply in the market. MIL is well equipped to manufacture such wheels, which will contribute significantly to the top line growth. Moreover, it has received orders from OEMs for the same. These initiatives will enable MIL to move up the value chain for its customers and improve its market share. Further, the recent consolidation of group businesses viz. Vietnam and Indonesia also will be a key driver of top line going ahead. With the ongoing diversification in the product line along with the new ventures and improving customer base; we expect the sales to grow at 18% CAGR over FY15-FY17E outperforming the industry. Sales 3,500 3,000 2,500 CAGR 21.8% 2,200 2,569 3,064 2,000 1,500 1, ,690 1,328 1, FY 11 FY 12 FY 13 FY 14 FY 15 FY 16E FY 17E Source: Company Data, Nirmal Bang Research Better capacity utilization and turnaround of subsidiaries to support the bottom line Currently, MIL is working at 80-85% capacity utilization and is continuously focusing towards improving it across product lines which will help it to improve its margins. EBITDA is likely to grow two folds from Rs. 154Cr in FY15 to Rs. 320Cr in FY17E coupled with improvement in EBIDTA margins by 300bps because of the benefit of operating leverage, turnaround of subsidiaries and the reduction in cost of inputs. With this the margins for the company are to be in double digit space going forward, which gives us confidence on the performance of the company. 4 P a g e

5 EBITDA Margins (%) 12.0% *In FY14, margins were lower on account of one time cost of new Hosur plant (Switches) and increase in fixed overhead cost (Lighting). 10.0% 8.0% 6.0% 8.9% 6.5% 7.0% 7.0% 9.1% 10.4% 4.0% 4.6% 2.0% FY 11 FY 12 FY 13 FY 14* FY 15 FY 16E FY 17E Source: Company Data, Nirmal Bang Research Also, the high profit margin business of Indonesia and Vietnam subsidiaries, manufacturing switches and lights have been brought under MIL which are aiding in elevating the margins. Companywise (H1 FY16) Revenue PBT PBT Margins (Rs. Cr.) (Rs. Cr.) (%) Standalone % Minda Auto Component % Minda Kyoraku % Minda Distribution Service (0.3) -0.2% Clarton Horn % Minda Emer % MJ Casting 82.0 (1.3) -1.6% Asean Business % Minda Kosei 0.0 (0.7) NA Intersegment (80.0) (1.8) NA Consolidated 1, % MIL was successful in achieving a turnaround amongst its subsidiaries leaving the worst behind to embark a profitable journey. As result of its efforts, two of its subsidiaries MJ Casting and Minda Kyoraku have shown the signs of a turnaround as illustrated in the table below: 5 P a g e

6 Subsidiary (Rs. Cr) PBT H1F15 PBT H1F16 Change (%) MJ Casting % Minda Kyoraku % While the below table illustrates the contribution of the subsidiaries to the profit of the company: Adj. PAT (Rs. Cr) FY14 H1 FY15 FY15 H1 FY16 Consolidated Standalone Difference (19.36) (1.34) Wide product range and ongoing product innovation has a wide range of products as an auto ancillary supplier and is the key player in the switches, lightings and horns. It also manufactures other auto components like Alloy wheels, Low pressure Die Casting, Gas kits, Blow Molds, Fuel Caps and Batteries. It is in the process of approaching towards advance technology for the existing products and has developed more electronic switches. Its acquisition of Clarton Horns has given a strategic advantage to horn division. It has also formed JV with Kosei group of Japan, where it will manufacture and sells aluminum alloy wheels for passenger vehicles with a capacity 7.2 lakh units p.a., which is expected to commence commercial production by We believe that well diversified product range will give MIL an edge over the other players in the industry and boost the margins going forward. Productwise Breakup - H1 FY16 17% 18% 19% 46% Swtich Lighting Horns Others Source: Company Data, Nirmal Bang Research 6 P a g e

7 Orders from new customers The company has as a wide range of customer portfolio in the domestic as well as international market. MIL is a key supplier to all the prominent OEMs in India. Recently, it has received orders new customers (both domestic and export) across all divisions. In Switches: from Piaggio and Moto Guzzi In Lightings: form Suzuki, Renault (Brazil), Maruti Suzuki In Horns: from Renault (Brazil), Maruti Suzuki and Tata Motors In Alloy wheels: from Maruti Suzuki and M&M Broadening customer base Minda Industries has a well diversified customer base and continue to broaden its customer profile with the help of product innovation and better offerings. At the same time with the development of multiple products, increasing market share and timely acquisitions, adds new clients to MIL s existing customer profile. 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 46% 21% 14% Customer wise Sales (FY15) (Standalone) 11% 10% 10% 10% 9% 6% 4% 6% 23% 30%. Bajaj FIAMM HSMI TVS Ford Royal Enfield Switches Horns Hero Moto Others Source: Company Data, Nirmal Bang Research 7 P a g e

8 Risk and concerns Currency Fluctuation: Of the company s consolidated revenues 17% is contributed from international markets and is thus exposed to its currency fluctuations. Dependence on Auto Sector: MIL s revenues are directly dependent on the growth in automobile sector. Sluggish growth in the sector may affect the sales of the company. Valuation and Recommendation We expect the MIL s top line to grow at a CAGR of 18% over FY15-FY17E led by product innovation, growing customer base and upcoming ventures. With the better capacity utilization and benefit of operating leverage, the EBIDTA margins will inch upwards to ~10.4% (FY17E) supporting the net earnings of the company. is aiming to expand its product range by introducing alloy wheels and batteries along with enhancing values to existing products. Further, the consolidation of the group companies will drive the growth in the future. Peer Comparison Company Net Sales EBITDA EBITDA PAT EV/ EV/ PAT EPS CMP M. Cap PE Margin Margin Sales EBITDA P/BV ROE (FY17) (Rs.cr) (Rs.cr) (%) (Rs.cr) (%) (Rs.) (Rs.) (Rs.cr) (x) (x) (x) (x) (%) Gabriel India Ltd. 1, % % , % Suprajit Engineering Ltd. 1, % % , % 3, % % , % Source: Bloomberg Estimates (FY17 numbers), Nirmal Bang Research At CMP of Rs.810, Minda Industries is trading at a PE of 12.6/8.8x on FY16E/FY17E earnings respectively. We have compared MIL with Gabriel and Suprajit Engineering which are also in auto ancillary space with similar size. Though the stock has ran up in the past, we believe the valuations are still attractive and the stock can give decent returns in the future. We initiate coverage with a BUY rating on Minda Industries Limited with target price of Rs. 1,193 (13x FY17E) implying an upside of 47% from current levels. 8 P a g e

9 01-Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan P/E - Forward 1200 P/BV - Forward Price 3x 6x 9x 12x 15x Price 0.5x 1x 1.5x 2x 2.5x Historically, MIL trades at average P/E levels of 11.53x of its trailing earnings from FY12 till date and at CMP it is currently trading at 8.8x FY17E earnings, which looks attractive. With expansion of ROE (26.3% in FY17E from 16.5% in FY15), we believe P/E will expand and MIL can get a P/E multiple of 13x, alike to its peer Gabriel India Ltd. 9 P a g e

10 Q2FY16: Consolidated Result Particulars (Rs in cr) Q2FY16 Q2FY15 YoY Q1FY16 QoQ Net Sales % % Other operating income % % Total income from operations % % Consumption of RM % % (Inc)/Dec stock in stocks (35.3) (30.0) 17.6% (19.3) 83.2% Purchase of finished goods N/A 66.2 N/A COGS % of sales 64.5% 66.1% 66.2% Employee Cost % % Other Expenditure % % Total % % EBITDA % % Margin 9.7% 6.8% 294 bps 6.4% 327 bps Depreciation % % Other income (26.1%) 4.9 (5.5%) Interest (3.8%) % Exceptional Items PBT % % Provision for Tax % % Tax rate 23.8% 24.7% 23.5% PAT % % MI and profit of associates PAT After MI and associates % % Margin 4.0% 4.5% (46) bps 2.6% 143 bps Adj. PAT After MI and associates % % Adj. Earnings per share (Rs) Source: Company Data, Nirmal Bang Research Key Highlights: Net sales for the quarter were Rs. 645Cr, growing 19.4% YoY and 22.0% QoQ led by volume growth across all segments. EBITDA margins stood at 9.7% witnessing a sharp increase of 294bps YoY on lower COGS currently (64.5% vs 66.1% YoY) and operational efficiency. Adjusted PAT grew more than two fold as compared to a year earlier and stood at Rs. 26.1Cr. Switches, lighting and horns contributed 46%, 18%, 17% respectively of the total turnover. EBITDA margins for switches, lighting and horns were 13.6%, 9.0% and 15.0% respectively. 10 P a g e

11 Financials P/L (Rs. Cr) FY14 FY15 FY16E FY17E Balance Sheet (Rs. Cr) FY14 FY15 FY16E FY17E Net sales 1, , , ,063.8 Share Capital Other Op. Income Reserve & Surplus % Growth 27.3% 30.2% 16.8% 19.3% Networth Operating Expenses 1, , , ,778.9 Minoirty Interest EBITDA Long term Borrowings EBITDA Margin 4.6% 7.0% 9.1% 10.4% Long term Liabilities Depreciation Long term Provision Other Income Total Non-Current Liab. il Interest Short term Borrowings Exceptional item (1.5) (16.0) Trade payable PBT Current Liabilities Tax Short term Provisions MI & profit of Ass (2.0) Total Current Liabilities PAT Total Liabilites , ,681.2 Adj. PAT Net Fixed Assets Adj. PAT Margin 0.4% 2.5% 4.0% 4.8% Capital WIP Shares o/s (No. Cr.) Investments Adj EPS Long term Advances Cash EPS Other non current assets Quarterly (Rs. Cr) Q3FY15 Q4FY15 Q1FY16 Q2FY16 Deferred tax asset (SA) (SA) (Cons) (Cons) Cash & Bank Revenue Inventories EBITDA Debtors Depreciation Short term Advances EBIT Other Current assets Interest Total Assets , ,681.2 Other Income Cash Flow (Rs. Cr) FY14 FY15 FY16E FY17E PBT EBITDA Tax Add: Profit of Associate Exceptional item 0.0 (11.9) Less: Exceptional items (1.5) (16.0) - - MI & profit of Ass (0.7) Op. profit before WC PAT Change in WC (33.6) (15.7) (42.3) (39.4) Adj. PAT Less: Tax Adj EPS CF from operations Performance Ratio FY14 FY15 FY16E FY17E Addition to assets (111.8) (78.0) (45.0) (55.0) EBITDA Margin (%) 4.6% 7.0% 9.1% 10.4% Adj. for Acquisitions - - (99.0) - PAT Margin (%) 0.4% 2.5% 4.0% 4.8% Capital WIP (191.0) (20.0) ROE (%) 2.1% 16.5% 24.0% 26.3% Investments (25.7) ROCE (%) 7.7% 18.7% 25.3% 26.9% Others Income D/E (x) CF from Investing (100.2) (23.4) (306.4) (40.5) Sales Growth (%) 27.3% 30.2% 16.8% 19.3% Change in borrowings (67.9) PAT Growth (%) -76.6% 748% 84% 42% Dividends paid (5.7) (10.5) (11.5) (11.5) Per Share Data FY14 FY15 FY16E FY17E Interest paid (24.2) (25.0) (34.4) (45.7) Adj EPS Others (25.9) (10.6) BV Per Share CF from Financing 50.5 (114.0) (7.6) Cash Per Share Net Change in cash (10.8) Dividend Per Share Cash at beginning Valuation Ratio FY14 FY15 FY16E FY17E Cash at end Price Earnings (x) Turnover Ratio (x) FY14 FY15 FY16E FY17E EV/EBITDA (x) Debtors Days Price/BV (x) Creditors Days Mkt cap/sales (x) Inventory Days EV/Sales (x) Fixed Asset Turnover P a g e

12 Disclaimer: Nirmal Bang Securities Private Limited (hereinafter referred to as NBSPL ) is a registered Member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited and MCX stock Exchange Limited. We have been granted certificate of Registration as a Research Analyst with SEBI. Registration no. is INH for the period to NBSPL or its associates including its relatives/analyst do not hold any financial interest/beneficial ownership of more than 1% in the company covered by Analyst (in case any financial interest is held kindly disclose) NBSPL or its associates/analyst has not received any compensation from the company covered by Analyst during the past twelve months. NBSPL /analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market making activity of the company covered by Analyst. The views expressed are based solely on information available publicly and believed to be true. Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision. Nirmal Bang Research (Division of Nirmal Bang Securities Pvt. Ltd.) B-2, 301/302, Marathon Innova, Opp. Peninsula Corporate Park, Off Ganpatrao Kadam Marg, Lower Parel (W), Mumbai Board No. : /8001 Fax. : P a g e