Minda Industries: Dim the lights

If the market turns bearish, mid-caps such as Minda Industries could lose sheen

Minda Industries is among the many small- and mid-cap stocks that stole the show in the market rally until recently. From our ‘buy’ recommendation at ₹234 in early July 2016, the stock is up nearly five times. It now trades at almost 40 times its trailing 12-month consolidated earnings. This valuation is higher than a much bigger diversified component player — Motherson Sumi — which trades at 33 times its consolidated earnings. It is also at a premium to mid- and small-cap auto component players such as Gabriel India ( 25 times) , Fiem Industries ( 34 times) and Automotive Axles ( 33 times).

Besides, after the strong rally in 2017, the market has been volatile in recent months. Minda Industries has already been hit in this period, with the stock losing about 16.5 per cent from its one-year high of ₹1,356 touched in end-January 2018. If the market continues to remain volatile or turns bearish, overvalued mid-cap stocks such as Minda Industries could further lose sheen. Hence, it will be prudent for investors to book profits in the stock at this juncture.

 

 

Sanguine outlook

The overall growth (year-on-year) in new vehicle sales has almost doubled in 2017-18, from the 6-7 per cent seen in 2016-17. After dampeners such as demonetisation, changeover to BS IV emission norms and the GST shift, urban consumption has picked up. Rural consumers too are likely to have more disposable income in their hands, given the government’s focus on improving rural livelihoods. Hence, new vehicle sales are expected to remain strong in the months to come, aiding Minda Industries.

Through its standalone operations and various subsidiaries, joint ventures and associate entities, the company is into products such as switches, lights, horns, fuel caps, CNG/LPG kits, die castings, and so on, for two-wheelers, cars and commercial vehicles. Switches bring about 30-35 per cent of the total revenue, while lights and horns chip in with around 20-25 per cent each. Bajaj Auto, TVS, Honda, Hero, Royal Enfield, Maruti Suzuki, Toyota, M&M and Hyundai are among its major domestic clients.

The company’s market leadership position in some of the segments it operates and its efforts to add value to its product line lend promise.

In 2014, the company acquired Spain-based Clarton Horns that boasts of premium clients such as Bentley, Rolls Royce and Porsche. The acquisition gave Minda access to technology for electric horns. With many of the high-end cars and bikes moving to LED lighting, Minda acquired Spain-based Rinder group in 2015 that is a pioneer in LED technology for automotives. It now supplies LED lighting to some premium models of Kawasaki, TVS and Maruti Suzuki.

Minda will also benefit from the increasing preference for alloy wheels by customers. Through a group company, Minda entered into the manufacture of aluminium alloy wheels for passenger vehicles about two-three years ago. From about 17 per cent two years ago, the penetration of alloy wheelers has moved up to 27 per cent now and will continue to rise further. Minda currently supplies alloy wheels to vehicles such as the Baleno and Vitara Brezza. With automobile buyers becoming more concerned on safety, Minda’s smaller but niche airbags business will also get a leg-up. All these moves spell well for higher product realisations and expansion in profit margins in the next few years.

Considering the sanguine outlook, investors can re-enter the stock at lower levels on a later date.

Financials

Minda Industries has been consistently clocking double-digit growth in consolidated sales and profits in the last few quarters. For the latest December 2017 quarter, net sales moved up by 26 per cent year-on-year to ₹1,056 crore and net profits by 27 per cent to ₹66 crore. Operating margins came in at 12 per cent, a tad higher than the 11.8 per cent recorded a year ago. Apart from good operational performance, the strong growth has also been helped by an ongoing restructuring exercise by which Minda gained higher stake in some of the group entities.

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