Ideas for Profit | Minda Corp: Strong business available at an attractive valuation

Minda Corporation (MCL) continues to deliver a strong set of Q2 earnings on robust domestic market growth. While it posted a healthy growth in net revenue on a year-on-year (YoY) basis, operating margin witnessed a slight contraction. The company has marquee clients, strong focus on research and development and a robust order book. The recent correction in its stock price has made valuation extremely attractive.

In terms of Q2 FY19 performance, MCL posted an 18.1 percent YoY growth in net revenue on the back of a 26 percent growth from the India business, which contributes around 77 percent to total revenue. Revenue for its European business declined 15 percent due to change in regulatory emission norms across the continent.

In terms of operating profitability, it posted an 82 basis points (100 bps = 1 percentage point) contraction in earnings before interest, tax, depreciation and amortisation (EBITDA) margin due to rise in operating expenses and poor performance of its interior systems segment. On quarter-on-quarter (QoQ) basis, EBITDA margin expanded 125 bps.

In terms H1 FY19 revenue performance, system security and restraint (SSR), driver information and telematics (DIT), and interior systems segments grew 26 percent, 30 percent, and 18 percent, respectively. EBITDA margin expanded 270 bps and 10 bps YoY, respectively. However, the same for interior systems contracted 430 bps due to Worldwide Harmonised Light Procedure (WHLP) norms in Europe.

We continue to exude confidence in the business on the back of following:

The upcoming Bharat Stage VI implementation is expected to augur well for the company as it will lead to higher content per vehicle. In fact, it received new orders to supply BS VI compliant instrument clusters and EFI wiring to a 2W original equipment manufacturer (OEM) with peak annual value of Rs 25 crore and Rs 30 crore, respectively. It also received business from a Japanese manufacturer for the supplies of die casted parts for its fuel injection pump in accordance with BS VI requirements.

The group has approximately 30 customers in more than 20 countries. It continues to capitalise on its global footprint further and has many initiatives underway to increase its export focus. It has bagged business from a leading German Tier-I company for supplying compressor housing and from an auto maker there for supplying seat latches. It has also made an inroad into the European electric vehicle (EV) segment and was awarded business by an EV company in the Netherlands. The company has received orders worth Rs 162 crore from multiple clients in export markets.

The company continues to have a very strong order book (Rs 4,200 crore), which provides earnings visibility. In Q2, Minda received Rs 961 crore in orders (lifetime value) across domestic and export businesses.

The company has a well-diversified presence across business segments and products. This helps the company to de-risk itself from product or client concentration.

To develop technologically advanced products, it has established a technical centre Spark Minda Technical Centre (SMIT) in Pune. The fruits of it are visible now. It has won smart key business from Piaggio and Hero MotoCorp. It has also bagged business from Honda Motorcycle & Scooters India (HMSI) to supply smart key and locks. Additionally, it has received letter of intention (LoI) from two OEMs each for telematics and DC-DC convertor for EV solutions.

The company had raised Rs 310 crore through a qualified institutional placement (QIP). The management said the money has been reserved solely for acquisitions to fuel growth.

Amid volatility in the overall market, the stock has corrected 44 percent from its 52-week high, making valuations extremely attractive. It is now trading at 18.2 and 15.0 times FY19 and FY20 projected earnings.

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