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Friday, November 17, 2017

Value Pick Stock - Minda Corp Ltd - ROI @ 101% in 8 Months

Dear Reader,

We are pleased to inform you that our Value Pick stock of February 2017 - Minda Corporation Ltd (BSE Code: 538962, NSE Code: MINDACORP) which was released this year on 28th March'17 is giving as on date returns of 101% to our Value Picks members. We suggested Buy on Minda Corp at price of Rs. 91.35 on 28th Mar'17 with a target price of Rs. 140. Stock has already achieved our target price. Minda Corp stock price made its 52 week high of Rs. 186.40 on NSE today and closed at Rs. 183.90 giving absolute returns of 101% in period of 8 months. We advised our members to book partial profits today by selling 50% of their holding and continue to hold the rest for long term.

Below is the summary of Minda Corporation Ltd shared by us under Value Pick stock - Feb'17 released on 28th March 2017.

1. Company Background:

Minda Corporation Limited (Minda Corp) is a diversified company with a product portfolio encompassing from Mechanical & Electronic Security System, Electronic Controllers for Electric Vehicles and for Auto OEM's across the Globe. It also manufactures Die Casting Parts for auto and consumer durable industry.

The Company is one of the largest suppliers of 2 wheeler, 3 wheeler and Off Road vehicles Electronic & Mechanical Security System to OEM's and exports about 20% of its products to USA, UK, Europe & South East Asia and ASEAN countries. Headquarter at Noida, Minda Corporation Limited is an erstwhile Joint Venture with Huf Hülsbeck & Furst GmbH & Co. KG, Germany.

The company manufactures different lines of automobile parts that broadly fall under the following categories:

i) Safety, security and restraint systems: This business involves manufacture of products like locks, door handles, immobilizers and die casting parts.  Minda Corp is the market leader in two wheeler security systems with around 35% market share. Exposure to Passenger Vehicle is via MVAST—a 50:50 JV that manufactures products like locks & keys, immobilizers, door handles and latches for clients like M&M, Tata Motors and Nissan. This business also have exposure to Indonesia and Vietnam through subsidiaries PT Minda Automotive (Indonesia) and Minda Vietnam.

ii) Driver information and telematics: This business involves manufacture of wiring harness, connectors, instrument clusters and sensors and contribute around 45% of total revenue. Minda Corp is the market leader in wiring harness for two wheelers and also supplies to CV and tractors. Its 51:49 JV with Minda Furukawa Electric (MFE) serves Japanese PV manufacturers like Maruti Suzuki, Nissan/Renault and Honda Cars. Minda Corp also has a 51:49 JV with Stoneridge for manufacture of instrument clusters and automotive sensors and serves clients like Tata Motots, M&M, Ashok Leyland and Bajaj.

iii) Interior systems: Under this business, the company offers products like glove box, cup holders and covers for steering columns & seats. The segment derives revenue from Europe through Minda KTSN. Key clients include VW, BMW, Daimler and Plastal. Minda KTSN has manufacturing facilities in Germany and in lowcost centres like Poland and Czech Republic. 

The Company is building Spark Minda Technical Centre in Pune which would focus on Electronics and Mechatronic product development. This centre will be equipped with state-of-the-art R&D and testing equipments including high-end EMC / EMI testing facilities for advanced system engineering.

2. Recent Development: (as on 28th Mar'17)

i) Minda Corporation (through its subsidiary) Announces a 50:50 Joint Venture with SBHAP, China (a BAIC group subsidiary) – Aug 2016

Minda Corporation Limited has signed a 50:50 joint venture with Shandong Beiqi Hai Hua Automobile Parts Co., Ltd, China (a BAIC group subsidiary) through its 100% subsidiary Minda KTSN.

This joint venture shall initially focus on producing and selling products such as ‘Plastic Oil Pans and Cylinder Head’ along with other plastic under-bonnet / interior parts. It shall also have the rights for production and marketing of Minda KTSN products within china. The new joint venture shall be known as ‘Minda China Plastic Solutions Ltd’ and the start of production is expected in next 12 to 15 months. The JV shall be targeting global orders of major OEMs (such as VW, BMW and Daimler) having their manufacturing plants in China.

The total investment amount of the JV shall be USD 12,500,000. The total registered capital of the JV would be USD 5,000,000, of which, Minda KTSN and SBHAP shall contribute for 50 % of the equity interest in the JV from both parties.

SBHAP is located in Boshan District of Zibo City, Shandong Province. BAIC Group is a leading automotive parts manufacturers in China in Interior and Exterior systems. BAIC Group (founded in 1958) has realized vehicle sales of 2.49 million and operating revenue of RMB 345.22 billion, ranking 5th in vehicle sales and revenue in China automotive industry in 2015. It also ranks 207th in the Fortune 500, and 16th in the global automotive industry

ii) Minda Corporation acquires Panalfa Autoelektrik for Rs 45.5 crores – April 2016

Minda Corporation has acquired Panalfa Autoelektrik Limited (PAL) for about Rs 45.5 crores in April 2016. PAL, founded in 2007, is a part of the Panalfa Group, a major original equipment manufacturer of automotive systems and components in India.

PAL manufactures reduction gear starter motors and alternators as per latest international technology and quality standards under the Panalfa brand. It caters to the agriculture machinery, stationary engine, construction equipment and automotive markets globally. Reduction gear starter aotors are fast replacing the conventional direct-drive starter motors. The optimum weight and dimensions of these starter motors help deliver much greater torque and cranking strength. Alternators, with their high quality avalanche diodes, help enhance an automobile’s battery life.

Panalfa Autoelektrik, which has a manufacturing facility at Bawal (Haryana), supplies its products to OEMs in India and also exports to the US and European markets. Key customers of PAL include Eicher, Escorts, Greaves, HMT, Magneton, New Holland, Polaris, Sonalika and TAFE. PAL had revenues of over Rs 70 crores in FY2015 and employs about 400 people.

3. Financial Performance:

Minda Corporation consolidated net profit declines 36.29% in the December 2016 quarter

Net profit of Minda Corporation declined 36.29% to Rs 20.10 crore in the quarter ended December 2016 as against Rs 31.55 crore during the previous quarter ended December 2015. Sales rose 9.66% to Rs 712.93 crore in the quarter ended December 2016 as against Rs 650.12 crore during the previous quarter ended December 2015.

Minda Corporation consolidated net profit rises 10.19% in the September 2016 quarter

Net profit of Minda Corporation rose 10.19% to Rs 32.02 crore in the quarter ended September 2016 as against Rs 29.06 crore during the previous quarter ended September 2015. Sales rose 26.86% to Rs 774.41 crore in the quarter ended September 2016 as against Rs 610.43 crore during the previous quarter ended September 2015​

4. Investment Rationale: (as on 28th Mar'17)

i) Minda Corp is one of the largest suppliers of locksets, wiring harness and speedometers in the Indian automotive market. The company is a market leader across several product segments and has excellent relationships with OEMs due to its ability to offer consistent and superior quality products. The company has technological tie-ups with global suppliers, which offer it an edge over domestic peers and also gives access to MNC OEMs. We believe the company’s revenues can grow at 20% CAGR over next 2 to 3 years with increase in market share in both wiring harness and locksets segments and expansion of product offerings to existing customers.

ii) The company has joint ventures / technical collaborations with global leaders like Furukawa of Japan, Stoneridge of USA, VAST Access System of USA, Silca of Italy and UzAvtosonat of Uzbekistan. Company’s subsidiary, Minda KTSN contributed ~16% of Minda Corp’s FY2016 revenues and has plants in Germany, Poland and Czech Republic for products such as Plastic Interior trims & Subsystem, Kinematic Modules, Structural Modules, Soft Touch Technology. Minda KTSN is also setting up greenfield plant at Queretaro, Mexico for plastic interior parts.

iii) The recent acquisition of Panalfa Autoelektrik is a step towards company’s overall strategy to become a leading player in auto component and auto electricals sector. With the help of this acquisition, Minda Corp will be able to add new product in its product portfolio and continue to sustain its ongoing growth year-on-year. The company has already have presence in aftermarket business with network of more than 400 dealers. This acquisition will further help in increasing its penetration in aftermarket business of starter motors and alternator.

iv) Acquisition of Panalfa Autoelektrik not only add highly complementary products to Minda Corp’s existing product portfolio but also provide access to additional high profile customers, particularly in the commercial vehicle segment. Access to new manufacturing technology from Magneton, used for starter motors and alternators, is another key advantage. This acquisition has enabled Minda Corp to better service its global OEM and tier I blue chip customer base, and reinforces senior management’s focus on operational excellence.

v) Minda Corp aims to enhance its market share of around 25% in two wheeler segment to 30%. In commercial vehicles and tractors, growth is expected to improve going forward with recovery in demand. In passenger vehicle segment, the company aims to double market share to 30% from current 15% by making greater inroads into Japanese OEMs MSIL, Renault, and Honda.

vi) Wider product portfolio has successfully enabled the company to acquire new OEMs like Hero Moto Corp & Royal Enfield in domestic market, Yamaha in Colombia & Piaggio in China & Suzuki in Indonesia for supplying various auto ancillary parts. Further, the company is also exploring opportunities in Die Casting segment like compressor housing & has started receiving new orders from domestic as well as international market. Strong relationship with OEMs offers plenty of opportunities to the company to expand product portfolio and increase its offerings.

vii) Minda Corp has launched new products like steering roll connectors which could present an additional opportunity for growth once safety equipment like airbags becomes mandatory for Passenger Vehicles. Airbags will likely become mandatory for passenger vehicles in India by CY2018, this could lead to around 70 million US dollar market opportunity for steering roll connectors (SRC) by 2020E. This augurs well for Minda as Furukawa is the global leader for this product.

viii) Despite muted new vehicle industry growth in past quarters, Minda Corp aftermarket revenue has delivered significant growth year on year as it expanded its distributor network as well as product portfolio. The company has a disribution network of over 400 dealers. It has started commercial production of new products (control cable/ filter/ CDI relays etc) and expects these to incrementally add around 20% to its aftermarket revenue going forward.

ix) Minda Corp stands out with strong financial performance. The company has registered sales CAGR of 27.2% and profit CAGR of 25% with ROE of 18.3% over last 5 years, its debt to equity ratio is below 1 with high ROE and ROCE. The company’s management has rewarded shareholders by paying regular dividend, dividend yield at current price is 0.55%.

x) As of Dec’16, promoter’s shareholding in the company is 70.21% without pledging any shares. Institution shareholding in the company is 10.72% which includes investments of Kotak Mahindra, Birla Sunlife, UTI etc. In Sept’16, promoters increased their stake doing open market purchase around Rs. 100. Increasing stake by Promoters at higher levels is positive as it indicates better growth prospects of the company.​

5. Key Concerns & Risks:

i) Any sharp increase in commodity prices globally may adversely impact the company’s manufacturing cost and margin.

ii) Any significant delay in localisation efforts across businesses that currently have higher import content can impact the company’s operating margin and profitability.

6. Saral Gyan Recommendation: (as on 28th Mar'17)

As per our estimates, Minda Corp can deliver PAT of 162 crores for full financial year 2018-19 with annualized EPS of Rs. 7.74. At current price of 91.35, stock is available at forward P/E multiple of 11.8X based on FY18-19 earnings which makes it attractively valued compared to other auto ancillary companies.

Considering Minda Corporation’s technology ties up with leading global players that gives it edge over competitors with access to MNC OEMs, robust growth potential with significant increase in product portfolio by introducing new products, its leadership position with ability to gain market share across segment and attractive valuations with improved fundamentals,Saral Gyan team recommends “Buy” on Minda Corp Ltd at current market price of Rs. 91.35 for target of 140 over a period of 12 to 18 months.

Buying Strategy:
  • 80% at current market price of 91.35
  • 20% at price range of 80-85 (in case of correction in stock price in near term)
Portfolio Allocation: 3% of your equity portfolio.

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