MINDA CORPORATION Muted quarter; growth prospects intact

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1 India Midcaps RESULT UPDATE MINDA CORPORATION Muted quarter; growth prospects intact India Equity Research Automobiles Minda Corporation s (MCL) Q4FY16 adjusted PAT of INR313mn, up 44% YoY but stood 5% below our estimates, largely due to revenue miss at Minda Furukawa. Key highlights: (1) strong revenue traction seen in 2W security systems, maintained share of business (SOB) across key clients; 2) in wiring harness business, continues to see huge potential for products like steering roll connectors and sensors; 3) targets ~100bps margin expansion in FY17 led by reduction in raw material and personnel costs; and 4) confident of turnaround in Panalfa in FY17 with ~4% PAT margin. Maintain BUY with target price of INR 131. Operating performance disappoints Standalone revenue at INR1.8bn, was 8% above our estimate, while EBITDA and PAT were in line. Consolidated EBITDA was impacted by several one-off items: a) Bonus Act provision of ~INR35mn (of which INR20mn was for prior period); b) forex loss of INR37mn impacted other operating income (which should be partly recovered in Q1FY17); c) re-grouping of certain expenses (bank charges) in other expenses; and d) repair costs (INR12mn). Adjusted revenue, at INR6.5bn, was 9% below our estimate largely due to miss at Minda Furukawa (lower revenue for Swift), while adjusted PAT of INR313mn, was 5% below our estimate of INR330mn. Market share gains and new products remain key growth drivers Increasing share of business from Hero MotoCorp (orders for new scooters) and Honda Motorcycle and Scooters (single source supplier for Gujarat plant) are key drivers for market share gains in 2W security systems. PV revenue spurt to be driven by deeper penetration across Maruti, Nissan and Honda. Additionally, product offerings through joint venture (JV) partnerships like steering roll connectors (Minda Furukawa) and sensors (Minda Stoneridge) present immense potential for growth. Outlook and valuations: Growth outlook robust; maintain BUY We estimate consolidated revenue to clock 25% CAGR over FY Operating margins are poised to improve led by scale benefits, cost reduction efforts and progress in localisation across JVs. We retain our FY18E EPS of INR9.4, implying EPS CAGR of ~35% over FY16-18e. Maintain BUY with TP of INR 131 (14x FY18E EPS). At CMP, the stock trades at FY18E PER of 12x. Financials (INR mn) Year to March Q4FY16 Q4FY15 % Chg Q3FY16 % Chg FY16 FY17E FY18E Net revenues 6,517 4, ,565 (0.7) 24,455 31,884 38,084 EBITDA (14.9) 2,233 3,251 3,978 Adjusted Profit (5.5) 935 1,521 1,964 Adjusted Diluted EPS (5.5) Diluted P/E (x) EV/EBITDA (x) ROAE (%) Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. EDELWEISS RATINGS Absolute Rating Investment Characteristics BUY Growth MARKET DATA (R: NA, B: MDA IN) CMP : INR 112 Target Price : INR week range (INR) : 124 / 65 Share in issue (mn) : M cap (INR bn/usd mn) : 23 / 348 Avg. Daily Vol. BSE/NSE ( 000) : SHARE HOLDING PATTERN (%) Current Q3FY16 Q2FY16 Promoters * MF's, FI's & BKs FII's Others * Promoters pledged shares (% of share in issue) : NIL PRICE PERFORMANCE (%) BSE Midcap Index Stock Edelweiss Securities Limited Stock over Index 1 month 1.5 (4.1) (5.6) 3 months months Chirag Shah [email protected] Karthik Subramaniam [email protected] June 15, 2016

2 Automobiles Q4FY16 conference call: Key highlights Margins Consolidated margins were impacted by provision for Bonus Act of ~INR35mn, of which INR20mn was for earlier period. For standalone business, this provision was made during Q3FY16 (INR44mn). However, for other businesses, this provision was made during the quarter. MCL expects ~100bps margin improvement in FY17, led by raw material cost reduction and lower personnel costs. Minda Standalone Continues to see strong traction in key 2W customers like Bajaj Auto, Yamaha and Honda Motorcycles and Scooters(HMSI). Currently, Bajaj accounts for 85% share of business (SOB); SOB with TVS increased to 30% (from 20%). The company has not lost SOB with any of its customers. Management expects export markets to present additional layer of growth. However, they added demand remains weak in the key Indonesian market. Minda Furukawa (MFE) Q4FY16 revenue stood at INR910mn, up 15% YoY. FY16 revenues were INR 4.37bn EBITDA margins for the quarter stood at 5%, impacted by pricing negotiations and forex loss impact. FY16 EBITDA margin came in at 6% versus 7% in FY15. There has been some delay in localisation efforts. However, the company expects to make progress on localisation front over next 6-9 months. MFE sees huge potential for steering roll connectors (SRC), with the upcoming mandatory crash test norms in Oct The company is the sole producer of SRC currently and supplies to Maruti and Nissan. Average realisation per kit is ~INR800, as per the company. For 4W wiring harness, MFE is single source supplier for S-Cross and Celerio and has 45% SOB for Alto, Swift and Dzire. Minda Stoneridge Sensors: Currently working on developing 4-5 new sensor products in FY17 and expects the business opportunity to ramp up to INR bn in FY18 (from current levels of INR450mn). Instrumentation clusters: Developing new product offerings like GPS and the company is confident of bagging new orders from HMSI and Yamaha. Targets revenue of ~INR3.5bn for Stoneridge business in FY17. Minda SAI FY16 revenues were INR5.43bn with 10% EBITDA margin. Seeing good demand traction from CV segment, particularly from players like Ashok Leyland, where it has 85% SOB. 2 Edelweiss Securities Limited

3 Minda Corporation Others Interior systems: KTSN revenues in FY16 were INR3.95bn with margin of 8.5%. The Mexico green-field facility is now 50% complete. The company reiterated its target of doubling revenues from this business over next 3 years. Net debt/equity improved to 0.8x from 0.87x in Sep 15 due to progress on debt reduction front and replacement of high-cost debt with low-cost debt. Acquisition of Panalfa provides complementary product portfolio and access to new clients across CVs and tractors like Eicher, Escorts, New Holland, Sonalika and TAFE. The company remains confident of turnaround and targets revenue of INR1.1bn with PAT margin of ~4% in FY17. 3 Edelweiss Securities Limited

4 Automobiles Financial snapshot (INR mn) Year to March Q4FY16 Q4FY15 % change Q3FY16 % change FY16 FY17E FY18E Net revenues 6,517 4, ,565 (0.7) 24,455 31,884 38,084 Raw material 3,909 3, ,969 (1.5) 14,986 19,290 22,851 Staff costs 1, , ,165 4,748 5,413 Other expenses ,071 4,595 5,844 EBITDA (14.9) 2,233 3,251 3,978 Depreciation (10.6) 214 (12.1) EBIT (16.2) 1,489 2,529 3,211 Other income (57.5) Interest (25.4) 96 (56.8) Add: Exceptional items 80 - (9) (951.1) Profit before tax (19.4) 1,465 2,372 3,113 Provision for taxes Minority interest (10) 44 NA 23 NA Associate profit share - 2 (100.0) Reported net profit (16.3) 1,073 1,521 1,964 Adjusted Profit (5.5) 935 1,521 1,964 Diluted shares (mn) Adjusted Diluted EPS (5.5) Diluted P/E (x) EV/EBITDA (x) ROAE (%) As % of net revenues Raw material Employee cost Other expenses EBITDA Adjusted net profit Reported net profit Edelweiss Securities Limited

5 Company Description Minda Corporation MCL is the flagship company of the Ashok Minda Group. The company is structured into 3 key business segments: 1) Safety, security and restraint systems; 2) driver information & telematics; and 3) interior systems accounting for 39%, 45% and 16% of revenue, respectively.(9mfy16). The company has a well diversified client portfolio, with the largest client contributing only ~10% to revenue, implying minimal concentration risk. In FY16, the domestic market accounted for 79% revenue and Europe & South East Asia operations contributed 16% and 5%, respectively. Investment Theme Minda Corporation(MCL) remains well placed to outperform industry growth riding deepening penetration in existing OEMs, new client wins and enhanced growth in new businesses like wiring harness, sensor and steering roll connectors. Moreover, JVs with with global players Furukawa, Stoneridge and VAST, besides ensuring access to technology, also entail potential to widen the product basket. Focus on margins and balance sheet to ensure that market share gains translate into robust earnings and return ratios Key Risks Success of new models by OEMs Revenue ramp up and market share gains across businesses are contingent on success of new model launches by OEMs for which the company has won orders. Failure of models may have a material impact on MCL's revenue and pricing Delay in localisation efforts Any significant delay in localisation efforts across businesses like Minda VAST and Minda Furukawa(that have high import content) can impact the company's operating margin and profitability Volatility in commodity prices Though MCL maintains inventory of raw materials and components for the operating cycle, a sharp increase in commodity prices globally may adversely impact the company's manufacturing cost and margin 5 Edelweiss Securities Limited

6 Automobiles Financial Statements Key assumptions (INR mn) Minda Corporation FY15 FY16 FY17E FY18E Macro assumptions GDP (% Y-o-Y) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Industry assumptions Cars - domestic volumes (% YoY) UV - domestic volumes (% YoY) Motorcycle-domestic vol. (% YoY) MHCV - domestic vol (% YoY) Steel prices(inr/t) 37,152 33,360 36,480 36,480 Aluminium prices(usd/t) 1,890 1,600 1,600 1,650 Company assumptions Revenue assumptions Standalone (% YoY) Consolidated (% YoY) Financial Assumptions Interest as % Debt Depreciation as % Sales Tax Rate (%) Dividend Payout ratio(%) B/s Assumptions Net borrowings(inr mn) 4,451 4,590 4,090 3,590 Capex (INR mn) (1,046) (866) (500) (1,000) Inventory days Debtors days Payable days Cash conversion cycle Income statement (INR mn) Income from operations 19,706 24,455 31,884 38,084 Materials costs 11,975 14,986 19,290 22,851 Employee costs 3,365 4,165 4,748 5,413 Total SG&A expenses 2,510 3,071 4,595 5,844 Total operating expenses 17,851 22,222 28,633 34,107 EBITDA 1,856 2,233 3,251 3,978 Depreciation EBIT 1,253 1,489 2,529 3,211 Add: Other income Less: Interest Expense Add: Exceptional items Profit Before Tax 1,109 1,465 2,372 3,113 Less: Provision for Tax Less: Minority Interest (14) Associate profit share Reported Profit 895 1,073 1,521 1,964 Exceptional Items Adjusted Profit ,521 1,964 Shares o /s (mn) Adjusted Basic EPS Diluted shares o/s (mn) Adjusted Diluted EPS Adjusted Cash EPS Dividend per share (DPS) Dividend Payout Ratio(%) Common size metrics Operating expenses Materials costs Staff costs S G & A expenses Depreciation Interest Expense EBITDA margins Net Profit margins Growth ratios (%) Revenues EBITDA PBT Adjusted Profit EPS Edelweiss Securities Limited

7 Minda Corporation Balance sheet (INR mn) As on 31st March FY15 FY16 FY17E FY18E Share capital Reserves & Surplus 4,059 5,066 6,482 8,340 Shareholders' funds 4,666 5,674 7,090 8,948 Minority Interest ,024 Short term borrowings 2,644 3,174 2,674 2,174 Long term borrowings 1,807 1,416 1,416 1,416 Total Borrowings 4,451 4,590 4,090 3,590 Def. Tax Liability (net) Sources of funds 9,415 11,013 12,086 13,676 Gross Block 10,916 11,782 12,282 13,282 Net Block 5,711 5,832 5,610 5,843 Capital work in progress Intangible Assets - 1,336 1,336 1,336 Total Fixed Assets 5,861 7,318 7,096 7,329 Cash and Equivalents ,288 1,807 Inventories 2,308 3,210 3,597 4,297 Sundry Debtors 3,176 4,353 4,908 5,862 Loans & Advances 2,141 1,892 2,629 3,140 Current Assets (ex cash) 7,624 9,455 11,134 13,299 Trade payable 4,384 6,088 6,826 8,153 Other Current Liab Total Current Liab 4,801 6,694 7,433 8,760 Net Curr Assets-ex cash 2,824 2,761 3,701 4,539 Uses of funds 9,415 11,013 12,086 13,676 BVPS (INR) Free cash flow (INR mn) Reported Profit ,521 1,964 Add: Depreciation Interest (Net of Tax) Others 1, (1,813) (1,563) Less: Changes in WC (940) (838) Operating cash flow 3,042 1,933 1,616 2,222 Less: Capex 1, ,000 Free Cash Flow 1,996 1,068 1,116 1,222 Cash flow metrics Operating cash flow 3,042 1,933 1,616 2,222 Investing cash flow (863) (456) (310) (791) Financing cash flow (1,361) (298) (952) (912) Net cash Flow 818 1, Capex (1,046) (866) (500) (1,000) Dividend paid (84) (105) (105) (105) Profitability and efficiency ratios ROAE (%) ROACE (%) Inventory Days Debtors Days Payable Days Cash Conversion Cycle Current Ratio Gross Debt/EBITDA Gross Debt/Equity Adjusted Debt/Equity Net Debt/Equity Interest Coverage Ratio Operating ratios Total Asset Turnover Fixed Asset Turnover Equity Turnover Valuation parameters Adj. Diluted EPS (INR) Y-o-Y growth (%) Adjusted Cash EPS (INR) Diluted P/E (x) P/B (x) EV / Sales (x) EV / EBITDA (x) Dividend Yield (%) Peer comparison valuation Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%) Name (USD mn) FY17E FY18E FY17E FY18E FY17E FY18E Minda Corporation Motherson Sumi Systems 5, Suprajit Engineering Median AVERAGE Source: Edelweiss research 7 Edelweiss Securities Limited

8 Automobiles Additional Data Directors Data Mr Ashok Minda Chairman & Group CEO Mr Avinash P Gandhi Independent Director Mr Rakesh Chopra Independent Director Mr Sunil Behari Mathur Independent Director Mr Ashok Kumar Jha Independent Director Mr Laxman Ramnarayan Director - Kotak Private Equity Mrs Thankom T Mathew Independent Director Mr Sudhir Kashyap Executive Director & CEO Auditors M/s B S R & Associates LLP *as per last available data Holding Top10 Perc. Holding Perc. Holding Minda ashok Minda sarika Kotak mahindra Minda aakash 7.59 Bhagwat sewa trust 5.18 Minda capital limite 4.97 Tech aid engineering 4 Kotak in pvt equity 3 Rns tyres private li 2.18 Blest marketing & ad 2.18 *as per last available data Bulk Deals Data Acquired / Seller B/S Qty Traded Price 16 Sep 2015 Minda Capital Ltd Buy Sep 2015 Almighty International Pte. Ltd Sell *as per last available data Insider Trades Reporting Data Acquired / Seller B/S Qty Traded 23 Mar 2016 MINDA CAPITAL LIMITED Buy Mar 2016 ALMIGHTY INTERNATIONAL PTE. LTD. Sell *as per last available data 8 Edelweiss Securities Limited

9 Minda Corporation Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai Board: (91-22) , Nirav Sheth Head Research ` Coverage group(s) of stocks by primary analyst(s): Automobiles Ashok Leyland, Bajaj Auto, Eicher Motors, Hero MotoCorp, Minda Corporation, Mahindra & Mahindra Ltd, Maruti Suzuki India Ltd, Motherson Sumi Systems, Suprajit Engineering, Tata Motors Ltd Recent Research Date Company Title Price (INR) Recos 31-May-16 Suprajit Engineering Stellar quarter; Phoenix getting into the groove; Result Update 31-May-16 Tata Motors JLR surprises on all counts; Result Update 31-May-16 Mahindra & Mahindra Inline quarter; pinning hopes on monsoon; Result Update 162 Buy 421 Buy 1,331 Buy Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Rating Interpretation Buy Hold Reduce Total Rating Distribution* * - stocks under review > 50bn Between 10bn and 50 bn < 10bn Market Cap (INR) Rating Buy Hold Reduce Expected to appreciate more than 15% over a 12-month period appreciate up to 15% over a 12-month period depreciate more than 5% over a 12-month period One year price chart (INR) Jul 15 Aug 15 Sep 15 Oct 15 Nov 15 Dec 15 Jan 16 Feb 16 Mar 16 Apr 16 May 16 Jun 16 Minda Corporation 9 Edelweiss Securities Limited

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