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Investment thesis playing out on expected lines…

Minda Corporation (MCL) reported strong Q3FY21 results. Consolidated net sales rose 36% YoY to | 740 crore (like-to-like basis) – far outpacing the growth observed in the domestic OEM space. Blended operating margins rose 100 bps QoQ to 11.1% (110 bps increase in mechatronics division to 13.8%; 40 bps increase in information connected systems division to 7.1%) amid 80 bps QoQ gross margin expansion and 80 bps savings in other expenses on percentage of sales basis. Consequent consolidated PAT was up 19% YoY to | 49.5 crore.

CV recovery further improves topline outlook

The domestic OEM space has recovered well post Covid, with early revival in rural facing pockets like tractors and motorcycles later being caught up by catch-up in urban segments like scooters and UVs. Over the past few months, one of the major laggard segments, CV, has also started to show signs of promise, on the back of a pick-up in demand from key sectors like mining, road building and construction. In our view, the industry has surpassed the usual cyclical bottom and is poised well for strong growth in coming years. This bodes well for MCL, which derived ~23% of FY20 sales (continued operations) from the space. Its wiring harness division, especially, should benefit from larger dependence on this segment (~40% of sales). With other major auto segments performing reasonably well already (2-W – 53% of FY20 sales, PV – 10% of FY20 sales), the overall topline picture at MCL appears encouraging over the medium term. On a long-term basis, the company is seen continuing to gain from increased content per vehicle (2-2.5x in 2-W wiring harness under BS-VI) and increased contribution from further value additive content such as smart keys. We build 18.1% FY21E-23E net sales CAGR at MCL to | 3140 crore.

Margin drivers in place for move to higher trajectory

Ongoing premiumisation is also expected to lead to structural improvement in margin trajectory at MCL down the line. Once near-term squeeze on gross margins brought about by sharp increase in prices of raw materials subsides, the company is seen moving to a higher margin plane on the back of increased operational efficiencies, cost controls and removal of profitability overhang due to hive-off of Minda KTSN (the management expects the restructuring to add ~2% to margins and ~5% to RoCE in time). We build 10.5%, 11% margins for FY22E & FY23E, respectively.

Valuation & Outlook

FY21E-23E PAT CAGR at MCL is seen at ~62% (albeit on a low base). Broadbased positivity across served segments domestically, new order wins along with structural margin tailwinds help us maintain BUY on MCL. We value it at | 120, 15x P/E FY23E EPS (previous target price | 105) and remain enthused by its long term vision to clock ~12% margins and ~20%+ RoIC.

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