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Acquires stake in competitor as financial investment, strategic intent not dispelled, await more clarity…

About the stock: Minda Corporation (MCL) primarily serves auto OEMs across two main verticals – Mechatronics & Aftermarket [i.e. MCH – safety & security system (lock & key, smart key), die-casting, starter motors, etc] and Information & Connected Systems (i.e. ICS – mainly wiring harnesses, sensors and instrument clusters).

* FY22 segment mix –2-W ~49%, CV ~19%, PV ~18%, Aftermarket ~15%

* FY22 product mix – MCH ~57%, ICS ~43%. India ~84%, Exports ~16%

Key Highlights:

* MCL on Friday February 17, 2023 acquired 1.91 crore shares comprising ~15.7% of share capital of Pricol Ltd for ~| 400 crore (~| 209 per share) from open market stating it as financial investment transaction only

* View: We see less merit in this transaction to be just a financial investment and believe it to have a strategic intent to either acquire Pricol in full or seek controlling stake or buyout of the Instrument cluster division given the potential content increase in this domain and healthy technological capabilities and customer profile at Pricol. Since the valuations and quantum of further investments for this strategic intent cannot be ascertained at this point in time with risk of company overpaying for it and amid lack of clarity on further line of action in this domain, we downgrade the stock to HOLD

What should investors do?MCL’s share price has been largely flattish over five years from ~| 195 in February 2018, underperforming the broader Nifty Auto Index.

* We have been positive on this space for quite some time given the company’s endeavour to grow ahead of industry and development of new technological capabilities. However, we now downgrade the stock from BUY to HOLD amid lack of clarity on the company’s strategic intent behind this investment in Pricol and b/s risk in case of any potential acquisition

Target Price and Valuation: Introducing FY25E and rolling over our valuations, we now value MCL at | 230 i.e. 16x P/E on FY25E EPS (earlier target price | 270).

Key triggers for future price performance:

* Robust orderbook with incremental wins in the EV space impart healthy revenue visibility. We build 23.3% (FY22-25E) consolidated sales CAGR

* Benign RM price outlook, operational efficiencies and localisation efforts to lead margin recovery, RoCE to 11.8%, 19.8%, respectively, by FY25E

Alternate Stock Idea: In our auto ancillary coverage we like Apollo Tyres.

* Focus on b/s deleveraging, sweating of assets & capital efficiency

* BUY with target price of | 390

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