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Investment thesis intact, valuations limit upside…

About the stock: Minda Industries (MIL) is India’s largest maker of automotive switches, horns, seats & PV alloy wheels and third largest automotive lighting player.

* FY21 segment mix – 4-W 53%, 2-W 47%; switches, lighting, castings, horns and seats comprised 28%, 22%, 12%, 10% and 10% of sales, respectively

* History of vast outperformance vs. user industries riding on growth in kit value, new client and product additions & inorganic acquisitions

Q2FY22 Results: The company reported robust Q2FY22 results.

* Consolidated revenues were at | 2,114 crore, up 31.9%% QoQ

* EBITDA margins for the quarter came in at 10.8%, up 160 bps QoQ

* Consolidated PAT in Q2FY22 was at | 94.7 crore (vs. | 15.4 crore - Q1FY22)

What should investors do? MIL’s share price has jumped >9x from ~| 100 levels in November 2016, thereby vastly outperforming Nifty Auto index in that time.

* We downgrade the stock from BUY to HOLD amid sharp run up in the recent past with prevailing valuations (~37x P/E on FY24E) limiting the upside

Target Price and Valuation: We value the company at a revised target price of | 940 i.e. 40x P/E on FY24E EPS of | 23.5 (previous target | 835)

Key triggers for future price performance:

* We build 20.7% net sales CAGR (FY21-24E) riding on OEM ramp up, focus on premiumisation (content per vehicle), new product launches

* Minimal EV risk to portfolio; actively working on EV-specific products

* Increasing share of new age products (sensors, alloy wheels)

* Mix, operating leverage to push margins, RoCE to 12.5%, 18% (FY24E)

* B/s strength to sustain with FY22E debt: equity at 0.2x

Alternate Stock Idea: Besides MIL, in our ancillary coverage we like Apollo Tyres.

* India CV revival beneficiary focused on debt reduction, higher return ratios

* BUY with target price of | 275

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