The Research Report is only for reference purposes for residents in India, but not for the purposes of advising or recommending on any investment. Kotak Securities Limited or its affiliates are not seeking any business relationship with any viewer of this report nor does Kotak Securities or its affiliates assume any liability for acting on this report nor does it take any responsibility to update information provided in this report. Company Report Minda Corp. (MDA) BUY Automobiles December 07, 2015 INITIATING COVERAGE Sector view: Attractive Harness the potential. Minda Corporation is one of the leading suppliers of locksets, Price (`): 89 wiring harness and instrument clusters in the Indian automotive market. Our positive view on the stock is underpinned by (1) Minda’s technology tie-ups with global Target price (`): 110 suppliers that give it access to MNC OEMs, (2) its ability to gain market share across BSE-30: 25,530 segments and (3) robust growth potential from new products such as steering roll connectors and sensors. We expect 25% EPS CAGR over FY2016-20E and initiate coverage with a BUY rating; our TP of `110 is based on 15X September 2017E EPS. Technology tie-ups and strong relationship with OEMs to drive market share gains Minda Corporation is well-placed to deliver 20% revenue CAGR over the next five years led by INSIDE (1) market share gains across segments, (2) expansion of product offerings with existing Key technology customers and (3) new products. We expect Minda Furukawa’s market share in wiring harness partners and their to increase to 16% by FY2020 (from 7% currently) led by market share gains with Maruti. capabilities…pg09 Minda’s market share in locksets is likely to increase by 7% over the next five years led by increase in share with Honda motorcycles and potential new business from Hero MotoCorp. OEMs and product New products to provide US$500 mn opportunity for Minda by FY2020E segments that will drive market share Airbags will likely become mandatory for passenger vehicles in India by CY2018E; this could gains…pg13 lead to ~US$70 mn market opportunity for steering roll connectors (SRC) by 2020E. This augurs well for Minda as Furukawa is the global leader for this product. Minda Stoneridge JV is Potential of new looking to aggressively expand offering of sensors, which could be a strong revenue driver over the medium term as automotive sensors could potentially be a US$430 mn industry products…pg15 opportunity in India by FY2020E, as per our calculations. Related-party Return ratios to improve led by strong profit growth over FY2016-20E transactions and other We expect consolidated net profit to grow at 25% CAGR over FY2016-20 led by 20% growth issues…pg17 in revenues. Due to limited capex requirements and strong operating cash flow, we expect FCF generation of ₹1.8 bn over FY2015-18. With this, net debt to equity will likely decline to 0.5X in FY2018E from 1X in FY2015. The company’s return ratios are likely to improve over the next three years. We expect Minda to report RoE/RoCE of 22%/19% in FY2018. Initiate with BUY rating and target price of `110 The stock is trading at 14.3X FY2017 EPS, which is inexpensive given strong growth prospects Nishit Jalan [email protected] and improving return ratios. We initiate coverage on Minda Corporation with a BUY rating Mumbai: +91-22-4336-0873 and target price of `110 based on 15X September 2017E EPS. Weak execution, inefficient capital allocation and break-up with JV partners are the key risks to our investment thesis. Hitesh Goel [email protected] Mumbai: +91-22-4336-0878 Company data and valuation summary Company data Stock data High Low Price performance 1M 3M 12M Rating: BUY 52-week range 105 65 Absolute (%) 19.7 25.3 0.0 Priced at close of: 07-Dec-15 Rel. to BSE-30 (%) 22.9 24.8 0.0 Current price (Rs) Capitalisation Forecasts/valuation 2015 2016E 2017E 89 Market cap (Rs bn) 18.6 EPS (Rs) 4.2 4.4 6.2 Net debt/(cash) (Rs bn) 4.6 P/E (X) 21.2 20.0 14.3 Kotak Institutional Equities Research Free float (%) 15.4 RoAE (%) 20.5 18.3 21.5 Shares outstanding (mn) 209 EV/EBITDA (X) 12.5 9.9 7.5 Important disclosures appear at the back Source: Company, Kotak Institutional Equities estimates For Private Circulation Only. In the US, this document may only be distributed to QIBs (qualified institutional buyers) as defined under rule 144A of the Securities Act of 1933. 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TABLE OF CONTENTS Minda Corporation—financial snapshot ..................................................... 3 Valuations: Decent growth story at reasonable valuations .......................... 4 Investment thesis: Revenues to grow at 20% CAGR over next five years .... 8 Key risks: Inefficient capital allocation and weak execution ....................... 17 Financials: Growth led by market share gains ........................................... 19 Appendix 1: Company profile ................................................................... 28 Appendix 2: Product portfolio .................................................................. 34 Appendix 3: Customers across different segments.................................... 35 The prices in this report are based on the market close of December 7, 2015 2 KOTAK INSTITUTIONAL EQUITIES RESEARCH Minda Corp. Automobiles MINDA CORPORATION—FINANCIAL SNAPSHOT Exhibit 1: Consolidated forecasts and valuation, March fiscal year-ends, 2013-20E Net sales EBITDA PAT EPS EV/EBITDA P/E RoACE RoAE (Rs mn) (Rs mn) (Rs mn) (Rs) (X) (X) (%) (%) 2013 21,736 1,087 67 0.3 21.5 279.3 2.0 1.9 2014 15,939 1,257 725 3.5 18.7 25.6 10.4 19.7 2015 19,706 1,855 876 4.2 12.5 21.2 12.3 20.5 2016E 25,790 2,393 929 4.4 9.9 20.0 13.7 18.3 2017E 32,821 3,137 1,298 6.2 7.5 14.3 16.7 21.5 2018E 38,660 3,755 1,651 7.9 6.1 11.3 18.8 22.4 2019E 47,102 4,567 1,937 9.3 4.8 9.6 20.7 21.6 2020E 53,314 5,145 2,248 10.7 4.1 8.3 21.6 20.8 Source: Company, Kotak Institutional Equities estimates Exhibit 2: We expect Minda Corporation to deliver 25% earnings CAGR over FY2016-20E Minda Corporation, consolidated financial summary, March fiscal year-ends, 2011-20E (` mn) 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Profit model (Rs mn) Net sales 7,322 13,855 21,736 15,939 19,706 25,790 32,821 38,660 47,102 53,314 EBITDA 758 1,349 1,087 1,257 1,855 2,393 3,137 3,755 4,567 5,145 Other income 40 204 362 304 227 179 189 206 220 235 Interest and finance charges (174) (268) (424) (275) (395) (427) (441) (377) (361) (281) Depreciation (172) (455) (771) (478) (603) (756) (849) (941) (1,072) (1,213) Pre-tax profits 452 830 254 808 1,085 1,390 2,035 2,642 3,353 3,884 Extraordinary items — (176) (30) 147 24 — — — — — Income tax (105) (138) (175) (172) (272) (347) (509) (661) (939) (1,088) Share of JVs — 6 — 10 44 — — — — — Minority interest — (2) 10 — 14 (114) (228) (331) (478) (549) Net profits 347 519 60 793 895 929 1,298 1,651 1,937 2,248 Adjusted net profit 347 658 67 725 876 929 1,298 1,651 1,937 2,248 Earnings per share (Rs) 1.8 3.1 0.3 3.5 4.2 4.4 6.2 7.9 9.3 10.7 Balance sheet (Rs mn) Total equity 2,693 3,530 3,462 3,894 4,666 5,470 6,619 8,093 9,817 11,828 Minority interest — 33 51 — 241 355 583 914 1,391 1,941 Total borrowings 2,046 4,759 5,319 5,523 5,018 6,018 5,518 4,718 4,518 3,518 Current liabilities 2,127 3,211 3,596 3,451 4,022 5,274 6,445 7,587 9,223 10,407 Other liabilities 85 390 301 253 269 269 269 269 269 269 Total liabilities and equity 6,951 11,922 12,729 13,122 14,216 17,386 19,434 21,581 25,218 27,962 Cash 655 972 575 540 441 853 562 341 953 986 Total fixed assets 2,646 4,978 5,342 5,418 5,861 6,555 6,906 7,365 8,292 9,079 Investments 38 189 — 245 289 289 289 289 289 289 Current assets 3,612 5,580 6,583 6,765 7,423 9,487 11,475 13,385 15,482 17,407 Other long-term assets — 203 229 154 202 202 202 202 202 202 Total assets 6,951 11,922 12,729 13,122 14,216 17,386 19,434 21,581 25,218 27,962 Cash flow (Rs mn) Operating cash flow, excl. working capital 676 1,082 1,295 861 1,427 2,175 2,777 3,280 3,823 4,262 Working capital (66) (1,314) (617) (326) (88) (813) (816) (768) (462) (741) Capital expenditure/Acquisitions (187) (1,565) (1,150) (321) (455) (1,449) (1,200) (1,400) (2,000) (2,000) Investments (118) 249 — — — — — — — — Free cash flow 424 (1,797) (472) 213 884 (88) 760 1,113 1,361 1,521 Ratios (%) EBITDA margin 10.4 9.7 5.0 7.9 9.4 9.3 9.6 9.7 9.7 9.6 Gross margin 37.3 38.7 39.9 38.9 39.2 37.5 37.0 36.5 36.0 36.0 Debt/equity (X) 0.8 1.3 1.5 1.4 1.1 1.1 0.8 0.6 0.5 0.3 Net debt/equity (X) 0.5 1.1 1.4 1.3 1.0 0.9 0.7 0.5 0.4 0.2 RoAE 20.3 21.2 1.9 19.7 20.5 18.3 21.5 22.4 21.6 20.8 RoACE 13.7 15.4 2.0 10.4 12.3 13.7 16.7 18.8 20.7 21.6 Source: Company, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 Automobiles Minda Corp.