Buy This Auto Ancillary Stock Says Axis Securities, Potential Returns Of 20% Likely

Axis Securities recently interacted with the management of Minda Corporation (Minda Corp) to understand the company's business strategy and growth prospects over the medium term.

The brokerage firm has now set a price target of Rs 270 on the stock from a price of Rs 228 currently.

Key takeaways from management

According to Axis Securities, the management highlighted that Minda is focussing on global trends which are currently shaping the auto ancillary space. The global trends are driven by Connectivity, Autonomous, Shared Mobility and Electrification (CASE) and inline with these trends, Minda has identified its strategic pillars of growth.

These are Focus on enhancing the Core business (Safety Security System, Wiring Harness, Instrument Cluster, and Die Casting), Innovation and Technology (In House R&D and JV's with Global Players), EV growth opportunities (with focus on EV-Agnostic Products and Increase Content Per Vehicle), and Strengthening Passenger Vehicle Offerings (Control Systems, Sensors, and Interior Solutions).

Electric vehicles business

According to Axis Securities, in Q1FY23, Minda Corp won lifetime orders worth Rs 2,500 Cr as per projections provided by the OEM (In FY22, it won orders worth Rs 5,930 Cr). Out of the total Rs 2,500 Cr order book, ~20% of orders are in the EV segment consisting of both the legacy products (such as smart key, die casting, and high voltage wiring harness) as well as new-age products (such as battery chargers, and DC to DC converter).

Capital expenditure update

Mimda is already developing several new products in the EV space. The next challenge for it is to grow these products vertically and increase their capacity (so Capex will be required for these). The company usually spends 4-5% of revenue as Capex, out of which 2% is towards R&D spending and the remaining is towards organic growth projects.

Management confident on margins

According to Axis Securities,, the management said that the fall in the commodity prices will impact the top line. However, the company will preserve its margins as the cost of the raw materials is mainly a pass-through and the company with its focus on product premiumisation, innovation, and cost control will be able to retain its margins moving forward.

Key growth drivers

"Despite near-term challenges, Minda Corp has a robust order book with Q1FY23 orders at Rs 2,500 Cr (FY22 order win was Rs 5,930 Cr), out of which ~20% is from the EV business. The company's key growth drivers include a) New product offerings, b) Deepening customer engagement, and c) Focusing on profitable growth," Axis Securities has said in its report.

Valuation and outlook

"We expect the company's return ratios to improve with improvement in profit margins and improving asset turnover. We maintain our BUY rating on the stock and value the company at 18x FY24E EPS to arrive at a target price of Rs 270 per share (unchanged), implying an upside of 16% from the current market price," Axis Securities has said.

Reasons to like the stock of Minda

"We continue to like the company's growth story driven by increasing kit value per vehicle, focus on EV, removal of drag from loss-making operations, and probable inorganic acquisition given its cash-rich position," it added.