EV Partnership And Localization Will Transform India's Auto Components Sector

Key Takeaways

• Strategic partnerships and premiumization in EV components are key to driving revenue growth and improving margins.
  
• Localization and increased R&D investment enhance operational efficiency and innovation, supporting sustainable long-term financial growth.
  
• Challenges in the commercial vehicle sector and subdued export demand, alongside high EV dependency and leverage from acquisitions, may affect Minda's financial stability.

Catalysts

Manufactures and assembles safety and security systems, and its associated components for the automotive industry in India, rest of Asia, the Americas, and Europe.

• Minda Corporation's strategic partnership with Flash Electronics aims to create the largest EV platform in the country, enhancing growth in the EV components sector and potentially increasing revenue.
  
• The company reported significant lifetime order wins exceeding ₹1,250 crores, with over 25% of these orders coming from EV platforms, which could drive future revenue growth and premiumization.
  
• Minda's focus on premiumization and new product launches in areas like EV power electronics and Intelligent Transportation Systems is likely to augment revenue and improve margins over time.
  
• The emphasis on localization, particularly in wiring harnesses, is expected to reduce costs and improve net margins through decreased import reliance and enhanced operational efficiency.
  
• Continuing growth in R&D investment, now over 4% of revenue, is expected to lead to innovative product developments and increased earnings in new market segments, sustaining long-term financial growth.

Minda Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Minda's revenue will grow by 13.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.1% today to 7.9% in 3 years time.
• Analysts expect earnings to reach ₹5.8 billion (and earnings per share of ₹23.75) by about August 2028, up from ₹2.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 35.6x on those 2028 earnings, down from 42.5x today. This future PE is greater than the current PE for the IN Auto Components industry at 29.8x.
• Analysts expect the number of shares outstanding to grow by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.63%, as per the Simply Wall St company report.

Minda Future Earnings Per Share Growth

Risks

• The commercial vehicle sector faced challenges due to prolonged monsoon delays and low infrastructure spending, which could impact Minda's revenue growth in this segment.
  
• Subdued export demand from especially the European market and a slowdown in the ASEAN countries could negatively affect revenue and profit margins.
  
• Increasing dependency on the EV segment, where penetration is still in its initial stages, poses a risk to consistent revenue growth if EV adoption does not meet expectations.
  
• The company's acquisition of a 49% stake in Flash Electronics increases debt levels, leading to a net debt to equity ratio of 0.6x, which may pressure financial stability if cash flows do not cover the increased financial burden.
  
• The company's reliance on imports for certain new electronic products, due to a lack of local components like semiconductors, might lead to margin pressure if costs rise or supply chains are disrupted.

Valuation

• The analysts have a consensus price target of ₹588.5 for Minda based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹630.0, and the most bearish reporting a price target of just ₹480.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹73.6 billion, earnings will come to ₹5.8 billion, and it would be trading on a PE ratio of 35.6x, assuming you use a discount rate of 14.6%.
• Given the current share price of ₹461.65, the analyst price target of ₹588.5 is 21.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.