Analysis: Minda Industries Ltd

The current section of the “Analysis” series covers Minda Industries Ltd a leading Indian auto-component manufacturer producing switches, horns, lighting, alloy wheels and other auto-ancillary products. The company has 62 plants located around the world.

“Analysis” series is an attempt to share with all the readers, our inputs to the company analysis submitted by readers on the “Ask Your Queries” section of our website.

To benefit the maximum from this article, an investor should focus on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc. used to get the information. This will help her in improving her stock analysis skills.

Minda Industries Ltd Research Report by Reader

Dr Malik,

Please find my analysis of M/s Minda Industries Ltd., a leading auto component company. I request you to provide your views and comments.

Regards,

T Srikrishna

About Minda Industries Ltd:

The company is one of the oldest automobile components manufacturing company. It supplies components to 2, 3, and 4W manufacturing companies.

Product-wise revenue generation: The company has 81% of the revenue from domestic sales and 19% revenue from international. The product-wise the revenue share is as below:

• Switching Systems: 37.8%
• Lighting systems: 21.9%
• Acoustic systems: 12.10%
• Light metal technology: 15.84%
• Other products, aftermarket sales: 12.8%

Segment-wise share of business:

• Passenger Vehicles: 13%
• Commercial Vehicles: 3%
• Three-wheelers: 3%
• Two-wheelers: 81%

Minda Industries Ltd has scaled up substantially and diversified its business profile through acquisitions as well as starting greenfield projects for expansion. Some of the important acquisitions are as below:

• Clarkton Horns: Global Player in Horns for Passenger Vehicles
• Ringer group: 2w lighting systems
• iSYS RTS GmbH: Electronic Controlled units
• Delvis GmbH: Automotive Lighting system
• HFRL: Automotive seating

Financial analysis of Minda Industries Ltd:

Sales growth: The company has sales though rising year to year, the percentage growth is chequered with peak growth witnessed in the year 2017, whereas in the year sales topped However the Co has registered a CAGR of 21.90% in sales from the past 9years.

Profitability: The profitability of the company is fluctuating. It is inconsistent with top-line growth. As Minda Industries Ltd is into auto component manufacturing and supplies to leading OEM cos, it does not have much pricing power. Besides, the company has invested heavily in capital expenditure, invested in acquisitions and entered into JVs. As its revenue is from supplies to 2W OEMs, it is also manufacturing new products to suit electric vehicles and thus revenue is future proof. Further, the profitability is expected to improve in the FY20-21 as it has raised Rs 240 Cr through the rights issue to reduce the debt. Due to the coronavirus pandemic, the sales of two-wheelers are expected to increase in the coming period, which would also increase top-line and profit growth.

Interest Coverage: 4.3 as at 31.3.2020

Debt to Equity Ratio: 0.70 is within the acceptable limit

Current Ratio: 1.07, is low due to diversion of short-term surplus funds to meet long term deficit

Cash flow/Free cash flow: CFO is 965 cr and free cash flow is Rs158 cr

PAT vs CFO: PAT is Rs155 cr as against CFO of Rs965 cr, which shows that all the Net profit is realized in cash

Inventory level: 40 days (AR2020 page no: 99)

Trade receivables (days): 54 days

Working capital days: 99 days

Inventory and receivables as % of current assets: 71.60 % of Current assets which shows good and the Co is also working capital intensive

Bad debts (over 6 months): As the Company is supplying lighting and other components to reputed OEMs, there are not much bad debts and sales are realized in cash

Trade payables: The company is getting 4 months’ credit from the supplier of raw material, which reduces the cost of holding inventory.

Funds flow/capex/(diversion of short-term surplus to long-term deficit, if any): short-term funds to a tune of Rs114.12 Cr diverted to meet the deficit in funding long-term assets. That resulted in a marginal decline in the Current Ratio from 1.17 to 1.08 in FY2019 to FY2020

Fixed assets turnover ratio: 2.69 is very low, but as sales pick up in the current year, it will achieve the long-term average level of4.5 in the current year

Fixed assets to long-term borrowings: Total fixed assets including CAPEX W I P is Rs1980 cr as against outstanding borrowings of Rs780 cr (long term) as of 31.03.2020, which is good.

Expansion through acquisitions, JVs, subsidiaries/% of capital employed in JVs and subsidiaries not exceeding 25% of net worth: As per the balance sheet, the unquoted investments (Non-Current Assets) is Rs 372 Cr, which is only 17.72% of net worth (Rs 2,099 cr). The company has substantial headroom to expand the production and can increase the return on investments in JVs, Associate Cos, and partnerships.

Business and industry analysis of Minda Industries Ltd:

Sales growth vis-a-vis peers: Sales growth barring the FY ending 2020, growth is increasing in tandem with the growth of 2W, 3W and 4W vehicles. Moreover, peer companies Lumax, FIEM, Autolite Industries, and Jagan Litech are also growing at the same pace.

Increase in production, capacity utilization and sales volume: The company has acquired some auto component manufacturing companies, invested in JVs, associate companies to meet the demand. The company has two sizable projects Rs 330 Crore 2w alloy wheel plant and Rs 175 cr sensor plant-project in collaboration with Sensata, which will help the company to increase content per vehicle.

Conversion of sales growth into profits: The CFO is more than the PAT. Therefore, all the sales are realized. Also, because the company is supplying products to reputed OEM in 2, 3, and 4W vehicles, sales realization is good.

Creation of value for shareholders: The company has retained earnings of Rs 1,075 Cr in the past 10 years and market capitalization increased by Rs 8,507 Cr. Thus for every rupee reinvested in the business it has increased the value of the stock by Rs. 7.92, which is a good sign.

Credit rating, consistency in rating and rating comments:

ICRA has reaffirmed its credit rating AA (stable) for the fund-based borrowings for Rs100 Cr and Rs. 308.75 Cr, and A1+ for Rs 100 cr commercial paper and non-fund-based limits and the rating remained the same from the 3 years consecutively from the year 2018 to 2020.

Management analysis of Minda Industries Ltd:

Project execution skills: The company has 16 direct subsidiaries, 12 steps down subsidiaries, 8 joint ventures, and 2 associates with an outstanding investment of Rs 755.61 Cr. The company has also set up multiple JVs with global automotive majors, which helped the company to expand its product portfolio besides strengthening its “content per vehicle” with OEMs and to get the latest tech know-how.

Some of the JVs and areas of product development are as below:

• Minda Kosei: Alloy wheels for PV
• Minda TG Rubber: Brake and fuel hoses
• Roki Minda: Air Intake systems, carbon canisters
• Minda d-Ten Inia: Infotainment systems
• Katolec, Tung, Thi (Electronic), Onkyo: For Mfg. of PCBs, driving assistance systems, speakers
• Kosei: Mfg. of alloy wheels
• Sensate technologies KPIT Engineering: For acquiring tech know-how in specific product segments

Promoters and their shareholding pledge of shares: Promoter directors (CMD, Mr. Nirmal K. Minda, and non -executive director, Mr. Anand k. Minda have a shareholding (70.79%) and there is no pledge of shares by the promoters.

Management succession: The Company is a family run business. Mr Nirmal Minda is the founder promoter and Anand Minda is his brother. Mr. Ashok Jindal is the son-in-law and husband of Mrs. Paridhi Minda (daughter of Nirmal Minda) who is presently non-executive director may be the successor.

Compensation claimed by promoters: Remuneration to the directors (CMD (Rs 2.94 Cr), other directors (Rs 0.28 Cr) is also below the benchmark level.

Regards,

T Srikrishna

Dr Vijay Malik’s Response

Dear T Srikrishna,

Thanks for sharing the analysis of Minda Industries Ltd with us! We appreciate the time & effort put in by you in the analysis.

While analysing the history of Minda Industries Ltd., an investor notices that throughout the last 10-years (FY2011-2020), the company has had many subsidiaries, joint ventures, associate companies as well as partnership firms. As per the FY2020 annual report, page 11, the company has 42 such entities in its corporate structure. As a result, throughout the last 10 years (FY2011-2020), Minda Industries Ltd has reported both standalone as well as consolidated financials.

We believe that while analysing any company, an investor should always look at the company as a whole and focus on the financials, which represent the business picture of the entire group. Consolidated financials of any company, whenever they are present, provide such a picture.

Further advised reading: Standalone vs Consolidated Financials: A Complete Guide

Therefore, in the analysis of Minda Industries Ltd, we have used consolidated financials in the assessment.

With this background, let us analyse the financial performance of the company.

Financial and Business Analysis of Minda Industries Ltd:

While analyzing the financials of Minda Industries Ltd, an investor notices that the sales of the company have grown at a pace of about 20% year on year from ₹954 cr in FY2011 to ₹5,465 cr in FY2020. During the 12-months ending September 2020, the sales of the company have declined to ₹4,548 cr.

An investor notices that the business of the company, producing auto components, is highly linked to the situation of the automobile industry in the country. In FY2020, the automobile industry witnessed a decline in the number of vehicles sold for the first time in the decade (FY2011-FY2020). The following graph from Statista shows the trend of automobile sales in India during FY2011-FY2020 and the sharp decline in the sales in FY2020.

As a result, the decline in the sales of Minda Industries Ltd in FY2020 seems more in line with the overall demand slowdown faced by the automobile industry. In addition, the sales in the 12-months ending September 2020 seem to be impacted by the coronavirus lockdown and the resultant slowdown.

While looking at the profitability of the company, an investor notices that the operating profit margin (OPM) of Minda Industries Ltd increased from 9% in FY2011 to 11% in FY2020. Moreover, during the 12-months ended in September 2020, the OPM of the company is 9%.

From the above data, it may seem that the operating profit margin of Minda Industries Ltd has been stable in the range of 9% to 11%. However, a look at the year-on-year movement of OPM indicates that the profit margins of the company have witnessed large fluctuations.

• In FY2012, the OPM declined to 5% from 9% in FY2011
• In FY2013, the OPM increased to 7%
• In FY2014, the OPM again declined to 5%
• Thereafter, the OPM witnessed a steady increase to 12% in FY2019.
• Since then, the OPM has declined to 9% in 12-months ended in September 2020.

Therefore, looking at the OPM of Minda Industries Ltd, an investor would notice the following patterns:

• The profit margins of the company fluctuate in cyclical patterns with periods of increasing profit margins followed by periods of declining profit margins and
• Within this trend of cyclicity, the profit margins of Minda Industries Ltd improved significantly from 5% in FY2014 to 12% in FY2019.

To understand the underlying reasons for such a behaviour of profit margins, an investor needs to understand the business of Minda Industries Ltd in detail along with the factors influencing its business and industry dynamics. Once an investor has understood the factors influencing the profit margins of the company, then she would be able to make an informed opinion about the future of the company.

Advised reading: How to do Business Analysis of Auto Ancillary Companies

Therefore, first, we need to understand the reasons for the cyclical behaviour of the profit margins of Minda Industries Ltd.

As discussed above, the business of the company, auto component manufacturing, is highly dependent on the automobile industry of the country. As a result, any cyclicity in the demand for the automobile industry affects the entire auto-component manufacturing industry including Minda Industries Ltd.

The credit rating agency, ICRA highlighted the interlinked nature of the business of Minda Industries Ltd and the automobile industry in its report for the company in April 2020, page 3:

As MIL derives most of its revenues (84% in FY2019) from the domestic automotive market, its earnings remain susceptible to the inherent cyclicality of the market

The nature of the automobile industry is cyclical. The key reasons for the cyclical nature of the automobile industry have been highlighted by Minda Industries Ltd in its FY2020 annual report, page 94:

Auto industries are discretionary in nature. Amidst slowdown, spending on new vehicles is often curtailed or postponed by user, making the industry a cyclical.

The company states that the purchases of automobiles are discretionary. Whenever the customers face financial constraints, then they postpone their purchases. As a result, the automobile industry faces periods of increasing demand followed by periods of decreasing demand in line with general economic cycles.

The company has elaborated the exposure of its business to the cyclical nature of the automobile industry in its prospectus for QIP in March 2017, page 43:

Substantially all of our business is directly related to vehicle sales and production by our customers, who consist primarily of large automotive OEMs, and demand for our products is largely dependent on the industrial output of the automotive industry. The sales, volumes and prices for vehicles are influenced by the cyclicality and seasonality of demand for these products. The automotive industry has been cyclical in the past and we expect this cyclicality to continue.

Moreover, the automobile component manufacturers do not enjoy a high pricing power on their customers, which are much larger original equipment manufacturers (OEMs). Also, most of the auto-component manufacturers do not have high bargaining power over their suppliers, as the suppliers are also large metal players.

ICRA rating guidelines, August 2018, page 2:

Most auto component manufacturers, moreover, do not enjoy adequate bargaining power with their much larger OEM customers or with their large raw material (metal) suppliers.

As a result, the automobile component manufacturers find it very difficult to protect their profit margins whenever the raw material prices increase or when the demand slows down. This is because, when raw material prices increase, then they are not able to pass on the costs to the OEMs. The OEMs are very large companies compared to auto-component manufacturers who have multiple suppliers for each component that they purchase. Therefore, the auto-component manufacturers can’t get a price increase each time the raw material costs increase.

Also, the auto-component manufacturers buy raw material like steel, aluminium, plastic etc. from suppliers like steel plants, refineries etc. who also are very large when compared to the auto-component manufacturers. Therefore, the auto-component manufacturers are not able to enjoy any bargaining power from their suppliers as well.

As a result, during tough times, the profit margins of the auto-component manufacturers are squeezed between the increasing cost of raw material from metal suppliers and the pricing pressures from the OEMs. This is the key reasons for the cyclical fluctuations in the profit margins of auto-component manufacturers. Minda Industries Ltd being an auto-component manufacturer is exposed to all these competitive pressures and as a result, its profit margins face cyclicity.

Nevertheless, as discussed above, an investor notices that during FY2014-FY2019, the operating profit margin of Minda Industries Ltd increased sharply from 5% in FY2014 to 12% in FY2019. Upon analysis, an investor finds the following factors that contributed to such a significant improvement:

A) Operating leverage and improving business performance of Minda Industries Ltd and its subsidiaries:

The credit rating agency, ICRA in its October 2018 report of the company highlighted the following reasons for its significant improvement in operating profit margins:

With operations ramping up across manufacturing facilities in various entities resulting in operating leverage benefits, and increasing revenue contribution from higher-margin entities like Minda Kosei, Minda Kyoraku and Mindarika, MIL’s consolidated OPM expanded impressively to 12.1% in FY2018 from 4.6% in FY2014.

Operating leverage benefits represent the situation where a company, which previously had unutilized manufacturing capacity, now starts to use it. As a result, the number of finished goods produced by the company increases and the fixed cost of the company is now spread over a larger number of finished goods. Therefore, the cost per unit of finished goods go down and the profit margins per unit of finished goods go up.

In addition, Minda Industries Ltd could also increase the business of its group entities, which had a higher profit margin. Another factor that led to an improvement in the profit margins for the company was its successful turnaround of a few loss-making subsidiaries.

FY2016 annual report, page 68:

This growth has been on account of strong performance of the standalone entity and backed by improved performance of its subsidiaries including turnaround of certain loss making subsidiaries viz., MJ Casting Limited and Minda Kyoraku Limited.

The combined impact of these factors contributed the most in improving operating profit margins.

An investor notices that the business of Minda Industries Ltd in the terms of sales revenue has also grown a lot during this period (FY2014-FY2019). The revenue increased from ₹1,706 cr in FY2014 to ₹5,908 cr in FY2019. The company has become about 3.5 times larger during this period growing at an annualized rate of 28% per year.

While analysing the nature of the relationship of auto-component manufacturers with the OEMs and the factors that influence this relationship, an investor notices that the size of an auto-component manufacturer plays a key role in getting it more business and in turn, improves its pricing power as well, which leads to increased profit margins.

B) Increasing size of operations of Minda Industries Ltd:

While reading about the factors influencing the business of auto-component manufacturers, an investor notices that increasingly the OEMs are trying to reduce the number of suppliers they deal with i.e. OEMs are consolidating their supplier base. OEMs prefer to deal with a few suppliers who can give them a lot of products rather than negotiating with many suppliers who give them one product each.

The following observations by the credit rating agency ICRA in its rating guidelines for auto-component manufacturers (August 2018) would help an investor in this regard.

To improve operational efficiencies and strengthen the overall supply chain network, OEMs are increasingly focusing on consolidation of their vendor base. Consequently, a supplier of multiple products could benefit as it will be easier for an OEM to manage a single vendor with multiple product offerings rather than negotiate with several small vendors with single products.

Large scale of operations generally reflects greater market penetration, improved bargaining power and higher purchasing efficiencies,

The size of an auto component manufacturer is crucial as larger suppliers typically receive preferential treatment from OEMs, which generally results in a relatively superior wallet share with OEMs as compared to their smaller peers.

Advised reading: Credit Rating Reports: A Complete Guide for Stock Investors

While analysing the business performance of Minda Industries Ltd, an investor would notice that during the last decade, the company has increased the size of its business by multiple aspects. The company did capacity expansions in its existing line of businesses like switches. In addition, it increased the size of its offering to the OEMs by acquiring horn and lighting business of European companies, and starting new lines of businesses like alloy wheels and fuel caps etc.

Currently, Minda Industries Ltd is the largest supplier of switches and horns and the third-largest supplier of lighting in India.

ICRA credit rating report of Minda Industries Ltd, October 2018, page 1:

In the domestic automotive market, the company is positioned as the largest player in switches (both in passenger vehicles or PV and two wheelers or 2W) and horns in terms of market presence and in PV alloy wheels in terms of installed capacity, and the third largest player in lighting products.

Moreover, Minda Industries Ltd is on a continuous lookout to increase the range of products that it can supply to OEMs. In its quest to widen its product basket, it announced the acquisition of Harita Seating in February 2019, which is still under process. If successful, the acquisition would further add scale to the business operations of Minda Industries Ltd.

FY2019 annual report, page 43:

The Board of Directors of your Company had its meeting held on 14 February 2019, approved acquisition of Harita Seating Systems Limited (“Harita”), by way of composite scheme of amalgamation, which is the leading manufacturer of seating systems in India

The increasing size of the business of Minda Industries Ltd has acted as an additional factor where it could get preferential treatment from its customers (OEMs) in terms of additional business leading to an even larger scale of operations and better pricing power. This is another factor leading to the increased profit margins of the company during FY2014-FY2019.

Let us see other factors that have contributed to the improvement in the profit margins of Minda Industries Ltd.

C) Increased focus on research & development and technological advancement:

While reading about the dynamics affecting the business of auto-component manufacturers, an investor gets to know that, the players who manufacture technologically advanced products benefit in many ways. These companies get better attention from OEMs in terms of intensive coordination on product development, preferential treatment in orders, better pricing terms etc.

Credit rating agencies ICRA and CARE have highlighted the technological superiority of the products as one of the key features for any auto-component manufacturer.

ICRA rating guidelines for auto-component manufacturers, August 2018:

Auto component manufacturers producing technology-intensive products where competitive pressures are benign are relatively better placed for passing on raw material price increases to customers compared to players with the presence in relatively lower value-added components.

CARE rating guidelines for auto-component manufacturers, July 2020:

The more critical, complex and technology-intensive the product is, higher is the extent of coordination called for between the auto ancillary and the OEM, and higher is the pricing power enjoyed by the ancillary.

While analysing Minda Industries Ltd, an investor notices that the company has continuously increased its spending on research and development over the last 10 years.

The expenditure on R&D in the standalone entity increased from ₹15 cr in FY2011 to ₹91 cr in FY2019. In the last 10 years (FY2011-2020), the company spent a total of ₹491 cr on R&D, which is about 2.9% of its standalone revenue.

The company also entered into many technological tie-ups for technological improvement of its products like lightings (AMS, Korea), horns (FIAMM, Italy), fuel caps (Toyoda Gosei), alloy wheels (Kosei, Japan), high-end sensors (Sensata, USA), speakers (Onkyo, Japan), printed circuit boards (Katolec, Japan) etc.

Additionally, Minda Industries Ltd acquired many companies to get access to the superior technology of these companies like horns (Clarton, Spain), lighting (Rinder group of Spain and Delvis), ECUs and controllers (iSYS RTS), Telematics AIS 40 technology (from KPIT Engineering) etc.

Moreover, an investor also needs to keep in mind that a strong focus on technological development is required by auto-component manufacturers to maintain their competence as well as profitability. This is because; the OEMs include periodic price reduction clauses in their contracts with auto-component manufacturers.

ICRA credit rating guidelines for auto-component manufacturers, August 2018, page 5:

Further, since most OEMs stipulate periodic price reduction through the life of their supply contracts, auto component manufacturers must continuously work at improving operational efficiencies and undertaking ‘value analysis and value engineering’ projects to optimise product costs.

Therefore, if an auto-component manufacturer does not continuously upgrade its technology on time, then it will miss the high profit-margin new contracts from OEMs and the supplies on the existing contracts would become less profitable as those vehicles models become old.

An investor would appreciate that in today’s world when technology is being upgraded at a fast pace, every company needs to keep up with the advancements. In the case of Minda Industries Ltd, an investor notices that when one of their technology partners could not meet their expectations about developments in the LED lights (AMS, Korea), then they finally bought out a European company (Delvis) to improve their in-house design and development capabilities.

October 2019 conference call on the acquisition of Delvis, page 7:

Sunil Bohra: …there has been dependency in terms of specifically LED lamps on one of our TLA partner and to be very honest we wanted them to do lot more, but obviously it was since they are not a partner or a JV partner you cannot force them right, so information development use to happen but then we could do much more and we could sense that opportunity, which you could not capitalize and I think with this acquisition and technology in-house we should be able to capitalize on the technology and we should see a faster growth in our lighting business.

The result of all these efforts to improve the technical aspect of its products seems to have led to Minda Industries Ltd becoming an important supplier for the OEMs. Therefore, it seems that the company could get frequent price increases from the OEMs whenever raw material costs increased.

D) Technological tie-ups helping the company in gaining additional business:

Whenever Minda Industries Ltd acquired a new company in overseas markets or it entered into a technical tie-up with global companies, then it got additional business from the Indian divisions of the global auto OEMs, which had business relationships with its technological partners.

The credit rating agency, CRISIL has highlighted in its rating guidelines for auto-component manufacturers, February 2018, that technical tie-ups help companies gain new business.

Technology partners have greatly influenced OEM decisions in finalising auto component vendors, especially when the former are suppliers to the concerned OEMs’ international operations, making validation easier. Consequently, companies with access to component technology, including that from overseas partners, stand to benefit.

Credit rating agency ICRA also stressed on technological tie-ups as a means to get new business in its rating guidelines for auto-component manufacturers, August 2018:

The presence of a strong technology partner not only mitigates technology obsolescence risk to an extent, but in some cases also provides additional business opportunities to domestic establishments of their global customers.

Therefore, an investor would appreciate the technological tie-ups done by Minda Industries Ltd have also contributed to the increased profit margins of the company due to two factors. First, the technologically advanced products usually have higher price and profit margins and second, new business leads to increased capacity utilization leading to operating leverage benefits discussed earlier.

E) Committed business from many customers leading to better production planning:

While analysing the business of Minda Industries Ltd, an investor comes across many instances where the preferential treatment of the company by OEM customers becomes evident. At times, the company has received minimum offtake commitment for its products from OEMs and at other times, the OEMs gave it confirmed orders even before its manufacturing plant became operational.

In 2017, when the company increased the capacity of its alloy wheel plant at Bawal, Haryana, then it had confirmed orders from its largest customers, Maruti Suzuki India Ltd (MSIL).

ICRA credit rating report, September 2017, page 4:

many of the newly incorporated companies like Minda Kosei scaled-up on the back of confirmed off-take from its customers

Minda Kosei is exposed to business risks, though mitigated to some extent by the confirmed business orders from MSIL.

Later on, in 2019, when the company was setting up another alloy wheel plant for 2-wheelers, then it had a confirmed order from another 2-wheeler OEM.

ICRA credit rating report, September 2019, page 4:

Though the investment in setting up the alloy wheels facility is sizeable, the business risk is mitigated partially by a confirmed order from a leading 2W OEM.

An investor would appreciate that confirmed orders even before the plant is operational indicate the special treatment large players like Minda Industries Ltd get from OEMs. Such confirmed orders help the companies to do better production-planning leading to the best utilization of resources and thereby better profit margins.

Here, an investor should keep in mind that the above-mentioned confirmed orders are only for specific contracts and not for all the contracts of Minda Industries Ltd. The company has clearly specified in its placement prospectus for QIP that for most of the contracts, the OEMs can order a lower quantity than what is mentioned in the contract.

QIP prospectus, March 2017, page 39:

In most instances, our OEM customers agree to purchase their requirements for specific products but are not mandatorily required to purchase any minimum quantity of products from us. Further, such conditions provide flexibility to our customers to place order for a lesser quantity of products in the purchase orders in spite of a higher number being specified in the contract.

Nevertheless, the presence of confirmed order before putting up a manufacturing plant shows the preferential treatment given by the OEMs to large players like Minda Industries Ltd.

Therefore, an investor would appreciate that Minda Industries Ltd has improved its OPM significantly during FY2014-FY2019 by increasing the product offerings to OEMs, making technologically advanced products and by improving its operating leverage.

However, despite a significant increase in OPM in FY2014-FY2019, an investor should not forget that the company is still exposed to the business cycles of the automobile industry and therefore, it would face periods of upturn and downturn in its business, which would have fluctuating profit margins. The recent decline in the OPM in FY2020 and the 12-months ending in September 2020 seems to be the result of the downturn in the automobile industry due to the general economic scenario and coronavirus.

The net profit margin (NPM) of Minda Industries Ltd has closely followed the trend of its operating profit margin (OPM). The NPM declined from 4% in FY2011 to 0% in FY2014. Thereafter, the NPM improved significantly until FY2018 when it reached 7%. Since then, the NPM is in a declining trend and it has reached 3% in FY2020 and further to 0% in the 12-months ending September 2020.

Therefore, going ahead, an investor should keep a close watch on the profit margins of Minda Industries Ltd. She should always monitor whether the change in its profit margins is in line with the phase of the automobile industry. If she notices that the profit margins of the company are deteriorating while the automobile industry is in an uptrend, then she should increase her due diligence to find out the reasons for it and take an appropriate decision.

Advised reading: How to do Business Analysis of a Company

While looking at the tax payout ratio of Minda Industries Ltd., an investor notices that in the last 10 years (FY2011-2020), the tax payout ratio of the company has continuously been lower than the standard corporate tax rate prevalent in India.

While analysing the “reconciliation of effective tax rate” section in the FY2020 annual report, an investor notices that the major factor leading to the lower tax payout ratio is the expenditure done by the company on research & development, which gets taxation benefits.

FY2020 annual report, page 170 (₹ crores)

Tax at India’s tax rate of 34.944% (previous year 34.944%) 47.20

Weighted deduction for expenditure incurred on research and development (11.48)

Govt. of India gives significant tax benefits to the spending done by companies on research and development. FY2019 annual report, page 91:

Reforms like tax concession on R&D of 150% to help boost the sector’s growth

Therefore, investors would notice that out of the total anticipated tax payment of ₹47 cr at standard corporate tax rate, the company got a rebate of almost 25% i.e. ₹11.48 cr due to the R&D expenditure.

Moreover, currently, the company has decided not to shift to the new corporate income tax regime offering the option of the lower standard tax rate for many entities in the group, as it has a lot of MAT credit available for adjustments.

August 24, 2020 conference call, page 15:

Sunil Bohra: Yes, so wherever we have got MAT credit available there we will continue to be there in the old regime than where the MAT accumulate has been utilized there we will go to the new one because once you have MAT your cash outgo in the old regime can be lower than 25%.

Further advised reading: How to do Financial Analysis of a Company

Operating Efficiency Analysis of Minda Industries Ltd:

a) Net fixed asset turnover (NFAT) of Minda Industries Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of Minda Industries Ltd in the past years (FY2011-20), then she notices that the NFAT of the company has declined from 4.5 in FY2012 to 2.7 in FY2020. The NFAT has reached a high of 5.5 in FY2015; however, it has been consistently on a decline since then.

A declining NFAT indicates that the company is not able to maintain the efficiency of utilization of its assets.

One of the reasons for a decline in the NFAT of the company is the continuous capital expenditure done by the company since FY2016. The company commissioned multiple plants like alloy wheel plants in Haryana and Gujarat, switches plant in Hosur, Sensors plant, increased capacity at many existing plants, acquired new companies abroad.

All these capital investments have led to an increase in the fixed assets; however, it seems that the company is yet to get their full benefits in the terms of sales. As a result, the company’s net fixed asset turnover has witnessed a significant decline over FY2015-FY2020.

Further advised reading: Asset Turnover Ratio: A Complete Guide for Investors

Going ahead, an investor should keep a close watch on the asset turnover ratio of the company. This is because investing money in such assets, which are not able to generate sufficient sales and profits, can lead to an increasing debt burden on the company that may increase the risks for the company.

b) Inventory turnover ratio of Minda Industries Ltd:

While analysing the efficiency of inventory utilization by Minda Industries Ltd, an investor notices that the inventory turnover ratio (ITR) of the company has also followed the same trend as its net fixed asset turnover ratio.

The inventory turnover ratio increased from FY2012 to FY2015 when it increased from 14.3 to 16.8. However, since FY2015, the ITR of the company is on a decline and it has declined to 9.8 in FY2020. A decline in the inventory turnover ratio highlights that the operations of the company have become more working capital intensive.

An investor would appreciate that if the inventory efficiency of any company declines, then it indicates that more money is being stuck in the working capital, which increases the debt burden and the finance costs for the company.

In the case of auto-component manufacturers, their almost-complete dependence on the OEMs for business exposes them to many risks with respect to inventory management as the OEMs can order less than contracted quantity leaving the auto-component manufacturer with excess inventory.

Minda Industries Ltd highlighted this aspect of the business of auto-ancillary players in its prospectus for QIP in March 2017, page 39:

We typically commit to order raw materials and sub-assembly components from our suppliers based on our customer recommendations, forecasts and orders. Cancellation by customers or any delay or reduction in their orders can result in a mismatch between the inventory of pre-constructed components, raw materials and the manufactured product that we hold. This could also result in excess inventory and increased working capital

Further advised reading: Inventory Turnover Ratio: A Complete Guide

c) Analysis of receivables days of Minda Industries Ltd:

While analysing the receivables position of the company, an investor notices that the receivables days of Minda Industries Ltd have consistently been in the range of 50-55 days. Even though, the receivables days had improved to 45-47 days during FY2015-FY2017; however, the receivables days again started increasing and the company reported receivables days of 54 days in FY2020.

There can be many reasons for the increase in the receivables days of the company from FY2017 to FY2020. One of the reasons can be that the company is giving a longer credit period to its customers to utilize the capacity expansions done by it. Another reason can be that the businesses of the companies acquired by Minda Industries Ltd have given a longer credit period to their customers.

Moreover, an investor would notice that in recent years, Minda Industries Ltd has increased its focus on the after-market i.e. replacement segment, in which companies need to give a longer credit period to the channel partners like distributors. The aftermarket business is unlike supplying to OEMs who usually give payments to their suppliers in time.

The credit rating agency, CRISIL highlighted the working-capital-intensive nature of aftermarket operations of auto-component manufacturers in its rating guidelines for the sector in February 2018, page 5:

That is because the OEMs follow just-in-time practices in procurement, and make prompt payments. Component suppliers selling largely to the AM segment, on the other hand, have larger working capital requirements, given the longer payment cycles involved.

Going ahead, an investor should monitor the receivables position of the company closely so that she gets to know if the company enters into a situation of working-capital stress.

Further advised reading: Receivable Days: A Complete Guide

When an investor compares the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of Minda Industries Ltd for FY2011-20 then she notices that the company has collected all the profits as cash flow from operating activities.

Over FY2011-20, Minda Industries Ltd reported a total cumulative net profit after tax (cPAT) of ₹1,195 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹2,618 cr.

It is advised that investors should read the article on CFO calculation, which would help them understand the situations in which companies tend to have the CFO lower than their PAT. In addition, the investors would also understand the situations when the companies would have their CFO higher than the PAT.

Further advised reading: Understanding Cash Flow from Operations (CFO)

Learning from the article on CFO will indicate to an investor that the cCFO of Minda Industries Ltd is higher than the cPAT due to following factors:

• Depreciation expense of ₹1,193 cr (a non-cash expense) over FY2011-FY2020, which is deducted while calculating PAT but is added back while calculating CFO.
• Interest expense of ₹359 cr (a non-operating expense) over FY2011-FY2020, which is deducted while calculating PAT but is added back while calculating CFO.

The Margin of Safety in the Business of Minda Industries Ltd:

a) Self-Sustainable Growth Rate (SSGR):

Read: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company

Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal to or less than the SSGR and it can convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds.

Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal resources would not be sufficient to fund its growth aspirations. As a result, the company would have to rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its target growth.

An investor may calculate the SSGR using the following formula:

SSGR = NFAT * NPM * (1-DPR) – Dep

Where,

• SSGR = Self Sustainable Growth Rate in %
• Dep = Depreciation rate as a % of net fixed assets
• NFAT = Net fixed asset turnover (Sales/average net fixed assets over the year)
• NPM = Net profit margin as % of sales
• DPR = Dividend paid as % of net profit after tax

(For systematic algebraic calculation of SSGR formula: Click Here)

While analysing the SSGR of Minda Industries Ltd, an investor would notice that the company has consistently had an SSGR of 3-8% over the years, which is lower than the sales growth of 20% and above achieved by the company over the years.

In light of the same, an investor notices that in addition to the profits generated by the company, Minda Industries Ltd has to raise additional money by the way of debt as well as repeated equity dilutions over the years.

1) Additional debt: during FY2011-2020, the company raised an additional debt of ₹1,122 cr as its debt increased from ₹173 cr in FY2011 to ₹1,295 cr in FY2020.

2) Additional equity: Minda Industries Ltd had to raise equity many times totalling to about ₹583 cr (=40 + 300 + 243) over the last 10 years.

• FY2010: raised ₹40 cr by issuing convertible preference shares to India Business Excellence Fund I and IL&FS Trust Company Ltd on February 3, 2010 (FY2010 annual report, page 14). These preference shares were converted into equity shares on April 1, 2011 (FY2011 annual report, page 13).
• FY2018: raised ₹300 cr by issuing shares to qualified institutional buyers (FY2017 annual report, page 128).
• FY2021: raised ₹243 cr by rights issue in September 2020.

Therefore, an investor would appreciate that the business profits of Minda Industries Ltd do not support the growth that it has achieved. As a result, apart from investing the profits back into the business, the company had to raise more than ₹1,700 cr from additional debt (₹1,122 cr) and equity (₹583 cr).

The credit rating agency, ICRA highlighted this aspect of the business strategy of Minda Industries Ltd in its report in July 2020, page 3:

Increased reliance on external borrowings over recent years to fund investment and capex requirements – During FY2019-FY2020, MIL availed sizeable debt to fund its capex requirements and investments related to acquisitions and consolidation exercise within the Group.

In light of the attempts by Minda Industries Ltd to grow at a pace faster than what its business profits can support, and the reliance of the company on external resources of funds like debt and equity, an investor should keep a close watch on the expansion plans and acquisitions done by the company. This is because debt-funded expansions and acquisitions expose the company to the risk of bankruptcy if these do not work out. In addition, raising money by equity dilutes the returns to the existing shareholders who end up owning a lesser stake in the company when new shareholders come in.

An investor gets similar observations about the business model of Minda Industries Ltd when analyses its free cash flow position.

b) Free Cash Flow (FCF) Analysis of Minda Industries Ltd:

While looking at the cash flow performance of Minda Industries Ltd, an investor notices that during FY2011-2020, it generated cash flow from operations of ₹2,618 cr. However, during the same period, it did a capital expenditure of about ₹3,455 cr.

Therefore, during this period (FY2011-2020), Minda Industries Ltd had a negative free cash flow (FCF) of ₹837 cr (=3,455 – 2,618).

In addition, during this period, the company had a non-operating income of ₹307 cr and an interest expense of ₹359 cr. As a result, the company had a net negative free cash flow of ₹889 cr (= – 837 + 307 – 359). Please note that the capitalized interest is already factored in as a part of capex deducted earlier.

As discussed earlier in the section on SSGR, Minda Industries Ltd raise additional debt as well as equity to meet the cash shortfall created by its expansions and acquisitions.

Further advised reading: Free Cash Flow: A Complete Guide to Understanding FCF

Self-Sustainable Growth Rate (SSGR) and free cash flow (FCF) are the main pillars of assessing the margin of safety in the business model of any company.

Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing

Additional aspects of Minda Industries Ltd:

On analysing Minda Industries Ltd and after reading its publicly available past annual reports since FY2010 and other public documents, an investor comes across certain other aspects of the company, which are important for any investor to know while making an investment decision.

1) Management Succession of Minda Industries Ltd:

The company is a part of the Uno Minda group led by Mr N. K. Minda (current age about 63 years, FY2011 annual report, page 8). His two daughters, Paridhi Minda Jindal and Palak Minda are currently a part of the management of Minda Industries Ltd.

In the 21^st AGM in 2013, the company has appointed both Ms Paridhi Minda and Ms Palak Minda as GM (Operations) of the company.

As per the FY2019 annual report, page 37, Ms Paridhi Minda is a whole-time director of the company. She joined the group in 2001. She worked at different levels in the group before being appointed as a whole-time director of the company.

As per the FY2020 annual report, page 279, both Ms. Paridhi Minda and Ms. Palak Minda received a remuneration of ₹60 lac each from the company.

Apart from the promoter family members, various other senior executive positions in the board and the company are occupied by professionals.

The presence of the next generation of the promoter-family members in the company when the elders are still playing an active role in the company seems a good succession plan. This is because such an arrangement allows time for the next generation to learn under the guidance of elders before the transition of leaders takes place.

Further advised reading: How to do Management Analysis of Companies?

2) Project execution by Minda Industries Ltd:

While analysing the history of the company, an investor notices that Minda Industries Ltd has regularly completed projects, both the new plants as well as the expansion of existing plants.

In FY2010, the company completed a lighting project at Chakan, Pune (FY2010 annual report, page 30).

In FY2013, the company completed a switches plant in Hosur, TN and a fuel caps plant in Manesar, Haryana (FY2013 annual report, page 16).

In FY2015, the company expanded the capacity of the lighting division at Manesar, Haryana (FY2015 annual report, page 25).

In FY2016, the company completed alloy wheel and rubber hoses plants at Bawal Haryana (FY2016 annual report, page 4).

In FY2018, the company under JV Minda Kosei started production at another alloy-wheel plant in Gujarat (FY2018 annual report, page 91).

In FY2021, the company completed the sensors plant (June 2020 presentation by the company, page 7) and 2-wheeler alloy wheels plant completed (August 2020, Q1-FY21 press release).

Therefore, an investor would notice that the company could execute capacity expansion projects at regular intervals. While assessing the project execution skills of the management, we value greenfield or brownfield project completion more than the purchase of plants by the acquisition of companies. This is because completion of projects within allotted time and cost displays good project execution skills of the management of any company.

Apart from the above, the company acquired many plants over the years. As per the FY2020 annual report, page 9, the group has 62 manufacturing plants across the world.

3) Complex corporate structure of Minda Industries Ltd:

When an investor analyses the company, then she notices that Minda Industries Ltd has a large number of subsidiaries, joint ventures, associates etc. On March 31, 2020, the company had 42 such entities (FY2020 annual report, page 11). Business groups with a large number of entities present difficulties for investors and analysts in the assessment.

Let us see some of the challenges it presents to investors.

a) Inability to assess the complete group position:

The biggest challenge of a complex corporate structure is that the investors are not able to assess the performance of the group as a whole. In many such instances, even the consolidated financials are not able to capture the overall group position leaving the analysis of investors incomplete.

In the case of Minda Industries Ltd, the consolidated financials for FY2020 show revenue of ₹5,465 cr. However, in the FY2020 annual report, on page 10, the company has declared that the total turnover of UNO Minda group is ₹7,200 cr.

Therefore, an investor would appreciate that a business of the size of ₹1,735 cr (=7,200 – 5,465) is a part of the UNO Minda group, which is not covered in its consolidated financials. Because this part of the group, which is more than 20% of the overall group is not covered in the consolidated financials; therefore, it becomes difficult for the investor to analyse it properly and make informed decisions about the group position.

b) Management uses a lot of discretion on what to include or what to exclude from consolidated financials:

In the case of complex corporate structures, another aspect that complicates an investor or analyst’s job is that the management uses a lot of discretion in determining what should be included in consolidated financials and what should be excluded. An investor would appreciate that most of the times; the management would tend to exclude loss-making companies from consolidation to present a better financial position to the investors.

In the case of Minda Industries Ltd, in the FY2012 annual report, the auditor highlighted that in the previous years, the management did not consolidate some JVs and associate companies in its financials. Had the company consolidated those companies, then its reported profit would have been lower.

FY2012 annual report, page 74:

Without qualifying our report, attention is drawn to note 50 of the Consolidated Financial Statements that during the previous periods, the management had not consolidated certain joint ventures and associates as part of their consolidated financial statements. Accordingly, during the current year, management has adjusted the effect of the same with the current year profits in accordance with Accounting Standard – 5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’. Had these joint ventures and associates been consolidated in the previous periods, the profit for the current year would have been lower by Rs. 340.20 lacs.

Therefore, an investor would appreciate that in the case of companies with a complex corporate structure, it is always a possibility that the consolidated financial statements presented to the investor may not represent the complete financial position of the company. If this is the case, then the analysis done by the investor or the investment decisions taken by the investor may be erroneous.

Advised reading: 7 Signs to tell whether a Company is cooking its Books: “Financial Shenanigans”

c) Many business decisions are not explained in the annual reports:

In the case of companies that have a large number of subsidiaries, JVs and associates, investors face a problem that many times, there are investments done by the company in different entities that are present in the tables in the notes to financial statements; however, there is no explanation about them in the directors’ report or management discussion & analysis section. As a result, the investor is not able to judge the purpose of the investment done by the company in those entities. In such instances, the assessment of the investment decisions by the investor becomes mere guesswork.

In the case of Minda Industries Ltd, in many years, in the financial statements, the company has disclosed an investment of money in certain entities as a part of the list of investments done; however, there is no explanation in the annual report to tell investors what was the purpose of the investment.

For example, in the case of Minda Industries Ltd, while reading its FY2012 annual report at page 54, an investor comes across a new investment done in an associate company Minda NexGen Tech Ltd for ₹2.47 cr. An investor is not able to find any explanation about this investment in the FY2012 annual report, regarding what is the purpose of this investment, what benefits the company or the shareholders would get from it etc.

In the next year, FY2013 annual report, page 104, an investor gets to know that Minda Industries Ltd has increased its investment in Minda NexGen Tech Ltd from ₹2.47 cr to ₹3.12 cr. However, on the same page, the investor also reads that Minda Industries Ltd has put the entire amount of ₹3.12 cr as an impairment indicating that the company has suffered a loss on this investment and there is a low possibility of its recovery.

In the FY2013 annual report, in the column for the previous year financial data, the investor also gets to know that Minda Industries Ltd has impaired ₹0.70 cr of its investment in Minda NexGen Tech Ltd in FY2012 itself. However, when she goes back to the FY2012 annual report to find out if this impairment of ₹0.70 cr of Minda NexGen Tech Ltd was present in the FY2012 annual report, then she is not able to find its mention. In the FY2012 annual report, all the discussion under impairment sections is related to the battery division of the company. The impairment of investment in Minda NexGen Tech Ltd if there might have been clubbed with other impairments without any separate mention. Therefore, the investor could not know that the investment done by the company in Minda NexGen Tech Ltd is impaired in the very first year of investing.

In such instances, when an investor sees that the investment is impaired within the first year, then she wants to know what this investment was for and what went wrong. Moreover, if in the last year, the company had realized that this investment is going in the wrong direction and required an impairment, then what was the need to put more money in the entity in the next year (FY2013). In addition, why the entire investment i.e. the money put in this entity in the previous year as well as in the current year is immediately impaired. She wants to know why the management could not envisage that the investment is not going to generate any value for the shareholders. This may look like a case of throwing good money after bad money. However, an investor is not able to find any explanation or any discussion about this investment in Minda NexGen Tech Ltd in the annual reports.

When an investor analyses companies with a complex corporate structure with many subsidiaries, JVs, associate companies, then an investor would come across such situations where the management would have done investment but there are no explanations in the annual reports. In such cases, the only option available to the investor is to directly approach the company to seek clarifications, which may be time-consuming and many investors may avoid doing.

Minda Industries Ltd also understands that investors prefer a simple corporate structure as complex corporate structures complicate the analysis process. On multiple occasions in the past, the company has acknowledged the complications its corporate structure presents.

The company has acknowledged that simpler corporate structures with a single entity are investor-friendly. FY2016 annual report, page 19:

the creation of a single entity not only gives us a better financial strength, but also helps us create an investor friendly holding structure, seamless process to maximise profits and ensure optimal revenue mix in two-wheeler and four-wheeler business in years to come.

The company acknowledged that simpler corporate structures are aligned to better the shareholders’ interests. FY2018 annual report, page 36:

We want to give our investors the confidence that we have one operational/holding centre for all the companies. It will align the shareholders interest as the consolidation will make Minda industries Ltd as the operating as well as the holding company of the Group.

In its attempts to simplify the corporate structure, in FY2016, Minda Industries Ltd appointed KPMG as its consultant for the consolidation exercise.

FY2016 annual report, page 19:

we appointed KPMG, to partner and guide us in creating a simplified corporate structure

Minda Industries Ltd expected to complete its consolidation exercise by FY2018.

FY2017 annual report, page 15:

We successfully completed the first phase and nearly 2/3rd of the second phase of our realignment strategy. By 2018, the realignment of our group structure to the future growth needs of the organisation will be completed.

However, despite the said consolidation exercise, still in FY2020, the corporate structure of Minda Industries Ltd is complex with 42 subsidiaries, JVs and associate companies where, as discussed above, almost 20% of the turnover of the group is outside its reported consolidated financials.

Advised reading: Understanding the Annual Report of a Company

4) Related party transactions of Minda Industries Ltd:

In business groups that have many subsidiaries, JVs and associate companies, the transactions between one group entity and another are also classified as related party transactions. However, these transactions between such entities may be normal transactions like one company buying raw material from another group entity and then processing it to make a product.

While discussing related party transactions, we focus primarily on the transactions that the listed company & its entities do with the promoters and other promoter-owned entities. This is because the transactions of the listed company with its promoters have the potential of shifting the economic benefits from the company/public shareholders to the promoters.

Therefore, in the case of related party transactions of Minda Industries Ltd, we have focused on the transactions of the company with the entities where its promoters are involved.

a) Minda Industries Ltd forms partnership firms with the promoters:

While analysing the annual reports of Minda Industries Ltd, an investor notices that the company has formed three partnership firms with the promoters. FY2020 annual report, page 142:

Auto Component:

• Minda Industries Limited 48.90%
• Nirmal K. Minda 25.55% (Promoter, CMD of Minda Industries Ltd)
• Pallak Minda 25.55% (daughter of CMD)

YA Auto Industries:

• Minda Industries Limited 51.00%
• Suman Minda 36.50% (wife of CMD as per FY2010 annual report, page 50)
• Sanjeev Garg 12.50%

Yogendra Engineering:

• Minda Industries Limited 48.90%
• Suman Minda 38.60% (wife of CMD)
• Sanjeev Garg 12.50%

As per the FY2020 annual report, page 184, in the related party transactions section, Minda Industries Ltd has disclosed that it has spent about ₹130 cr in the purchase of goods from these partnership firms:

• Auto Component (Firm) Purchase of goods ₹12 cr
• YA Auto Purchase of goods ₹47 cr.

An investor would appreciate that whenever a company enters into the buy/sell transactions with the promoter-entities, then there is a possibility of shifting economic benefits from public shareholders to the promoters if the company buys goods at a higher than the market price or sells goods to the promoter entities at a price lower than the market price.

Moreover, some of these partnership firms use the resources of Minda Industries Ltd to sell their goods. An investor gets to know this when she reads the FY2015 annual report of the company, page 147 and realises that Minda Distributions and Services Limited, which is the retail distribution/aftermarket arm of Minda Industries Ltd, has purchased goods of about ₹38 cr from the partnership firm ‘Auto Component” in FY2015. In FY2014, the amount of purchases from Auto Component was ₹30 cr.

Moreover, an investor is confused about the need for Minda Industries Ltd to make such partnership firms with promoter-family members when the company has itself highlighted that such transactions lead to a complex corporate structure and markets do not view them favourably.

Advised reading: How Promoters benefit themselves using Related Party Transactions

b) Merger of Minda AutoGas Ltd with Minda Industries Ltd:

As per the FY2010 annual report, page 42, Minda AutoGas Ltd was classified by Minda Industries Ltd as a company under the “same management”. It indicated that the same people (probably the promoters) who control Minda Industries Ltd, also control Minda AutoGas Ltd.

In FY2011, Minda Industries Ltd merged Minda AutoGas Ltd with itself and issued 2,405,128 shares to its shareholders as purchase consideration.

FY2011 annual report, page 36:

2,405,128 equity shares of ₹ 10 each fully paid up issued during the year 2010 -11 for consideration other than cash to the shareholders of Minda Autogas Ltd. pursuant to the scheme of amalgamation.

Simultaneously, an investor notices that in FY2011, the shareholding of the promoters in Minda Industries Ltd increased by 2,084,208 shares (i.e. 2.97%) from 7,426,669 shares (70.70%) on March 31, 2010 (FY2010 annual report, page 27) to 9,510,877 shares (73.67%) at March 31, 2011 (FY2011 annual report, page 25).

From the above two disclosures (i) Minda AutoGas Ltd being a company under the same management and (ii) increase in promoters’ shareholding by about 2,000,000 shares when about 2,400,000 shares were issued by Minda Industries Ltd for acquiring Minda AutoGas Ltd; an investor may interpret that the promoters of Minda Industries Ltd were the major beneficiaries of the purchase consideration paid by Minda Industries Ltd for this amalgamation.

On March 31, 2011, the shares of Minda Industries Ltd closed at ₹227.40 on BSE. Therefore, the purchase consideration was about ₹54.7 cr (= 227.40 * 2,405,128). If an investor assumes that the increase in the number of shares of the promoters (2,084,208) was the consideration that the promoters got for their stake in Minda AutoGas Ltd, then the purchase consideration received by promoters was ₹47.4 cr  (=227.40 * 2,084,208).

It may be argued that the amalgamation transaction was at an arm’s length and the purchase consideration of 2,405,128 shares was a fair value for the business of AutoGas received by Minda Industries Ltd. However, soon after the amalgamation, in FY2013, Minda Industries Ltd impaired the value of assets of the autogas division indicating that these assets were not worth the amount on the balance sheet.

FY2013 annual report, page 67:

During the current year, the company has recorded an impairment charge of ₹108.92 being the excess of carrying value of fixed assets of Autogas division over its recoverable amount. The same has been disclosed as an exceptional item in the Statement of Profit and Loss.

An impairment shortly after amalgamation may indicate that the value paid in the amalgamation may be higher than the actual worth of the assets of the Autogas division acquired by Minda Industries Ltd.

For gaining further insights into this transaction, an investor may contact the company directly to understand whether the increase in shareholding of the promoters in FY2011 by about 2,000,000 shares was primarily due to the amalgamation of Minda AutoGas Ltd. She may also seek the data of profit/loss of the autogas division before and after the amalgamation to ascertain the valuation levels in the transaction.

c) Merger and acquisition of companies and other assets owned by promoters:

While reading the annual reports of Minda Industries Ltd, an investor comes across many instances where the company has merged or purchased promoters’ assets.

In FY2016, the board of director of Minda Industries Ltd approved a merger transaction involving two promoter-entities Minda Investments Ltd and Singhal Fincap Ltd. FY2016 annual report, page 115:

The Board also considered and approved the scheme of de-merger, of International Investment Division of Minda Investments Limited & Singhal Fincap Limited and their merger with Minda Industries Limited.

Minda Investments Ltd and Singhal Fincap Ltd are the companies through which the promoters own their shareholding in Minda Industries Ltd. As per the FY2020 annual report, page 82, Minda Investments Ltd owns 24.35% stake and Singhal Fincap Ltd owns a 2.84% stake in Minda Industries Ltd.

In FY2016, the company also proposed to purchase stakes owned by promoter companies in various joint ventures of Minda Industries Ltd with foreign partners like Minda TG Rubber Private Limited (at a value of ₹17.85 cr) and Kosei Minda Aluminium Co. Private Limited (at a value of ₹12.28 cr).

FY2016 annual report, page 55:

purchasing, 51% i.e. 1,78,50,000 (One Crore Seventy Eight Lac Fifty Thousand Only) fully paid up equity shares of ₹10 (Rupees Ten Only) each of M/s Minda TG Rubber Private Limited at ₹10 (Rupees Ten Only) per share from Maa Rukmani Devi Auto Private Limited, a related party;

purchasing 30% i.e. 2,45,58,800 (Two Crore Forty Five Lacs Fifty Eight Thousand Eight Hundred Only) fully paid up equity shares of ₹10 (Rupees Ten Only) each of Kosei Minda Aluminium Co. Private Limited at ₹5 (Rupees Five Only) per share from Minda Investments Limited, a related party.

These instances represent cases where Minda Industries Ltd explored tie-ups with the foreign partners and when the deal was being signed off, then the promoters entered as a third party, in their personal capacity through their entities like Maa Rukmani Devi Auto Private Ltd and Minda Investments Ltd and acquired a stake for themselves. An investor may think about what could be the purpose of these stakes held by promoter entities in the JVs of Minda Industries Ltd with foreign partners.

Now, Minda Industries Ltd is buying these stakes held by promoters in these JVs. An investor may do her due diligence about the valuation offered to promoter-entities for these stakes.

In FY2020, Minda Industries Ltd has proposed to acquire another promoter-entity Minda iConnect Pvt. Ltd. As per the corporate announcement by Minda Industries Ltd to BSE on February 6, 2020, page 5, this acquisition will lead to an increase in the shareholding of the promoters in Minda Industries Ltd from 70.79% to 70.83%.

As per the FY2020 annual report, page 5, Minda Industries Ltd is effectively paying an equity valuation of ₹17 cr for this acquisition.

As part of our consolidation strategy, the Company has planned acquisition and amalgamation of Minda iConnect Private Limited into MIL at an equity valuation of ₹17 Crores.

In FY2016, Minda Industries Ltd acquired a land parcel from promoter-entity Maa Rukmani Devi Auto Private Limited for ₹13.64 cr. As per the corporate database Zaubacorp, the directors of Maa Rukmani Devi Auto Private Ltd are Mr. Amit Minda and Anand Kumar Minda.

FY2016 annual report, page 169:

Haryana State Industrial & Infrastructure Development Corporation Limited (‘HSIIDC’) had re-allotted a land to a subsidiary Company which was initially allotted to MaaRukmani Devi Auto Private Limited (the ‘Party’). The Party had got the earlier land allotment and paid stamp duty at the price at which the Party had acquired it from the HSIIDC. The subsidiary Company has paid the Party a total consideration of ₹1,363.79 which includes the amount paid towards the cost of the land, consideration for vacating/ surrendering the said property, stamp duty charges, development charges, bifurcation charges, taxes and any other charges, etc.

In another transaction as per the FY2020 annual report, Minda Industries Ltd plans to acquire 14.37 acres of land in Gurgaon from “certain related parties” to set up a factory.

FY2020 annual report, page 167:

The Company considered factors such as price, distance and convenience of employees and other stake holders’ and is of the view that shifting to Farrukhnagar will be a suitable option. In this respect, the Company has approached certain related parties who have land admeasuring 14.37 acres in Farrukhnagar, Haryana (which is close to existing Manesar plant) and have taken land on lease for 99 years at a lump-sum rent of ` 0.05 Crores for entire tenure. The Company has applied CLU (change of land use from agricultural to industrial) for Farrukhnagar land. Post approval of CLU, the Company will cancel the lease and purchase the land at fair market price as determined by registered valuer.

Investors may contact the company to know whether these “certain related parties” are promoters, their relatives or promoter-owned entities. Moreover, whenever the company purchases the said land parcel, then investors may analyse the value to be paid by Minda Industries Ltd to the related parties to assess whether the same is at fair market value or not.

Since FY2016 when Minda Industries Ltd initiated its consolidation exercise, it has purchased the stake of promoters in many transactions. As per the report of ICRA, April 2020, page 3:

The consolidation exercise undertaken within the Uno Minda Group, wherein MIL purchased stake from some promoter companies and JV partners, supported MIL’s revenue growth and business diversification over the last few years.

An investor would appreciate that all the transactions of the listed company with its promoters where it purchases stakes or assets from its promoters have the potential to shift an economic benefit from public shareholders to the promoters if the stakes or the assets are acquired at a price higher than the fair market value.

Minda Industries Ltd highlighted to the investors that there is no assurance that the transactions entered by it with its related parties are at the best terms and that it could not have got better terms from third parties.

March 2017, Prospectus for QIP, page 52:

We have entered into certain transactions with related parties. While we believe that all such transactions have been conducted on an arm’s length basis, there can be no assurance that we could not have achieved more favourable terms had such transactions not been entered into with related parties. Furthermore, it is likely that we may enter into related party transactions in the future. There can be no assurance that such transactions, individually or in the aggregate, will not have an adverse effect on our financial condition and results of operations.

Therefore, investors should analyse all these transactions in-depth to make an insightful judgment.

Advised reading: How Promoters benefit themselves using Related Party Transactions

5) Curious case of battery division of Minda Industries Ltd:

When an investor analyses the history of Minda Industries Ltd, then she gets to know various strategic business decisions undertaken by the company to generate value for shareholders. However, some of the capital allocation decisions indicated that there has been room for improvement. The decisions taken by the company for its batter division is one such case.

While analysing the annual reports of the company, an investor notices that the battery division of the company has consistently been an issue for Minda Industries Ltd.

In the FY2012 annual report, the auditor of Minda Industries Ltd highlighted that the battery division of the company is making continuous losses. The auditor mentioned that even though the company has impaired the value of assets of the battery division; however, it is not certain whether the amount of impairment is accurate/sufficient.

FY2012 annual report, page 28:

The Battery Division of the Company is incurring continuous losses. Based on its estimates and report of an independent valuer, the management has recorded an impairment charge amounting to Rs 2,206.03 lacs during the year ended 31 March 2012, being the excess of the carrying amount of the assets at the Battery Division over their recoverable amount. In the absence of sufficient appropriate evidence, we are unable to comment on the accuracy of the impairment charge created during the year ended 31 March 2012.

Moreover, in FY2012, Minda Industries Ltd had decided to hive off the battery unit and had taken shareholders’ approval for the same as well. However, due to some reason, the company decided to reverse the shareholders’ approval and decided not to hive off the unit.

FY2012 annual report, page 61:

The Battery division of the Company was incurring continuous losses. The shareholders of the Company had approved the hiving off of this division to a separate entity through postal ballot on 28 December 2011. Subsequently, the Board of Directors in their meeting held on 30 March 2012 reviewed the financial position of the division and decided to revive the unit and approved to scale down the operations instead of hiving off division. Accordingly, the Board’s approval has been considered as withdrawn and the operations of the Battery Division have been disclosed under ‘Revenue from operations’.

The battery division continued to lose money in the next year, FY2013, Minda Industries Ltd had to provide for additional impairment for the battery division.

FY2013 annual report, page 67:

Management has, however, created an impairment charge amounting to ₹186.35 (previous year ₹2,206.03) as at 31 March 2013 based on the projected cash flow (previous year on the basis of valuation of independent valuer). The carrying value of tangible fixed assets of the battery division after providing for the above mentioned impairment charge…

While reading the FY2014 annual report, an investor notices that Minda Industries Ltd intimated the shareholders about an improvement achieved in the quality of the batteries leading to lower warranty claims. An investor may interpret from this information that previously, the quality of the batteries produced by the company was not up to the mark and there was room for improvement. It may be a reason for the continuous losses in the division.

FY2014 annual report, page 30:

During the year under review the Battery Divison has enhanced its quality resulting in reduction of warranty claims.

Finally, in FY2015, the company could find a partner to hive off the battery division. Minda Industries Ltd formed a 40:60 JV with Panasonic for manufacturing batteries and it hived off the assets of the battery division to the JV.

In 2014-15, we entered into a joint venture with Panasonic Corporation, Japan to form a new company – Panasonic Minda Storage Batteries India Private Limited. With this, the battery division being hived off, and the technical collaboration brought in by Panasonic would be leveraged to take the business segment to new heights.

However, the partnership with Panasonic could not last long as in June 2016; the JV was terminated when Panasonic exited its battery business globally.

ICRA credit rating rationale, August 2016, page 3:

In June 2016 MIL’s joint venture with Panasonic was terminated as the former sold its global acid-lead battery business. Although Panasonic exited the business (MIL acquired existing assets of Rs. 98 crore at Rs. 1.8 crore).

An investor is surprised to see that Panasonic sold the assets of the battery division, which were otherwise valued at ₹98 cr to Minda Industries Ltd at a very low value of ₹1.8 cr. In such a situation, an investor questions the actual value of the assets of the battery division shown on the books of the company.

Thereafter, the company again hived off the battery division to its wholly-owned subsidiary, Minda storage Batteries Private Limited.

FY2017 annual report, page 30:

The shareholders of the Company approved the transfer of Battery Division situated at Pant Nagar, Uttrakhand to its subsidiary namely, Minda storage Batteries Private Limited.

The battery division operating under the wholly-owned subsidiary, Minda storage Batteries Private Limited is still continuously making losses.

• In FY2018, a loss of ₹5.93 cr (FY2018 annual report, page 264)
• In FY2019, a loss of ₹16.53 cr (FY2019 annual report, page 274)
• In FY2020, a loss of ₹14.31 cr (FY2020 annual report, page 286)

Therefore, an investor notices that the decision of Minda Industries Ltd to continue running the batteries division even when it was making continuous losses 10-years back, make more investments into the same and continue until date seems to be erroneous as the division is still making losses after 10 years of additional investment of money and management time.

An investor gets an idea about the non-attractiveness of the assets of the battery division when she reads that Panasonic sold off these assets that were worth ₹98 cr on the balance sheet to Minda Industries Ltd at a very low valuation of ₹1.8 cr.

In addition, an investor is surprised when she notices that Minda Industries Ltd recognized profits in its annual report both the times when it hived off the battery division.

The first time, in FY2015, when the company hived off the battery division to the JV with Panasonic, then Minda Industries Ltd recognized a profit of ₹15.76 cr.

FY2015 annual report, page 93:

Accordingly, based on the net selling price (lump sum consideration) and the fact that the Company has entered into a binding sale agreement, impairment charge to the extent of ₹1,576.33 (net of depreciation of ₹637.46) has been reversed as on 30 September 2014. The same has been disclosed as income under ‘exceptional item’ in the Statement of Profit and Loss.

The second time, in FY2018, when the company hived off the battery division to its wholly-owned subsidiary, even then it recognized a profit of ₹5.49 cr on this transfer. FY2018 annual report, page 145:

Profit on hive off of battery division (refer note 40) ₹5.49 cr

Therefore, when an investor analyses the developments around the battery division in the last 10 years, then she feels that the managements’ decisions could not generate any value for the shareholders. The battery division was making continuous losses 10 years back and it is still making continuous losses. During these 10 years, a lot of management time and good money seems to have been thrown after the bad money. In addition, the profits recognized by the company whenever it hived off the battery division to other entities, seem to be only paper profits without any actual value on the ground. The JV partner, Panasonic, might have found that getting ₹1.8 cr for assets valued at ₹98 cr is a better deal than finding an alternate solution of realizing a higher value.

All these instances indicate that the battery division does not seem to be an attractive proposition for the shareholders of Minda Industries Ltd.

Advised reading: How to Identify if Management is Misallocating Capital

6) Instances of weaknesses of internal controls & processes of Minda Industries Ltd:

While analysing the annual reports of the company an investor notices certain instances where the company did not adhere to the timelines for meeting statutory requirements like payment of statutory dues. In some cases, undisputed statutory dues were pending payment even after they became due for payment.

In FY2013, the company delayed the deposit of undisputed statutory dues. FY2013 annual report, page 38:

though there have been a slight delay in a few cases in respect of Value Added tax, withholding taxes, Provident Fund and Employee State Insurance Fund.

Again, in FY2014, the company delayed the deposit of undisputed statutory dues. FY2014 annual report, page 35:

though there has been a delay in a few cases in respect of value added tax, withholding taxes and service tax.

In FY2017, the company delayed the deposit of income tax. FY2017 annual report, page 80:

except for deposit of income tax where there have been delays in a few cases.

An investor would note that many times when companies do not have robust processes in their internal control, then these companies are at a higher risk of frauds by employees. The corporate world is full of instances where employees took benefit of lax processes and conducted frauds on companies and shareholders.

An investor may read the analysis of National Peroxide Ltd, a Wadia Group company, which had similar instances of lax internal controls. The auditor of the company highlighted these lapses in meeting statutory requirements in the annual reports. Thereafter, it was discovered that the Managing Director of the company along with some other employees did a fraud of ₹37 cr on the company. After investigation, the company found that its internal controls & processes were not good. Thereafter, the company took steps to strengthen internal controls and processes.

An investor may read our detailed analysis of National Peroxide Ltd in the following article: Analysis: National Peroxide Ltd

While reading the annual reports of Minda Industries Ltd, an investor notices that at multiple occasions whistleblowers brought forward instances where employees of the company were conducting frauds on the company.

In FY2018, a whistleblower highlighted an instance of fraud in the purchasing department of the company. FY2018 annual report, page 99:

The whistle blower complaint received from a company employee was related to fraud in purchase.

In FY2019, the number of whistleblower complaints increased to six. FY2019 annual report, page 105:

Six Whistle-blower complaints (including relating to its subsidiaries) have been received in the last Financial Year.

In FY2020, the company received five whistleblower complaints. FY2020 annual report, page 105:

Five (5) Whistle-blower complaints have been received in the last Financial Year.

An investor would appreciate that for companies where she notices instances of non-adherence to statutory guidelines, she should increase her due diligence and her monitoring checks.

Advised reading: Understanding the Annual Report of a Company

7) Errors in the annual reports of Minda Industries Ltd:

While reading the annual reports, an investor notices that at a few places Minda Industries Ltd has done some mistakes in its annual reports. Given below are some of these instances.

a) FY2018 annual report:

In the FY2018 annual report, Minda Industries Ltd missed providing the Annexure A (CARO) report. This annexure provides auditors comments on essential elements like an audit of fixed assets, inventory, transactions including outstanding with parties under section 189 (i.e. related parties), delays in undisputed statutory dues, details of disputed statutory dues, frauds by employees, compliance to managerial remuneration guidelines etc. (click here for FY2018 annual report, check page no. 102-103)

b) FY2019 annual report:

In the annual report, while illustrating the segment-wise revenue distribution for the previous year (FY2018), the company made a mistake in the preparation of the graph. Due to the mistake, the slice of the chart representing a bigger 56% share (2-wheeler) is shown smaller than the slice showing the smaller 44% share (4-wheelers).

The Margin of Safety in the market price of Minda Industries Ltd:

Currently (January 8, 2021), Minda Industries Ltd is available at a price to earnings (PE) ratio of about 68 based on consolidated earnings for FY2020. The PE ratio of 68 does not offer any margin of safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.

However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.

In the absence of any strength in the business model of the company, even a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.

• 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
• How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
• Hidden Risk of Investing in High P/E Stocks

Analysis Summary

Overall, Minda Industries Ltd is a company that is growing its business at a rate of 20% over the last 10 years (FY2011-2020). The operating profit margin of the company has seen fluctuating patterns with periods of increasing margins followed by periods of decreasing profit margins. However, on a long-term basis, the company saw its operating profit margin increase from 5% in FY2014 to 12% in FY2019. An investor finds that various factors contributed to this improvement in profit margins like operating leverage by increasing capacity utilization, the turnaround of its loss-making subsidiaries and the increasing business size of the company where it can give more products to OEMs. In addition, the focus of the company on research & development, improving technology by tie-ups etc. also contributed to improving profit margins.

However, an investor should keep in her mind that like all auto-component manufacturers, Minda Industries Ltd is dependent on the performance of the automobile industry for business. Therefore, its performance is exposed to the cyclical demand-phases seen by the automobile industry. In FY2020 and the 12-months ended in September 2020 have seen the profit margins of the company decline due to demand-slowdown faced by the automobile industry.

In the last 10-years, Minda Industries Ltd has witnessed its operating efficiency parameters like net fixed asset turnover ratio and inventory turnover ratio decline. An investor needs to keep a close watch on the operating efficiency of the company going ahead.

Minda Industries Ltd has a highly capital-intensive business model where its profits are not able to sustain its business growth. Its self-sustainable growth rate is lower than the sales growth achieved by the company in the past. As a result, the company has to rely on outside funds of about ₹1,700 cr from additional debt and equity. Minda Industries Ltd had to raise money by equity multiple times like private equity funds, QIP, rights issue etc. Going ahead, an investor should keep a watch on the debt levels of the company.

The company seems to have a succession plan in place as two daughters of the promoter are working for the company. One of the daughters is a part of the board of directors as a whole-time director. Minda Industries Ltd has shown good project execution skills by completing capacity expansion plans at regular intervals.

The company has a complex corporate structure. As a result, it becomes difficult for any investor to get a comprehensive view of the actual financial position of the overall group. At times, the management has decided to include or exclude companies from consolidation at its discretion, which had to be highlighted by the auditor in the annual report. Another fallout of complex corporate structure is that the company does not explain many business decisions like investments in different companies in the annual report.

Minda Industries Ltd has also acknowledged that the complex corporate structure is not good from the perspective of public investors. As a result, the company has initiated a consolidation exercise. However, as a part of this exercise, the company has bought the stake from many promoter-entities in its joint ventures and associates entities etc. The transactions where the listed company buys stakes/assets from promoter entities require increased due diligence from investors.

Over the years, the company has taken many strategic business decisions to add value to shareholders. However, its decisions related to the battery division do not seem to have generated good value. It seems that the company has devoted a lot of management time and money to the battery division; however, still, the company is making continuous losses as it was doing 10-years back.

While analysing the company, an investor comes across instances of weakness in the internal controls and processes as well as some errors in the annual reports. An investor should do a deep due diligence of the company to monitor for any signs of weakness as it may expose the company to frauds.

Going ahead, an investor should keep a close watch on the profit margins and debt levels of the company. She should monitor instances of acquisition of promoters’ stake by the company in different entities as well as the purchase of assets by the company from promoters. She should closely track various initiatives of the company to keep its technology up-to-date as any lag in upgrading the technology can lead to loss of business and profitability for an auto-component manufacturer.

Further advised reading: How to Monitor Stocks in your Portfolio

In case of any additional information and clarifications, an investor may contact the company directly.

These are our views on Minda Industries Ltd. However, investors should do their own analysis before making any investment-related decisions about the company.

You may use the following steps to analyse the company: “Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks”

I hope it helps!

Regards,

Dr Vijay Malik

P.S.

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Disclaimer

Registration status with SEBI:

I am registered with SEBI as a research analyst.

Details of financial interest in the Subject Company:

I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.