Minda Industries, which manufacturers switches, light and horn for the automaker, has priced its right issue at Rs 250 per share, which is nearly 15 per cent discount to the current market price. The right issue would result in 3 per cent equity dilution and about 5 per cent saving at the profit level due to the lower debt. The key rationale for raising funds from right issue is to lower debt on the balance sheet and improve credit rating to bring down interest rate on borrowings. Minda Industries had gross debt of Rs 1,180 crore at end March 2020. Sunil Bohra, CFO at Minda Industries says the right issue would help the company to bring down debt to equity ratio below 0.5, thereby strengthening the Balance sheet of the company, especially at a time when sentiments are weak. “The Rights offer price is attractive for the existing shareholders and offers long term value creation opportunities”, adds Bohra
The additional funds from the right issue may ease tight liquidity for the company, particularly at a time when the first quarter for the current fiscal for auto ancillary is appearing to be a washout. The volume of automakers fell 60-80 per cent in the June quarter. Therefore, the reflection of the falling volume on the suppliers financial will not be a surprise.
The silver-lining for the suppliers is that the production schedule of the automaker has been improving on a month on month basis since May and vehicle makers have cleared nearly all receivables of their suppliers . This would auger well for the auto component supplier like Minda Industries. The company has maintained its guidance to grow 1.5 times more than industry growth in the conference call after the March 2020 earnings.
The two-wheeler and four- wheeler makers contributed equally for the revenue of the Minda Industries. The company could benefit from early mover advantage for putting up a new alloy vehicle factory. India imports nearly 35-40 per cent alloy wheels for four wheelers and upto 60 per cent for the two-wheeler. The total import of alloy wheels in India is around Rs 3000 crore. Minda Industries is eyeing sizeable incremental revenue as automakers move to domestic sourcing for alloy wheels.
Minda Industries plans to produce six million alloy wheels. It would be investing around Rs 320 crore on alloy wheel plants, out of which 80-90 per cent of funds have already been invested. The alloy wheel plant will be completed in the two phases. The production from the alloy wheel plant is likely to commission by the end of August 2020 and it may take about one year to reach full production capacity of the first phase. The peak revenue from the both phases of alloy wheels for the company could be around Rs 700 crore.
Besides this, the addition of several new types of sensors to its product line could add another Rs 300 crore revenue opportunity in the next two years. The revenue for sensor division was around Rs 130 core in the previous fiscal year. The big opportunity for sensors is emerging from the BS6 transition, where business could reach around Rs 500 core in the next 4-5 years.
The capex cycle of the company is nearing end and it will be largely investing in the maintenance capex.
The stock is trading at 20.2 times projected earnings of FY22, which is in line with its long-term average.
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