The Outperformers 2018


A mix of consolidation and diversification is proving to be a good growth formula for Minda Industries

Photographs by Vishal Koul

Nirmal Minda has an amiable air to him. As he walks from his Manesar corporate office to the adjacent switches factory, he greets everyone he meets on the way. The switch factory has all the familiar two and four-wheeler parts being inspected by the workforce on the production lines. This plant has been churning out switching systems for decades, and continues to bring home the bread and butter for the Minda group. But the affable chairman smiles and says, “An old cow can only be milked so much,” as we quiz him on the rationale for the shake-up at Minda group over the past four years. 

The shake-up involved consolidating the fragmented group companies around Minda Industries (MIL), the sole listed entity, and adding new businesses to the Minda group which had largely been living off its legacy in automotive switches and vehicle horn for decades.

The result of such bold calls is already showing up. Revenue has shot up from Rs.17 billion in FY14 to Rs.45 billion in FY18 (see: Racing ahead). During the same period, the Ebitda margin has more than doubled from 5.1% to 11.9% and group PAT on a consolidated basis has jumped from Rs.70 million in FY14 to Rs.2.56 billion in FY18. Today, Nirmal Minda’s proverbial ‘old and ageing cow’ has transformed into a ‘Kamadhenu’. 

Unlocking value

Four years ago, if one looked at MIL’s stock, its value appeared subdued. The company’s market cap atRs.2.5 billion in July 2013didn’t reflect what it really was — a market leader in two niches with a formidable client base. Pre-restructuring, MIL’s financials failed to capture the value locked in Minda group’s several joint ventures with foreign players, which were the technological backbone of the group. Admits Minda, “From the stock market point of view, for a potential shareholder, there was ambiguity about the structure and its value.” 

There was a reason why the structure stayed that way for years together. Explains group CFO Sudhir Jain, who has been associated with Minda for more than two decades, “Over a period of time, we launched different products and variants by entering into JVs with Suzuki suppliers or Toyota suppliers. All those investments were flowing either from MIL or co-finance companies or from the promoters directly. The ownership of those ventures was thus fragmented.” The many years of “joint venturing” led to a structural disintegration. 

minda new business lineWhile Minda talks confidently about the group today, it wasn’t the case earlier. “Whenever we met institutional investors, we didn’t have a clear answer to several of their questions,” he says. The investors would quiz them on the products and ask why a particular best-selling product was not being sold through the listed company. Minda was tired of not being able to satisfactorily address investor queries. 

Minda knew he had to fix this to realise the full potential of the listed company. In 2015, he decided to hire KPMG to implement his vision. There was a lot to be ironed out — ascertaining the valuation of group companies, taxation issues, convincing the board, and even court approvals. Minda recalls, “When we first showed our jungle to them, they were also shocked.” It was a maze of holdings, cross holdings, co-finance companies, ventures, and joint ventures. 

However, the mandate to the consultant was clear — to facilitate reorganisation of the fragmented companies around the listed entity, MIL. The three-year long restructuring is almost complete now, barring two group companies (which will also be brought under the umbrella of MIL). MIL today is both the operating as well as the holding company. 

Minda industries Sum and SubstanceBetween July 2015 and July 2018, a total of nine companies have been brought under the MIL umbrella (see: Sum and substance). These companies generate revenue of Rs.28.95 billion among them. “Combined with other factors, this has had a significant impact on our topline and bottomline growth,” says Jain. 

Even in Q4FY18, the company clocked a 53% YoY growth in revenue, from Rs.8.97 billion to Rs.13.71 billion as it merged two group companies Mindarika, which makes 4w switches and Denso Ten Minda, engaged in car infotainment. Standalone business, on the contrary, grew at 26%. 

The restructuring did not stop at consolidation of ownership though. “We realised that to take advantage of potential synergies, we had to operate like an interconnected unit, and so the organisation, too, needed restructuring,” says Jain. The entire organisation was therefore grouped under five domains — engine, exhaust, body and structure, control and safety, each led by a CEO. “This leads to better management, efficiency and synergy,” he says. 

Gains from synergies to bolster margin is only one of the objectives of this entire exercise. “Besides, this will improve productivity — we have a continuous plan to achieve this,” he adds. But restructuring is only the first half of Minda’s story. 

Safety first

If one borrows Minda’s terminology, the other plank of the growth strategy has been adding ‘new cows’ to the barn. A host of new business lines have been introduced in the past five years: alloy wheels, speakers, airbags, car parking assistance devices, aluminium die casting and moulding parts. While some of these bets are based on emerging market trends, others have been in response to the changing regulatory environment.

Six years ago, during their interaction with OEMs such as Mahindra and Toyota, Minda and his team spotted a pain area. A pain point of an OEM can very well be an opportunity for a component supplier. “We realised that there was only one reliable player, Enkei, in the alloy wheel space and the OEMs were facing quality issues with other players. But the usage and demand for alloy wheels was going up and gap was widening,” says Minda. 

The trend was very clear — customers were increasingly gravitating towards alloy wheels for passenger cars. Despite the rising demand, Indian carmakers were mostly importing alloy wheels.

Akito Tachibana MD, Toyota Kirloskar MotorAfter discussion with Mahindra and later Toyota, they started looking for a technology partner and found one in Japan — Kosei, in 2015. Kosei had already been a supplier to Toyota, so credibility wasn’t going to be an issue. That readily convinced Toyota India to try them as well. On the partnerships with Minda group, Akito Tachibana, MD, Toyota Kirloskar Motor says, “Minda group has come a long way in a very short span of time with immense focus on R&D and innovation, and with their recent moves, they are set to continue on that path.”

After Toyota, the largest passenger vehicle player, Maruti Suzuki also agreed to become their customer. On Maruti’s onboarding, Minda says, “As carmakers are constantly trying to localise parts to bring down cost, the attempt to localise alloy wheels paid off. It was a win-win for both of us.”

The alloy wheel vertical posted revenue of Rs.4.36 billion in FY18. The company has become the largest supplier to Maruti, with around 90% of production going to them. More importantly, over the past five years, the percentage of customers opting for alloy wheels has also gone up from 10% to 35%. In the western world, the number is 80%. “We may take another 10 years to reach that point. That’s the growth runway available to us,” says Minda. 

A shifting regulatory environment has also favoured Minda group. Several of their new businesses owe their existence to changing regulation. “Some of our growth is because there has been a significant change in automotive safety and emissions regulation in India during the past five years, and we’ve responded to those shifts very quickly,” says Minda. The major shifts include making of reverse parking sensors mandatory from 2018, driver-seat airbag in all new cars from July 2019, BS-VI norms etc. 

minda sysytem

Minda dabbled in the airbag space in 2009 in a very small way by taking a minority stake (6.13%) in Toyoda Gosei Minda India (TGMIPL), a joint venture between UNO Minda group, Toyoda Gosei Company and Toyota Tsusho Corporation. TGMIPL manufactures airbags, steering wheels with airbags and body sealing for automobiles and supplies to Maruti and Toyota. It has an installed capacity of 1 million car sets. It has two plants — one in Bawal in Haryana, and the other in Neemrana, Rajasthan. 

CFO Jain recalls the thought process behind the airbag entry. “In 2009-10, we were just testing the market. We thought we would take 6-10% stake and watch before we grow that holding”. In April 2018, with the tremendous opportunity created by the regulation to mandate air-bags, MIL decided to increase its share in TGMIPL to 48%. 

“Airbag had been a nascent business for us but it is maturing now. Volume will increase next year onwards when the regulation comes into play. That’s why we are adding capacity,” says Minda. TGMIPL is investing Rs.730 million in setting up a new plant in Gujarat to manufacture airbags to meet the expected increase. TGMIPL currently produces 750,000 airbags. Around 75% of the total volume will be supplied to Maruti’s Gujarat plant. 

After Takata, TGMIPL is the second largest supplier of airbags in India, and the largest supplier to Maruti. “Next year, we can expect a big boost in airbag sales,” says Ashutosh Tiwari of Equirus Capital who has been covering the company for the past five years. Last year, TGMIPL clocked Rs.4.7 billion in revenue, 70% of which was from the sale of airbags. The new Gujarat plant is expected to bring in another Rs.2.5 billion every year. 

Switched on 

Leveraging on safety regulation, Minda also got into driving assistance systems, mainly reverse parking sensors, three years ago. Quite like airbags, the bet here is on a likely spurt in demand when regulation comes into place by the end of 2018. The company once again found a technology partner in Taiwan’s TTE. Already, MIL is supplying these sensors to Mahindra, Tata and Suzuki. 

Adding new products is not as simple as it seems. The gestation period can be as long as five years, and then each new product has to find acceptance in the market too. Explains Jain, “Usually, it takes two years to set up a plant. The next two years goes in settling production and quality issues. That’s when the first main customer is fully convinced and willing to commit higher volume. Other customers follow thereafter. Only then do we reap the benefits of scale.”

The next product Minda is betting on is speakers. Over the past decade, infotainment systems have become a factory-fitted item from a replacement market accessory. That opens up another avenue for suppliers like Minda which already have brand equity with large automakers like Maruti. 

The import substitution and quality concerns of OEMs, in an increasing demand scenario, has worked in Minda’s favour. “Our market observation and discussion with key OEMs gave us confidence that we could be a meaningful supplier in this space.”

Ashutosh Tiwari Analyst (auto), Equirus Capital

Minda entered the space in 2016 to cash in on this new trend. “As we realised this big gap — all the speakers were being imported by OEMs — we talked to Onkyo in Japan and brought them here for local manufacturing,” says Minda. With an investment of Rs.500 million, the 50:50 Minda Onkyo JV started production in Haryana in September 2017. 

While many of these new businesses will reflect in the company’s performance in the next few years, some new ventures are already becoming cash cows. “Having borne losses in the nascent years, alloy wheels, aluminium dye-casting and moulding parts businesses have already turned around. There is better capacity utilisation now, converting them into positive contributors to our bottomline,” says Jain. 

Tiwari of Equirus seconds, “Foreign partners are happy to partner with MIL because they have very strong relationships with OEMs. Most of the new businesses which they have added in the past few years have higher margin.” MIL clubs these businesses — alloy wheels, aluminium dye casting, molding parts, airbags, parking sensors etc — as “others” and they contributed 24% to MIL’s revenue in FY18. Interestingly, the Ebitda margin is over 15%, compared with 12% for the company overall. 

Home win 

The old cow — switches, horn and lights — continues to remain the company’s mainstay even as it tries its luck with new businesses (see: Light and sound). “When you have a dominant market share in certain products, it’s a real challenge to hold on to your turf,” admits Minda. MIL has 60% market share in switches and 47% in horns. “We need to continuously upgrade technology, rationalise cost, focus on delivery quality, and ensure regular flow of value-for-money products,” he says. That’s why the company is constantly on the lookout to enhance aesthetics, add or combine features. “We were the first in the industry to introduce automatic turn-off indicator in two-wheelers, two years ago,” informs Minda. Similarly, the company introduced an electric horn in 2017 for two-wheelers. “Earlier, the horns used to gather carbon deposits. With electric horns, that’s not the problem and hence, it has an extended life,” he says. In FY18, switches contributed 34% to MIL’s revenue, and acoustics contributed 15.7%.

Analysts feel MIL has done well to guard its turf in the legacy space. “There are no other major players per se. Minda also has a number of patents in switches,” says Tiwari. MIL boasts of more than 180 patents in total. Minda isn’t worried about the threat from electric vehicles either as they make filters and CNG kits, which are the only parts connected to engines. “Currently engine-related parts contribute 8-9% of our revenue. By 2030, these will be down to probably 2-3%.” 

Sudhir Jain CFO, UNO Minda

Road ahead

Minda group has achieved a sales growth of 27% CAGR over the past five years to cross Rs.70 billion in FY18. During these years, the overall debt of the group has increased from Rs.1.5 billion in FY14 to Rs.5.5 billion now. “We have a debt-equity ratio of 0.5. We can live with 1. It was 0.9 when we made our last acquisition but it has come down. It may go up again when we make an acquisition in the future. But it will be kept under control,” informs Jain. 

MIL has an order book of Rs.28.5 billion and is expanding aggressively into Gujarat. “When Maruti went into Gujarat, we had to be there as their suppliers. Some of our lines are already online, others will commission soon,” says Minda. The alloy wheels capacity is also expected to be ramped up by another 60,000 at the newly set-up plant for an investment of Rs.2 billion. 

Scaling up the product line in alloy wheels, infotainment and reverse parking systems is expected to drive growth for Minda in the future, and the group is expecting to reach a turnover of Rs.100 billion by March 2020. “We have a clear path to that number given our order book,” concludes Minda. He believes both his new and old cows will deliver in unison to get them there.


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