Uno Minda shares rise 4% as Jefferies says valuations rich but justified; target price

Shares of Uno Minda Ltd climbed 4 per cent in Tuesday's trade after Jefferies initiated coverage on the stock with a 'Buy' rating and a target price that suggested 25 per cent upside potential. The foreign brokerage said it is constructive on Indian auto demand amid tailwinds of underlying economic growth, recent GST cut, easing liquidity and upcoming government wage hikes. 

Uno Minda valuations are rich but justified for the strong growth, low margin volatility and high return on equity (RoE), it said as the foreign brokerage valued the stock at 42 times FY27 earnings estimates, which is similar to last 5-year average of 43 times. The stock rose 4.13 per cent to hit a high of Rs 1,125.70, trimming its year-to-date losses to 15 per cent.

"We believe premium valuations are justified given Uno Minda's strong growth outlook, fueled by well-diversified and largely powertrain-agnostic portfolio, along with low margin volatility and high ROE. We initiate at Buy with Rs 1,350 price target," it said.
 
Jefferies said Uno Minda has delivered strong growth with 23-25 per cent revenue and EPS CAGR over FY16-26E, outpacing India's PV and two-wheeler production CAGR of 4-5 per cent. 

"Prudent portfolio and capacity expansions for components such as lighting, alloy wheels and airbags, which enjoy tailwinds of premiumisation, aesthetics, safety and import substitution. have boosted its content-per-vehicle. it is further expanding in sunroof and EV parts. We expect Uno Minda to deliver strong 17 per cent revenue CAGR over FY26-28E," Jefferies said.

The foreign brokerage said  Uno Minda has maintained its Ebitda margin in a tight 10.7-12.3 per cent range over FY17-9MFY26 despite the severe demand slowdown and Covid during FY20-21. Strong top-line growth should drive better economies of scale although new businesses like sunroof and EVs could be lower margin initially, it said.

Jefferies is assuming Ebitda margin of 11.2-11.8 per cent over FY26-28E; we expect 20 per cent EBITDA and 25% EPS CAGR over FY26-28E. "Our EPS estimates are broadly inline with Street, it said.

Jefferies said Uno Minda has generated a healthy 18 per cent average ROE over FY16-25, and we expect 19-21 per cent over FY26-28E. It had good operating cashflow, averaging 71 per cent of Ebitda over FY16-25, although high growth capex resulted in negative FCFE. 

"With rising OCF and assuring range-bound capex, we expect positive FCFE over FY26-28E and net-debt to-Ebitda declining from 1.2 times in FY25 to 0.4 times by FY28," it said.