Consolidate + Diversify equals to Growth
Sumant Banerji September 1, 2020
If someone were to tell you that one of the Indian companies that have made most money for shareholders in the last few years is a supplier of automotive parts, you would be forgiven for thinking of it as a joke. India's $120 billion automobile industry has been in the grip of an unprecedented slowdown for almost two years now, and the pandemic has exacerbated matters. Sales of vehicles declined 18 per cent in FY20 and are expected to contract another 30 per cent this year. The component industry registered its worst performance in FY20 with a 12 per cent dip in revenues. FY21 looks set to be worse.
Yet, Gurgaon-based Minda Industries is as big an outlier as any. The company, which makes components as diverse as cigar lighters and CD tuners to sensors, actuators and steering wheels with airbags, has increased its turnover at a compounded annual growth rate of over 21.25 per cent in the last five years with 20.94 per cent annual growth in profitability. The performance saw its Chairman, the soft-spoken 62-year-old Nirmal Minda, become one of Business Today's biggest wealth creators between 2015 and 2020. Minda Industries has outperformed every other automotive company in the stock market with its share price galloping from just Rs 39 in August 2015 to Rs 282, a rise of 623 per cent. This translates into a return of 48.52 per cent a year for shareholders and makes Minda one of the top wealth generators in the industry.
So, what is it that makes the company the darling of stock markets at a time when most investors are not willing to even look at automobile companies? Minda says he does not keep tabs on his company's share performance on daily or even weekly basis and was a bit surprised when presented with facts about the five-year performance. "To be honest, this is not something I am obsessed about. Sometimes, weeks would pass and I wouldn't check the company's stock performance and then our Chief Financial Officer (Sunil Bohra) would point it out in one of our meetings," he says. "My primary focus is to keep my customers happy. I know if I do that well, it will take care of the business of creating wealth for my shareholders."
While this partly explains the company's run at bourses, diversification and strategy to consolidate subsidiaries and joint ventures into the parent firm have contributed significantly in reinforcing the trust of investors. Since 2015, as many as 11 subsidiary companies have been merged in a process that is still not finished. "This has benefited us in two ways. One, it has strengthened our balance sheet both in terms of top line and bottom line performance and presented a more cohesive entity to investors, increasing their confidence in the firm," says Sunil Bohra, CFO, Minda Industries.
At the same time, the company has been spending more time in building rapport with investors and brokerage houses through roadshows and investor meets. "It has been our endeavour that no query from any investor, howsoever small or insignificant, should go unaddressed. At the same time, we are clear that no selective information will be shared with anybody," says Bohra.
In a dynamic sector where rampant technological changes are on the anvil, including electrification and autonomous driving, Minda has diversified and expanded its product portfolio to stay ahead of the curve. For example, it ventured into alloy wheels early on after realising the potential. Adoption of alloy wheels was slow in India till 2015 and the industry was heavily dependent on imports from China. They now account for 40 per cent of the market compared to 10 per cent then. Minda, as a first mover, has been a big beneficiary. It set up a factory for four-wheeler alloy wheels in Bawal, Haryana, in 2016. A second factory, for two-wheelers, will be operational next month.
"Maruti welcomed this step of ours with open arms," says Minda. "People are talking of import substitution from China today but we have already shown how it can be done in alloy wheels."
Similarly, the company was quick to realise that under the new BS VI emission regime, which kicked in from April 1 this year, demand for sensors will grow manifold. It expanded capacity for sensors. In the same way, it joined hands with Taiwan's Tung Thi Electronic Co in 2017 to develop and produce driver assistance products and safety systems such as reverse parking camera and tyre pressure monitoring systems.
"We are open for more. There are big opportunities. We are still dependent on China for many components - semi-conductors, small motors, printed circuit boards. Some of them we can't make it here but we should not be fully dependent on China," he says. "Localisation of technology is a big area. Wherever we see a chance for growth in any business in automobiles, even if we are not manufacturing that product today, we will look at it. That is the way to future-proof ourselves and stay relevant."
While the outlook for the industry is bleak, at least in the short term, Minda is confident that its growth story will not be impacted. Beyond the domestic market, it wants to increase the share of exports from 10 per cent to one-third of revenues by FY25. "We are looking at exports. That is something where potential is huge but we have only scratched the surface so far," he says. For example, the company has a manufacturing facility in Indonesia for the ASEAN region but wants to expand its presence in the market by making more products there. "We are doing switches and lights but are in active discussions to sell more products in the region. In the domestic market, the projections for this fiscal are conservative, but growth will return. Our per capita ownership of cars and two-wheelers is nowhere close to the global average. We are bound to grow in the long term."
The prognosis for the industry may be dire, but if you are an investor in Minda, you can rest easy.