Days after Minda Corp. announced its acquisition of a 15.75% stake in Pricol Ltd., the management of the company defended the "financial" investment.
Analysts have raised questions on why the management spent its almost entire cash reserve of Rs 400 crore on an acquisition that appears to be unclear in terms of strategy and does not grant any special rights as a minority shareholder. The funds for the transaction partly came from the proceeds of a Rs 310-crore qualified institutional placement issue in 2018.
How the management could make such an aggressive move to use a large chunk of QIP proceeds was among the key concern raised by analysts in a call with the management of Minda Corp.
Post the stake purchase, debt-equity stands at 0.3 times, and total debt amounts to Rs 410 crore, including Rs 150 crore in long-term and Rs 250 crore in short-term borrowings.
"Minda Corp. is bullish on 'instrument cluster' business and truly believes that it is set to grow and will undergo premiumisation in the upcoming future," said Executive Director Aakash Minda. "The company has an advanced technology centre working on and developing future technologies for instrument clusters and electric vehicle mobility."
As part of its long-term strategy, the company had earlier invested Rs 1,161 crore in Minda Instruments by acquiring a 49% stake in a joint venture partner, he said.
The Pricol stake purchase is an earnings per share dilutive deal over the short-to-medium term as the company will lose interest income, which it earned on the accumulated cash balance, according to Nirmal Bang. Also, Pricol is a non-dividend-paying company, the brokerage said.
To BQ Prime's question in the analyst call that if Minda Corp. was open to buying an additional stake in Pricol, the executive director reiterated that "this is purely a financial investment". "The company will continue to explore inorganic growth opportunities that come their way."
The response suggested that the company is keeping its options open. On the possibility of a voluntary open offer, Minda said "no comments."
Pricol is a competitor to Minda Corp. in vehicle clusters, sensors, telematics, electric vehicle parts, and connected vehicle solutions. "The management is not looking at any synergies between the two companies," Minda said in response to a question. Although the acquisition of a stake in Pricol will not add any unique technology capabilities or new product lines, he said the kit value for a two-wheeler instrument cluster is slated to increase from Rs 500 to Rs 4,000 in a few years, and thus the future for this segment is bright.
Meanwhile, analysts see the utilisation of QIP proceeds to buy a minority stake in a competitor as an aggressive move, as there could have been a better strategy for capital allocation. Minda could have deployed the QIP proceeds in a manner that could have yielded higher ROIC, thus improving the company’s overall return profile, according to Nirmal Bang.
"We are confident about the strength of our balance sheet, and are well positioned to fund capex and organic growth in the short and medium term," Aakash Minda said. "The company will only look at fundraising if we see an inorganic growth opportunity," he said, indicating that if the company plans to buy an additional stake in Pricol, they will have to go for a fundraiser.
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February 21, 2023 at 12:18PM
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Minda Corp.'s Management Defends 'Financial' Investment In Pricol - BQ Prime
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