INDIA NIPPON ELECTRICALS LTD : SLOW BUT STEADY !!

Scrip Code: 532240 / INDNIPPON

CMP:  Rs. 390.50; Market Cap: Rs. 441.68 Cr; 52 Week High/Low: Rs. 435.00/ Rs. 315.00.

Total Shares: 1,13,10,712 shares; Promoters : 75,09,166 shares –66.36 %; Total Public holding : 38,01,546 shares –33.64 %; Book Value: Rs. 207.63; Face Value: Rs. 10.00; EPS: Rs. 23.82; Dividend: 90.00 %; P/E: 16.62 times; Ind. P/E: 55.23; EV/EBITDA: 9.86 times.

Total Debt: ZERO; Enterprise Value: Rs. 437.67 Cr.

INDIA NIPPON ELECTRICALS LIMITED: Incorporated in 1984, and converted into a joint venture in 1986 between Lucas Indian Service Ltd, a wholly-owned subsidiary of Lucas-TVS Ltd and Kokusan Denki Co. Ltd, Japan - a group company of Hitachi Japan. The company came out with an IPO on September 1986 offering 49,50,000 equity shares of Rs. 10 each. The company has not given any splits in face value of its shares. The company gave its first bonus in May 1994 in ratio of 1 bonus for every 2 held,  on December 1998 in ratio of 8 bonus for every 5 held, in October 2002 in ratio of 7 bonus for every 10 held and last bonus was announced in August 2011 in ratio 2 bonus for every five held. India Nippon Electricals Ltd is manufactures Electronic Ignition Systems for two-wheelers, three wheelers and portable engines. Over the years the company has enlarged its customer base and now supplies to most of the manufacturers of two-wheelers, three wheelers and gensets. INEL makes the entire range of 2/3 wheelers, digital and analog ignition products. The company mainly deals with the ignition units, coils, regulators, flywheel magnetos, capacitor discharge, etc. Its products include AC Generator, Capacitor Discharge Ignition & Transistor Ignition Units, Ignition coil Units, Integral Units (Combined CDI & Ignition Coil), Regulator / Rectifier Units. The company obtain certificates of recognition from BVQI for ISO 9001 in the year 1998, QS 9000 in the year 2001 and ISO 14001 in the year 2002. The company's manufacturing unit is at Hosur- Thali Road Uliveeranapalli Krishna giri District Tamil Nadu India, second one at Madukarai Road, Nettapakkam Commune Kariamanickam Village Pondicherry and third at Rewari Masani Village Rewari Haryana State India. It also has a wholly owned subsidiary with Lucas TVS Ltd and Kokusan Denki Company Limited, a member of Hitachi, Japan. And an investment arm IN Investments Ltd and helds all the 63,010 equity shares making it 100 % subsidiary of the company. INDIA NIPPON ELECTRICALS LTD is locally compared with Denso India Ltd, Minda Industries, Majestic Auto Ltd, Igarashi Motors, Remsons Industries, PPAP Automotive Ltd, Motherson Sumi Systems, REIL Electricals, Lumax Industries and globally compared with Delphi Automotive of UK, BorgWarner of USA, Federal Mogul Corp of USA, Denso Corp of Japan, Robert Bosch GmbH of Germany, SEM of Sweden, Mitsubishi Electric Corporation of Japan.      

Investment Rationale:

India Nippon Electricals Limited (INEL) was incorporated in 1984. The company is into manufacturing of electronic ignition systems, auto components and other related products for two wheelers, three- wheelers and portable gensets. Offers wide range of products INEL offers varied range of products to serve 2/3 wheelers, mopeds and portable engines effectively. Its products are used in different areas such as power generation, power management, ignition management, automotive electronics and test kits. The company manufactures rotors, stators, capacitor discharge ignition and transistor ignition units, ignition coil and control units, integral units such as combined capacitor discharge ignition and ignition coil units, regulators and rectifiers. Strong client base INEL is one of established players in the auto ancillary industry. It operates in both domestic and international markets. It has strong client base which includes clients like- TVS Motor, Hero Honda Motor, Honda Motorcycle and scooter, Bajaj Auto, Royal Enfield, LML, Lombardini India, Piaggio India, Honda SIEL Power Products, Birla Power Solutions, Kokusan Denki and others. INEL has successfully demonstrated to the two wheeler industry its ability to adapt to the changing business and technological needs of customers in the areas of quality and customer service. India’s automotive industry is one of the most competitive in the world. Leading auto maker expects Indian passenger car market to reach four million units by 2020, up from 1.97 million units in 2014-15. The Indian automotive sector has the potential to generate up to US$ 300 billion in annual revenue by 2026, create 65 million additional jobs and contribute over 12 per cent to India’s Gross Domestic Product, as per the Automotive Mission Plan 2016-26 prepared jointly by the Society of Indian Automobile Manufacturers (SIAM) and government. The Indian auto industry is one of the largest in the world with an annual production of 2.33 Cr vehicles in FY 2015-16, following a growth of 8.68 % over the last year. The Two Wheelers segment with 81 % market share is the leader of the Indian Automobile market owing to a growing middle class and a young population. Moreover, the growing interest of the companies in exploring the rural markets further aided the growth of the sector. The overall Passenger Vehicle (PV) segment has 13 % market share. India is also a prominent auto exporter and has strong export growth expectations for the near future. In FY 2015-16, automobile exports grew by 15 % over the last year. In addition, several initiatives by the Government of India and the major automobile players in the Indian market are expected to make India a leader in the Two Wheeler (2W) and Four Wheeler (4W) market in the world by 2020. The industry produced a total 1.42 Cr vehicles including PVs, commercial vehicles (CVs), three wheelers (3W) and 2W in April-October 2015 as against 13.83 in April-October 2014, registering a marginal growth of 3.07 % year-on-year. The sales of PVs grew by 8.51 % in April-October 2015 over the same period last year. The overall CVs segment registered a growth of 8.02 % in April-October 2015 as compared to same period last year. Medium & Heavy Commercial Vehicles (M&HCVs) registered very strong growth of 32.3 % while sales of Light Commercial Vehicles (LCVs) reduced by 5.24 % during April-October 2015 year-on-year. In April-October 2015, overall automobile exports grew by 5.78 %. PVs, CVs, 3Ws and 2Ws registered growth of 6.34 %, 17.95 %, 18.59 % and 3.22 % respectively in April-October 2015 over April- October 2014. During 2015-16, the two three wheeler industry grew 2 % and India Nippon Electrical sales posted a growth of 4 % over its previous year despite difficult market conditions. India Nippon achieved a 54 % growth in export business and the direct sales to aftermarket recorded a growth of around 36 % with the help of expanding the dealer network and product range. The company have secured business for EGR controller for small diesel engines; company will work closely with customer to meet BS IV emission norms. The company is jointly developing other technology oriented products like ECU for Electronic Fuel Injection (EFI), Integrated starter Generator (ISG) for two wheeler and off road engines with its technical partners. ISG & EFI are two critical new technologies that will be disruptive to the industry and with constant focus on R&D the engineers along with technical partners are building newer capabilities for the future. The company has planned major investment which will be fruitful in next two years. Great R&D facility and product line-up along with the strong clientele, India Nippon looks promising.  

Outlook and Valuation:

Incorporated in 1984, INEL was converted into a joint venture in 1986 between Lucas India Services Ltd ( a wholly owned subsidiary of Lucas- TVS Ltd) and Kokusan Denki Co. Ltd, Japan ( a group company of Hitachi Japan) to manufacture electronic ignition systems for two-wheelers, three wheelers and portable engines. In 1986, the company established its first manufacturing plant in Hosur at Tamil Nadu and started production to supply to TVS Motor Company for motor cycles. INEL offers wide range of products which include flywheel magnetos, capacitor discharge ignition units, ignition coils and others. Its manufacturing facilities are located in Hosur, Puducherry and Rewari. The company serves to domestic and international markets with a subsidiary viz- P T Automotive Systems Indonesia. The Indian auto component industry expects to grow by over four-fold to US$ 113 billion by 2020, as per the Automotive Component Manufacturers' Association (ACMA). The total passenger car production in the country will jump four times to reach 9 million cars in the next ten years.  Although a major chunk of this will come from the fast growing domestic market, exports are likely to form around 35 % of the total market by 2020. India would be among the top-five vehicle producing countries in the world by 2020. The 40 % of the auto component industry is dominated by body and structural products, 20 % by engines and exhaust, and 10 % each by suspension and braking parts, transmission and steering parts, electronics and electrical and interiors. By 2017, body and structural will account for 35 % of the auto component industry, engines and exhaust 20 %, suspension and braking parts, transmission and steering parts and electronics and electrical will account for 13 % each and interiors 9 %. India is turning out to be an attractive destination as a global outsourcing hub and manufacturing base for original equipment manufacturers (OEMs), especially after the global economic downturn. With the finalisation of the Automotive Mission Plan (AMP) India is expected to become a preferred destination for design and manufacture of automobile. The plan envisaged an investment of US$ 40 billion and provided a road map to help transform India into a global automobile player. The AMP proposed a 25-point plan that included making India a manufacturing and export hub for small cars, multi-utility vehicles, two and three-wheelers, tractors and components. The Government has taken many initiatives to promote foreign direct investment (FDI) in this industry like Automatic approval for foreign equity investment up to 100 % of manufacture of automobiles and components is permitted, the automobile industry is de-licensed, and Import of components is freely allowed. The Ministry of Heavy Industries and Public Enterprises has envisaged the Automotive Mission Plan 2006-2016 to promote growth in the sector. It targets to Increase turnover to US$ 122 billion–US$ 159 billion by 2016 from US$ 34 billion in 2006, increase export revenue to US$ 35 billion by 2016 Provide employment to additional 25 million people by 2016. India Nippon Electricals ltd being a leader in manufacturing of Electronic Ignition Systems for two-wheelers, three wheelers and portable engines, will surely be benefitted by the increased investments in auto sector and by increase export potentials. On the financial side INEL posted good numbers. Its June 2016 net Revenue came in at Rs. 84 Cr as against Rs. 78.33 Cr YoY. It posted total expenses of Rs. 76.83 Cr as against Rs. 71.77 Cr YoY. The company posted Net Profit of Rs. 6.12 Cr as against Rs. 6.11 YoY. India Nippon is a very small company with good financials and has strong cash flow generating capacity; the company has been able to keep its debt to equity lower and also been able to expand through internal accruals. India Nippon Electricals ltd is debt free company and can remain debt free due to its huge cash flow. At the current market price of Rs. 90.50, the stock is trading at a PE of 14.04 x FY17E and 13.01 x FY18E respectively. The company can post Earnings per share (EPS) of Rs. 27.75 in FY17E and Rs. 30.00 in FY18E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also . 

KEY FINANCIALS	FY15	FY16	FY17E	FY18E
SALES (₹ Crs)	327.73	339.65	368.90	400.25
NET PROFIT (₹ Cr)	22.66	26.93	31.35	34.00
EPS (₹)	20.05	23.83	27.75	30.00
PE (x)	17.57	14.46	13.25	12.25
P/BV (x)	1.79	1.62	1.48	1.80
EV/EBITDA (x)	8.43	7.14	6.05	5.70
ROE (%)	9.30	10.22	11.19	11.62
ROCE (%)	17.72	21.43	20.08	20.50

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*As the author of this blog I disclose that I do not hold INDIA NIPPON ELECTRICALS LTD in my any of the portfolios.

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