Igarashi Motors India Ltd CMP Target Rating Rs. 647 Rs. 745 BUY Believe The Hype!
Igarashi Motors India Ltd (IMIL) manufactures DC motors deployed in niche applications for reducing emissions and improving fuel efficiencies in passenger cars. IMIL’s product portfolio includes Electronic Throttle Controls (ETC), Exhaust Initiating Coverage Gas Recirculation (EGR) and Turbochargers, together referred to as Torque Actuator Motors (TAM), hereinafter. IMIL is the market leader, globally, in ETCs with ~40% market share (>80% of revenue) Date June 21, 2016 The automotive industry is inexorably turning to power electronics as a panacea to achieve adherence to strict CO2 and fuel Market Data economy regulations coming into force, which further accentuates the criticality of IMIL’s offerings. The consequent improvement in penetration of these applications going forward, juxtaposed with IMIL’s leadership and close technical SENSEX 26867 collaborations with its customers provides strong revenue visibility. IMIL maintains its leadership (in ETCs) in a market Nifty 8239 dominated by Japanese and Chinese motor manufacturers, by virtue of being intensely backward integrated with possession of IPs and technical knowhow. Also, IMIL counts the largest Tier 1 auto comp companies amongst its clientele. Bloomberg IGM IN Power electronics in automobiles – a panacea for the mandated emissions/fuel economy norms; would also lead to improved penetration levels of TAM : Major auto markets have enacted exacting emission regulation targets to be progressively achieved over Shares o/s 31mn the medium term, requiring significant improvement in fuel efficiencies. Usage of automotive electronics including the TAM, enable Market Cap Rs. 20bn optimization of fuel consumption, critical in reducing CO2 emissions. The TAM market which stood at ~90mn motors in FY16 is expected to increase to ~200mn motors led by increasing penetration of the technology. IMIL is expected to significantly benefit 52-wk High-Low Rs. 774-372 from this on the back of its improving market share in the EGR and turbocharger applications, enabled by possession of critical IPs in key stages of the manufacturing process and its low cost, backward integrated operations. 3m Avg. Daily Vol Rs. 40mn IMIL is amongst the lowest cost manufacturers of DC motors world over; possession of IPs and backward integrated Index member BSESMALLCAP operations give it an invaluable edge: Even in the face of intense competition from large Japanese and Chinese manufacturers, coupled with intense cost cutting pressures flowing down from the Tier 1 suppliers/ OEMs, IMIL has exhibited non-liner growth in its Latest shareholding (%) margin (improving from 13.8% in FY11 to 24.1% in FY16). This is aided by lower value addition costs enabled by lower labour costs, supplemented by backward integration of operations, whereby the company has in-housed a significant portion of the production Promoters 85.9 process. IMIL thus boasts of significantly higher operating margins that its’ global peers. IMIL is also in possession of critical IPs concerning key stages of the manufacturing process, which gives it a significant edge over competition. Institutions 3.0 Standardization of motors- an important driver of profitability going forward: IMIL is intently focused on manufacture of Public 11.1 standardized motors, which could then be modified according to the end use application (ETC/EGR/Turbocharger). With single motors going into >100 car platforms across OEMs, standardization will further accentuate profitability and cost savings Stock Performance (%) Unswerving focus on staying up the curve on technological changes impacting the industry: Brushless DC motors are expected 1m 3m 12m dominate the DC motors industry over the medium term, consequent to significant operational and efficiency advantages over brushed DC motors, with the only inhibition being the cost itself. IMIL is investing meaningful resources on R&D for offering brushless DC motors IGM 3% 30% 34% at a cost comparable to brushed DC motors, which we believe would be a significant game changer. Also, the company plans to Sensex 6% 8% -2% expand its product portfolio into applications like electronic water/oil/vacuum pumps, which would improve the quality of growth. BSE Auto 8% 13% 5% Initiate coverage with TP of Rs. 745, basis 25x FY18 EPS of Rs.29 Financial Summary Year Revenues (Rs. mn) EBITDA (Rs. mn) EBITDA Margin Adj. PAT (Rs. mn) Adj. EPS (Rs.) P/E(x) EV/EBITDA(x) FY16 4,450 1,070 24.1% 636 20.8 31.1 17.6 FY17E 5,423 1,288 23.8% 797 26.0 24.9 14.4 FY18E 6,432 1,431 22.3% 894 29.2 22.2 13.8
MUKESH SARAF [email protected] +91 44 4344 0041 Find Spark Research on Bloomberg (SPAK
TAM Market size estimates and expected volumes and revenue of IMIL
FY16 FY18E FY21E Comments
Global car production volumes (Mn 70 77 89 We have assumed the global passenger car production to grow at a ~5% p.a. through FY21 Units) Amongst the TAM applications, ETC is currently the highest penetrated, at ~67%. This is expected to increase to ~73% by FY18 and further to 80% by FY21. TAM Penetration (Number of 1.2 1.6 2.2 motors per car) Our interactions with industry experts suggest that the penetration of EGR and Turbochargers currently stands at 30% and 33% respectively, and that the penetration for both the technologies would increase to 45% in FY18 and 70% in FY21
TAM Market size (Mn motors) 91 126 197 Derived using the TAM penetration and the global production volumes above
Expect IMIL's market share in the ETC segment (~80% of revenue currently) to increase IMIL Volumes (mn motors) 20 32 54 marginally from the current 38% to 40% by FY21. Expect the market share in the EGR and Turbocharger segments to progressively increase IMIL Market share 21.5% 25.5% 27.3% to 20% each by FY21 Expect the realizations to remain flattish, with improving product mix (increasing mix of EGR and Turbochargers), platform standardization and value engineering expected to aid Average realization (Rs/motor) 200 200 200 realizations which would be tempered by the cost reduction pressures exerted by Tier 1 suppliers and OEMs We have not factored in revenue from IMIL’s new product offerings including electric water, IMIL Revenue (Rs. Mn) 4,450 6,422 10,721 oil and vacuum pumps. Per Nidec’s corporate presentations, the overall market size for electric water and oil pumps alone could be 55 mn in FY20 from 31mn in FY16
. Our estimates of the TAM market size is basis our discussions with the management of IMIL, discussions with one of the largest manufacturers of motors based out of China and also on a perusal of presentations and earnings call transcripts including that of Mabuchi Motors, Nidec, Mitsuba and Johnson Electric.
Page 2 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY Company Factsheet
Corporate Factsheet
. Igarashi Motors India Ltd (IMIL) was established in 1993 as CG Igarashi Motors Ltd, a joint venture between Crompton Greaves Ltd (CGL), Igarashi Electric Works (IEW), Japan and Igarashi Electric Works (H.K) Ltd. Company . The company, since rechristened Igarashi Motors India Ltd , is currently a subsidiary of Agile Electric Sub-Assembly Private Limited (Agile), which Background holds a 41.92% stake. (For complete details of the current, and historical changes in the ownership structure, please refer the next slide) . The company is engaged in the manufacture and export of permanent DC magnet motors for passenger cars . Companies forming part of the Igarashi Group include Agile, Igarashi Electric Works (IEW), Japan, Igarashi Electric Works (H.K) Limited, Igarashi Motor Sales USA LLC, Igarashi Motoren GMBH, Germany, Igarashi Electric Works – China, Baesung Igarashi Co. Ltd, Korea. . The group manufactures DC motors finding application in the automobile, office equipment, home appliances, electric tools, and industrial equipment Group industries. For more details on the group companies, please refer slide 5. companies . IMIL holds 10.8% stake in Joint Venture Company viz., Bosch Electrical Drives. The JV is engaged in the sale, manufacturing, development, and application of wiper systems including wiper motors, engine cooling systems including fan motors, HVAC blower motors, window lift motors and other system components
Board of Directors: Management . Mr. K. K. Nohria - Chairman and Independent Director, Mr. Hemant M Nerurkar - Independent Director, Mr. Keiichi Igarashi - Director, Mr. P. depth Mukund - MD, Mr. S. Radhakrishnan - Independent Director, Mr. Akhil Awasthi - Additional Director, Ms. Eva Maria Rosa Schork - Additional Director
. The company manufactures DC motors primarily for powertrain applications, majorly electronic throttle control, exhaust gas recirculation systems and Products turbochargers. The company derives ~80% of its revenue from electronic throttle controls segment.
. The company sells its products primarily through its group companies - Igarashi Motor Sales LLC USA, Igarashi Moteren GMBH, IEW Japan and Customers and IEW Hong Kong. geographical . The company derives its revenue primarily from the export markets. In FY15, the company derived 44% of its revenue from Europe, 28% each, from mix of revenue Asia and USA . Major customers include Bosch, Continental, Bosch, Continental, Denso, Delphi, Keihin, Magneti Marelli, Visteon, Pierburg, Valeo and others Manufacturing . IMIL has two manufacturing facilities situated in MEPZ-SEZ Chennai, Facilities Corporate . Axis Bank, State Bank of India Banking
Auditors . Sharp & Tannan
Page 3 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY Corporate timeline – Snapshot of ownership changes
1993 2013-14 . Igarashi Motors India Ltd (IMIL) was . In July 2013, HBL’s 97.9% stake in Agile (which held 62.8% stake in IMIL) was sold to Blackstone for Rs3.3bn established in 1993 as CG Igarashi . In Aug 2013, Mr. P. Mukund – (M.D), IMIL subscribed to OCDs for ~Rs.600mn, which was converted into equity Motors Ltd, a joint venture between shares in Jan14 Crompton Greaves Ltd (CGL), . Post the deal – Agile held 42.1% and Mr. P. Mukund held 32.8% in the company. Igarashi Electric Works (IEW), Japan . IEW continued to hold its stake which stood at 11.3% post dilution and Igarashi Electric Works (H.K) Ltd., Hong Kong.
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
2010-11 2015 . IEW sold its stake to Agile (Agile - which in turn was controlled by HBL Power Systems) at a price of . IEW, Alpha FDI Holdings Pte Ltd, Tata Rs60.7/share Capital Growth Fund I and MAPE . Further, 31.9% stake was allotted to Agile on a preferential allotment basis. Securities Pvt. Ltd together bought . Agile made an open offer at Rs76.3/share for a stake of 20%, of which 7.2% was subscribed Blackstone’s 97.9% stake in Agile for . Post the above, Agile held 62.9% stake in IMIL. IEW Japan held remaining~24.9% stake post dilution Rs6.6bn.
Igarashi Electric Works Igarashi Electric Works Ltd, Japan (HK) Ltd
8.17% Changed Hands thrice: 55.21% 3.16% 1) Igarashi Electric sold stake to HBL – Dec’2010 Agile Electric Sub-Assembly 41.92% 2) HBL sold stake to Blackstone – Igarashi Motors India July’2013 Private Limited 3) Blackstone sold stake to Igarashi Electric and three others – August’2015 32.6% 29.44% 4.60% 8.65% Alpha FDI Holdings Tata Capital Growth MAPE Securities Pvt. Mr. P Mukund (MD) Pte Ltd Fund I ltd
Page 4 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY About the larger Igarashi Group – Entities constituting the Igarashi group and geographical footprint
GLOBAL PRESENCE Sales Site Production Site
Founded in 1952, Igarashi Igarashi Japan Electric Works Ltd. supplies compact DC brush motors, Igarashi Motoren geared motors, and other GmbH Germany motor components under the IG Motor (Igarashi Motor) Igarashi Motor Sales USA, LLC brand, for use in （USA） automobiles, office equipment, home appliances, Baesung Igarashi electric tools, and industrial IMIL and Agile Electric - India Co., Ltd. equipment. (South Korea）
Regional Sales Trends – Igarashi group
286 . Igarashi Electric Works . Igarashi Electric Works Japan North America Europa Asia 253 (H.K.）Ltd. (Heng Gang) Factory 212 31% 188 25% . Yat Yue Industrial Co., . Yat Yue Electric 155 150 25% 23% (H.K.）Ltd. (Shenzhen) Co., Ltd. 21% 43% 42% 38% 38% . Igarashi Electric Works
Mn US$ Mn 36% 35% . Igarashi Electric Works 26% International Ltd. （Zhuha) Ltd. 27% 26% 24% 21% 24% 29% (Hong Kong） (China） 12% 15% 15% 12% 8% 6% 2010 2011 2012 2013 2014 2015
Page 5 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY About the larger Igarashi Group – Wide array of product offerings ranging from automotive to industrial motors
The group’s offerings under the automotive segment encompass safety, emission and comfort applications
Automobile
. Electronic Throttle Control (ETC) . Exhaust Gas Recirculation (EGR) Valves . Air Pumps . Seats: Lumbar Support . Seats: Headrests . Power Trunks / Power Tailgates . Sun Shades . Dashboard Actuators . Rotating Lamps
Other Appliances
Appliances and Toys/Residential
. Vacuum Cleaner Office Equipment Medical and health devices Industrial Equipment . Vending Machine . Stapler . Medical Equipment Actuator . Coin Validator . Washing Machine . Projector . Pump . Window Opener . Printer . Gearbox . Coffee Machine . Massager
Page 6 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY Igarashi Motors India Ltd (IMIL) – Current product offerings focused on improving fuel efficiencies and reducing emissions
Key Products – IMIL
Electronic Throttle Control (ETC) Exhaust Gas Recirculation (EGR) Turbocharger (Waste gate and Bypass motors motors valve pump motors) (>80% of revenues in FY16)
. Turbochargers are commonly used in cars to obtain greater power output from a given . EGR helps reduction in NOx emissions engine size . Electronic throttle control uses electronic, from the engine by recirculating a quantity . This helps generate increased mechanical signals to control the throttle, instead of of exhaust gas back to the engine cylinders power and overall efficiency improvement mechanical signals. Tech. . Intermixing the recirculated gas with the of the combustion process . Optimally-timed ignition and valve opening, Explained incoming air reduces the amount of O2 . Therefore, the engine size can be reduced results in precise levels of fuel injections available for combustion and also lowers for a turbocharged engine leading to better thus serving to optimise consumption and the peak temperature of combustion, packaging, weight saving benefits and emissions control reducing emissions overall improved fuel economy. . This is enabled by the waste-gate actuator and bypass value
Market IMIL has a 38% market share globally IMIL has a large headroom for growth in these applications, with its market share share in the ETC application expected to progressively increase to ~20% by FY21
Major competitors include Tier 1 Major competitors include Johnson Electric, Mitsuba Corporation, Sonceboz, Tier Competition manufacturers, Mitsuba Corporation 1 manufacturers and others and others
Customers Include Bosch, Continental, Denso, Delphi,Keihin,Magneti Marelli,Visteon, Pierburg, Valeo and others
Source: Industry, Spark Capital Research, *FY15
Page 7 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY Igarashi Motors India Ltd (IMIL) - Snapshot of company profile
IMIL’s revenue has grown at a CAGR of ~18% over last five years ETC motors continue to be the main product offering, others include motors for turbocharger and EGR applications 7,000 6,432 FY11 FY16 6,000 5,423 Others Others, >20% <20% 5,000 4,450 3,851 4,000 3,612 2,908 3,000 2,685 1,972 2,000 1,000 0 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E ETC , ETC , Revenue (Rs. Mn) >80% <80%
Source: Company, Spark Capital Research Source: Company, Spark Capital Research
Non-linear growth in margins witnessed over the last five years IMIL’s capital efficiency is robust, at par with best in the industry
45.0% 30.0% 27.0% 40.0% 22.9% 23.3% 25.0% 35.0% 20.8% 18.4% 30.0% 20.0% 16.4% 25.0% 15.0% 17.7% 20.0% 16.5% 16.3% 16.6% 15.0% 10.0% 14.0% 14.1% 10.0% 5.0% 5.0% 0.0% 0.0% FY11 FY12 FY13 FY14 FY15 FY16 FY11 FY12 FY13 FY14 FY15 FY16
Gross margin (%) EBITDA margin (%) PAT margin (%) RoCE RoE
Source: Company, Spark Capital Research Source: Company, Spark Capital Research
Page 8 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY OEMs have been set strict, staggered targets w.r.t. emissions and fuel economy standards to be achieved progressively over the next 5-10 years; This would necessitate greater usage of power electronics
. Nine governments worldwide - Japan, the European Union, United States, Canada, China, South Korea, Mexico, Brazil, and India—have established or proposed fuel economy or greenhouse-gas emission standards for passenger vehicles and light-commercial vehicles/light trucks, as depicted in the charts below . These markets cover ~80 per cent of the global passenger vehicle sales. . It is believed that the coming into force of these norms are among the most effective climate-change mitigation measures to have been implemented over the past decade. . Importantly, it also means that auto OEMs have to increasingly direct efforts on the improving the overall fuel efficiencies and reducing emissions to achieve the regulatory standards.
Passenger car CO2 emissions and fuel consumption, normalized to NEDC Passenger car miles per gallon, normalized to CAFÉ (New European Driving Cycle) (Corporate Average Fuel Efficiency)
*Note that Japan has already exceeded its 2020 statutory target as of 2015 *Note that Japan has already exceeded its 2020 statutory target as of 2013
Source: ICCT, Spark Capital Research Source: ICCT, Spark Capital Research
Page 9 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY OEMs have been set strict, staggered targets w.r.t. emissions and fuel economy standards to be achieved progressively over the next 5-10 years; This would necessitate greater usage of power electronics
. To meet the emission targets, automakers in the US, EU and China must reduce their average CO2 emission volume by 4% p.a., 3.6% p.a. and 5.3% p.a., respectively over the stipulated periods. . This will necessitate improved fuel economy for larger vehicles and importantly, a reduction in the average CO2 emissions for compact cars. . Usage of power electronics in the powertrain and the chassis enable automobile engines function optimally reducing fuel consumption and reduce emissions . Also, since the targets cannot be achieved without an expansion in the OEM’s product portfolio to include eco-friendly vehicles (using Hybrid Electric Vehicle/Electric Vehicle /Fuel Cell Vehicle technologies), automakers are now increasingly looking to increase their exposure to such vehicles.
Overall and annual required rates of CO2 reduction p.a. - Passenger cars Region wise passenger car production – 2015
Overall Reduction 2025
- mandated North
2025
- 2020
- America, 2020
- 10.2%
US 2013 US
Canada 2010 Canada
2021
-
2020
2016
-
-
S Korea 2012 Korea S
2017
China 2013 China
-
2020 -
EU 2013 EU Europe, 42% 2012 India 27.1% 39% 2011 Mexico 34% 2013 Brazil Asia Pacific, Japan 2013 Japan 32% 25% 57.0% 17% 3% 11% 10%
0.4% 1.9% 2.2% 2.6% 4.0% 3.5% 3.5% 5.3% 5.8% Asia Pacific Europe North America Annual Reduction LATAM Middle East & Africa Others Required
Source: ICCT, Spark Capital Research Source: Industry, Spark Capital Research
Page 10 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY Scope for reducing efficiency losses and enhancing efficiency opportunities and technologies available
Technologies to improve fuel efficiency
Electronic Throttle Low Friction Exhaust Gas 6-8 speed Transmission Compression ignition Control Lubrication Recirculation Variable Valve Timing Cylinder Deactivation Direct Injection Lean-burn Electric Power Steering
ENGINE LOSSES ACCESSORY IDLING TRANSMISSION BRAKING 67% ENERGY STAND-BY 5% 5% FUEL 2% 10% 100% Inertial Mass 5% ROAD LOAD Rolling Resistance 16% 5% Aerodynamic Drag 6%
Efficient Air- Dual-clutch Optimized Vehicle Improved Turbo Charging conditioning Transmission Design Aerodynamics Integrated Starter Advanced Lightweight Low Rolling Resistance Efficient Alternator Low Drag Brakes “Stop” Materials Tires
. The automobile engine, which is the primary consumer of fuel energy at ~67% is also the primary source efficiency losses and, by implication provides the greatest opportunities for enhancing efficiencies. . Applications like the Turbocharger, electronic throttle control and exhaust gas recirculation ensure that the engine functions at optimal power, reduces wear and tear, improves fuel economy and reduces emissions
IMIL’S PRODUCT PROFILE Page 11 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY Amongst varied applications of DC motors, IMIL is focused on three key Power Train applications
Power Train Chassis Comfort System
. Starter Motors . Electronic Power Steering . Mirrors . Alternator . Electronic Steering lock . Door lock actuators . Power Window . Electronic Throttle Control . Electronic Parking Brake . Easy Closer {Luggage, Front & Read Door) . Variable Valve Timing . Electronic Brake control . Wiper/ Washer Motors . Electronic EGR Valve . Variable Gear Ratio Steering . Power Seats . Radiator Cooling Fan . Electronic Suspension Control . Active seating Head-rest . Fuel Pump . Electronic Steering System . Auto Front light Leveling . Front light Cleaner . Turbochargers (Waste gate, Bypass . Electronic Active Stabiliser valve) . Air Conditioner Blower, Damper . ElectronicControl4-WD . Interior Air Conditioning System . Electronic DuaI Clutch Transmission . Electronic Tilt Steering/Fuel lid Opener
AGILE ELECTRIC
*Indicative product list for Agile
DC motor applications focus on fulfilling objectives of Comfort, Emission, Fuel efficiency and Safety
Page 12 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY IMIL’s Power train application #1 – The Electronic Throttle Control (~80% of revenue and ~40% global market share)
Mechanical Throttle Controls A mechanical throttle control uses a mechanical connection between the accelerator pedal and the throttle. Upon pressing the accelerator pedal, the throttle opens through a mechanically connected wire, facilitating air flow into the engine and thereby, combustion. (Throttle is a mechanism by which fuel flow is managed by constriction or obstruction)
The mechanical throttle is replaced with an electronic throttle device which controls the flow Electronic Throttle Control of fuel to the engine. An ETC (also known as "drive by wire“) ensures precise control of engine output by converting the movement of the accelerator pedal to a digital signal that is sent to the engine management system. Essentially, upon pressing the accelerator, an accelerator pedal module is activated, which converts the pressure applied into an electric signal. The signal is then sent to an electronic control unit, which takes the driver’s inputs, to open the throttle for optimum efficiency and performance.
Components of ETC BMW 7 Series 1988 Model – First to use ETC i) an accelerator pedal module (ideally with two or more independent sensors), (ii) a throttle valve that can be opened and closed by an electric motor and (iii) a powertrain or engine control module (PCM or ECM).
Page 13 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY IMIL’s Power train application #1 – The Electronic Throttle Control
The ETC module requires a mere 120 milliseconds to fully open the throttle, about the same time it takes an Ease of Driving experienced driver to fully depress the accelerator. This allows the driver to apply engine power with greater precision and ensures particularly smooth, shudder-free motoring, at low engine speeds.
Reduced Fuel Consumption and Optimally-timed ignition and valve opening, the ideal throttle butterfly position and volume of injected fuel also serves to optimise consumption and emissions control Emission
Warranty Advantages Electronic throttle control also provides some warranty advantages for the vehicle manufacturer. In case of excess pressure on the accelerator, at a sub-optimal gear setting, the car tyres will not be impacted by friction and wear for OEMs out as the ETC would regulate the throttle position accordingly.
Reduced maintenance Over the life of the car, the various components can wear out. By comparison, an electronic throttle control system has comparatively few moving parts -- it sends its signals by electric impulse, not moving parts. That reduces wear costs and the amount of maintenance needed on the system.
Besides reliability they are much easier to integrate with traction control, antilock brakes, stability control and Compatibility with Other cruise control, which many cars have these days
Systems
With an ETC, the main control unit reads input from the driver's foot on the accelerator, and also simultaneously Improved driver safety examines input from wheels that are slipping, wheels that have grip, the steering system and the brakes, helping correct driver error and keep the car under control. In other words, a throttle control system can balance several factors that affect a car's speed and direction
Page 14 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY IMIL’s Power train application #2 – Turbo Chargers (enabled by Waste gate actuator and bypass valve)
What is a Turbocharger?
Turbochargers are commonly used in passenger cars to obtain greater power output from a given engine size. The compact nature of a turbocharger means it is often a more space-efficient solution for increasing power output than increasing engine displacement
How is it different from the existing technology? General Motors manufactured the first A significant difference between a turbocharged engine and a traditional engine is that the air entering a diesel engine is compressed before the turbocharged production cars with fuel is injected. the Turbo Jetfire engine used in the Oldsmobile Jetfire
. The turbocharger compresses and pushes more air into the engine’s cylinder. When air is compressed the oxygen molecules are packed closer together. This increase in air means that more fuel can be added for the same size naturally aspirated engine. This generates increased mechanical power and overall efficiency improvement of the combustion process.
. Therefore, turbocharged engine produces more power overall than the same engine without the charging. This can significantly improve the power-to-weight ratio for the engine.
Page 15 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY IMIL’s Power train application #2 – Turbo Chargers (enabled by Waste gate actuator and bypass valve)
How does it work?
A turbocharger is made up of two main sections: the turbine and the compressor. The turbine consists of the (1) turbine wheel and the (2) turbine housing. It is the job of the turbine housing to guide the (3) exhaust gas into the turbine wheel. The energy from the exhaust gas turns the turbine wheel, and the gas then exits the turbine housing through an (4) exhaust outlet area (5) The compressor wheel (6) The compressor housing (7) Forged steel shaft (8) Compressed air
Benefits BENEFITS OF TURBOS
. Turbochargers generates increased mechanical power and improved efficiency improvement of the combustion process . Therefore, the engine size can be reduced for a turbocharged engine leading to better packaging, weight saving benefits and overall improved fuel economy . The typical boost provided by a turbocharger is 6 to 8 pounds per square inch (psi). Since normal atmospheric pressure is 14.7 psi at sea level, around 50% more air is pumped into the engine, which in turn translates into a 30-40% improvement in power. . A turbocharger also helps at high altitudes, where the air is less dense. Normal engines will experience reduced power at high altitudes because for each stroke of the piston, the engine will get a smaller mass of air. A turbocharged engine may also have reduced power, but the reduction will be less dramatic because the thinner air is easier for the turbocharger to pump.
Page 16 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY IMIL’s Power train application #2 – Turbo Chargers (enabled by Waste gate actuator and bypass valve)
. Electric waste gate actuator ensures the best possible interaction between ICE engine and turbocharger. This technology allows high actuation speeds along with precise boost pressure regulation. Electrical actuator can quickly reach any waste gate position, irrespective of the system pressure. A high compressive force ensures minimal leakage and ensures quick boost pressure build-up. Key advantage of electrical actuator is the ability to open the waste gate completely, which allows the catalytic converter to discharge quickly, thereby reducing exhaust gas emissions and fuel consumption. Electric waste gate actuator has gained momentum in recent times and it will gradually be more popular with enhanced turbo charger penetration.
. The bypass valve prevents the unnecessary braking of the turbocharger, reducing the turbo lag effect. . If the accelerator is suddenly released at a high turbocharger speed, the throttle valve is closed, and the high back pressure produced behind the compressor will not be able to escape. This has a strong braking effect on the compressor wheel, exposing the closed throttle valve and turbine side of the turbocharger to great loads. . When the throttle valve opens again, the turbocharger first has to be brought back up to speed. This effect is known as turbo lag, i.e. a fall-off in performance when accelerating after overrun operation. . The bypass valve prevents this. It releases a bypass to the suction side in overrun, ensuring a fast drop in pressure on the compressor side. This means that the braking effect on the compressor is not as strong. When the driver accelerates again, i.e. by opening the throttle valve, the bypass valve closes, and full charge pressure is again immediately available. This reduces turbo lag, which is now barely noticeable.
Components of a bypass valve: 1. Compressor 2. Turbine 3. Bypass Valve 4. To Throttle Valve 5. From Cylinders
Page 17 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY IMIL’s Power train application #2 – Turbo Chargers (enabled by Waste gate actuator and bypass valve)
Forecasted Turbo Market Penetration By Region Turbo Market Growth
Global Turbo Penetration
During The Next 5 Years… Source: Honeywell t
. Turbochargers are primarily used in diesel vehicles.
. Gasoline variants are picking up steam of late.
. We believe that the penetration of turbochargers is higher in countries which have a higher proportion of diesel vehicles, including India
Source: Honeywell
Page 18 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY IMIL’s Power train application #3 – Exhaust Gas Recirculation
. EGR is an efficient method to reduce the NOx emissions
from the engine. It works by re-circulating a quantity of
exhaust gas back to the engine cylinders
. Intermixing the re-circulated gas with the incoming air
reduces the amount of O2 available for combustion and
lowers the peak temperature of combustion, and thus
produces lesser NOx emissions
. EGR also helps in making the fuel warmer, which helps it
heat up more efficiently and improves the fuel economy.
. Recirculation is achieved by piping a route from the exhaust manifold to the intake manifold with a control valve within the circuit regulates and times the gas flow
Page 19 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY Pressing need for emission control and fuel efficiencies to propel non linear growth for IMIL’s products
Global vehicle production expected to grow at CAGR of 3% over 2015-2022 TAM penetration to continue to grow strongly over 2016 - 2020
95 2.5 ~90 2.2 90 2 85 1.5 80 ~1.2-1.3 ~75 75 1 Fraction of 1 70 0.5 65 FY16 FY21 0 2010 2016 2020 Growth in car production (mn units) Penetration of Power Train Actuator Motors Source: Company, Spark Capital Research Source: Company, Spark Capital Research
. The management estimates the current penetration of the The TAM motor market is estimated to be 90 mn unit TAM Motors (ETC, Turbocharger and EGR motors) at 1.2 -1.3 market worldwide, with the size of the market in India per car currently. being around 4mn . With stiff emission control and fuel efficiency targets, expect With penetration in India being significantly low, the adoption of these technologies to increase and improve the penetration to ~2.2 per vehicle by 2020. management believes that only once the size of the market reaches atleast 10mn units p.a. and the per . The market for these motors is estimated to grow at more than twice the rate of the vehicle growth. capita income increases, it could have manufacturing facilities dedicated for India
Page 20 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY Penetration of varied applications of motors – IMIL poised to benefit from low penetration levels and leading market share
Penetration Application Luxury Middle/SUV Light/ Compact Power train
Starter
Alternator
Electronic throttle control
Turbo charger
Electronic EGR valve
Radiator cooling fan
Fuel pump
Chassis
Electronic power steering (EPS)
Electronic steering lock
Electronic parking brake
Electronic control brake (ABS/ESC)
Electronic control suspension
Electronic four-wheel steering system
Penetrated Less Penetrated
. IMIL currently manufactures motors for brush DC motors. It is undertaking focussed efforts to develop applications for brushless DC motors (discussed in detail on slide 33) which would give it an edge when brushless variants of its applications gain traction in the ETC and EGR space
. Development of this technology would also enable it penetrate the Turbocharger market better, where the adoption of Brushless motors is higher
Page 21 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY Penetration of different applications of motors
Penetration Application Luxury Middle/SUV Light/ Compact
Interior/Exterior
Mirror
Door lock
Power window
Easy closer (luggage, front & rear door)
Wiper
Washer
Power sheet
Active headrest
Adaptive front lighting system (AFS)
Front light cleaner
Air conditioner blower
Air conditioner damper
Seat air conditioning system
Electronic tilt steering, telescopic
Electronic fuel lid opener
Penetrated Less Penetrated
Page 22 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY Different applications of DC motors classified by price and power output
Motor Price and Output by Application
EV＆HEV Driving motor
EV＆HEV Motor Generator IMIL’s Future Focus Market Power Brushless Motor Conventional IMIL’s Focus Market . Water pump Alternator . Oil pump Enhanced . Vacuum pump Starter motor . Electric power steering
. Electric brake motor Conventional Starter motor Companies present: Price Electronic Throttle Control/ Bosch, Denso, Continental, Valeo and Mitsuba Turbocharger/ Exhaust Gas Recirculation
Power seat, power window Companies present : Wiper motor Bosch, Denso, Brose, Mitsuba, Johnson Electric
Mirror and door motor
Power Output
Source: Industry, Spark Capital
. From a relatively lower price and power point, IMIL is moving up the DC motor value chain with its foray into water, oil and electronic pumps
. Additionally, the development of brushless DC motors would equip IMIL with requisite capabilities to venture into the aforesaid and other applications. Refer slide 33 for more details
Page 23 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY IMIL has a leading market share in the ETC segment and caters to the foremost auto comp suppliers in the world
IMIL has a leading market share in the ETC motor market IMIL counts the foremost auto-comp suppliers as its clients
Others 16% IMIL, ~38% Mitsuba, (estimated) Delphi,Keihin, Johnson Magneti Electric, Tier 1 Marelli,Visteon, Bosch, Continental, OEMs, Pierburg, Valeo Denso 47-49% ~60% 36%
Source: Company, Spark Capital Research Source: Company, Spark Capital Research
IMIL caters meaningfully to the top three auto-comp suppliers by revenue Exports contribute a significant chunk to the overall revenue
45 100% 40 96.3% 35 94.0% 30 95% 92.9% 25 90.2% 20
USD Bn USD 15 90% 10 85.9% 5 85%
-
ZF
80%
Denso
Magna Michelin
Faurecia FY11 FY12 FY13 FY14 FY15
Aisin Seiki Aisin
Continental
Bridgestone Robert Bosch Robert
Hyundai Mobis Hyundai Exports as % of revenue
Source: Industry, Spark Capital Research Source: Company, Spark Capital Research
Page 24 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY Building on the strong demand for its products, IMIL has demonstrated a robust operating performance
IMIL’s revenue has grown at a CAGR of ~14.2% over last five years ETC actuators continue to be the main product offering, others include actuators for turbocharger and exhaust gas recirculation applications 7,000 6,432 FY11 FY16 6,000 5,423 Others Others, >20% 5,000 4,450 <20% 3,851 4,000 3,612 2,908 3,000 2,685 1,972 2,000 1,000 0 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 ETC , ETC , Revenue (Rs. Mn) >80% <80% Source: Company, Spark Capital Research Source: Company, Spark Capital Research
Non-linear growth in margins witnessed over the last five years IMIL’s ETC and EGR volumes have been progressively increasing over the years 45% 40.3% 25 40% 34.5% 35.0% 36.1% 31.3% 32.3% 35% 20 30% 24.1% 25% 20.5% 15 18.0% 18.6% 20% 15.0% 15.5% 10 20 15% 17 18 7.3% 15 10% 4.6% 6.2% 14 12.8% 12.7% 14.3% 5 11 5% 0% 0 FY11 FY12 FY13 FY14 FY15 FY16 FY11 FY12 FY13 FY14 FY15 FY16 Gross margin (%) EBITDA margin (%) PAT margin (%) Sale volumes (EGR and ETC - Mn Nos)
Source: Company, Spark Capital Research Source: Company, Spark Capital Research
Page 25 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY Intense cost cutting pressures flowing down from the OEM and Tier 1 suppliers mutes growth in realizations
Intense cost pressures in the automotive sector necessitates focus on value engineering led cost reductions by IMIL; this mutes growth in realizations
25 250 201 192 200 20 182 200 144 151 15 150
10 20 100 17 18 15 14 5 11 50
0 0 FY11 FY12 FY13 FY14 FY15 FY16
Sale volumes (EGR and ETC - Mn Nos) Realisation /unit
Source: Company, Spark Capital Research
In its endeavor to increasingly add . Intense competitive pressures faced by OEMs globally, increases emphasis on cost value to its customers, IMIL focuses control/reduction. This trickles down on to suppliers (Tier 1/2/3 and so on) lower on down the rung. 1) More performance to Weight . Management indicated that there is constant pressure on IMIL to reduce costs, with 2) More performance to Volume customers bargaining for a reduction in the cost per motor every year. 3) More performance to Current . This necessitates efforts on value engineering led cost reductions by IMIL, consequent to which the value of an average motor supplied has reduced from ~ $4 to $3.2 currently.
Page 26 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY IMIL surmounts cost cutting pressures exerted by the OEMs through increasing integration and value engineering
IMIL HAS INTEGRATED ITS SUPPLY CHAIN ACROSS THE TIER 2, TIER 3 AND TIER 4 VALUE CHAINS. THIS IS NECESSITATED BY REQUIREMENTS OF COST CONTROL AND QUALITY CONTROL
TIER 4 TIER 3 TIER 2 TIER 1 OEM Parts & Components Sub-assemblies Motors System Integrators
TIER TIER TIER TIER 4 3 2 1
. In-housing of technology and parts ensures control over capacity and costs for IMIL . Additionally, as a cost saving measure, in case of parts that are not in-housed, IMIL buys from suppliers where it constitutes only ~2% of suppliers’ business, so that benefits of their economies of scale flow through to them
SOME OF THE PARTS AND TECHNOLOGIES IN-HOUSED BY IMIL 45% 40.3% Stampings & Lamination 36.1% 40% 34.5% 35.0% 32.3% . Technology for tooling and housing parts has been acquired from AIDA Japan and IEW Japan 35% 31.3% 30% Plastics 24.1% . Formed a partnership with a Taiwanese company engaged in machining, parts and tooling . 25% 20.5% 18.0% 18.6% The entity was bought out subsequently 20% 15.0% 15.5% Machined parts 15% . Licensed know-how for manufacture of machined parts from a Korean firm 10% FY11 FY12 FY13 FY14 FY15 FY16 Press Parts Gross margin (%) EBITDA margin (%) . Acquired know-how of the modalities press parts supply chain
Page 27 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY IMIL surmounts cost cutting pressures exerted by the OEMs through increasing integration and value engineering
FY10 FY11 FY12 through FY15
Efforts, in brief, made towards technology absorption, adaptation and innovation :
. Developed New products at India . Continued to Develop new products at India , co- . Motor Performance innovation and improvement operating with large Customers to create Products for programs with Car Makers directly and Tier-1 experts. . Established technology center for Motors in India by the Global platform; working with collaborators for New applications of DC . New thoughts in engineering of Manufacturing Motors. . Diversified into studying new types of Electric Motors Processes were implemented, resulting in for future and alternative segment applications; improvement in Quality and Capacity; . Working with Suppliers of Equipment and Machinery for Improved Productivity Machinery for Process . Continuously improving Equipment and Machinery . Concept outliners were laid for production lines with technology up-gradation Technology for improved productivity; about 30% increased productivity; . Understanding of New Hi-technology and more . Understanding of new Hi-Technology and more efficient Manufacturing Processes for component efficient manufacturing processes for component making resulting in quality improvement and Cost making resulting in quality improvement and cost reduction. reduction. Benefits derived as a result of the above efforts
. Opened up New global market opportunities, . Opened up new global market opportunities; . Acquired New Generation Electric Motor Business for especially for US and European markets. leading OEM / Tier-1 combination for 5 years from . Started working with European Companies for existing customers; . Continued working with overseas Companies for supplying equipment with Low Cost Automation; supplying Equipment with low Cost automation. . Improved Capacity utilization and increased . Supported the establishment of a Hi Quality Supply Productivity of Resources; . Value Stream engineering efforts deployed across the chain around your Company and launch business of Company in manufacture of Motors and reduced those products independently; operating costs substantially as reflected in the . Launched the Development of New products - Motors results. for domestic market.
STANDARDISATION – THE NEW WATCHWARD FOR IMIL
. IMIL is working on generic platforms for its motor applications. Management indicated that 80% of the components can be standardised, then can be modified depending on the application . With the product life cycle being more than 10 years, and single motors going into >100 car platforms across OEMs, it assumes the nature of a generic part. Standardisation will further accentuate profitability and cost savings
Page 28 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY Improvements in value engineering and production efficiencies have significantly cut the production cycle time
Consequent to efforts on improving efficiencies and value engineering the cycle time for producing motors has seen exponential improvements over the years
25 21 20
15 12
10 5 5
0 IMIL’s All Girl Shop Floor 2006 2010 2016 . A team from IMIL paid a visit to motor mfg. factories in China Cycle time/motor produced (Seconds) where it observed that factories employing girls beating production standards. Source: Company, Spark Capital Research . The team mapped physical and physiological characteristics of including - Dexterity, eye-hand co-ordination of these workers, in an attempt to replicate the same in India. . IMIL carried out a battery of psychometric tests in India on different focus groups using these characteristics and discovered that girls are most suited to operating in the motor manufacturing production line
. With a view to reduce the cycle time further, IMIL, on a pilot basis is ROBOTS EMPLOYED ON employing robots to fully automate the production process PILOT BASIS . However, these efforts are currently at a nascent stage
Page 29 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY Improvements in value engineering and production efficiencies have significantly cut the production cycle time
New product development and design expenditure capitalized New product development and design expenditure expensed
Expenditure on New Product 81 81 FY11 FY12 FY13 FY14 FY15 Development (Rs. Mn) 64 60 53 Programme expenditure incurred 27 during the year 1 - - - 27
1
-3 -7 Program Expenditure Amortized during the year 11 6 2 11 3 FY11 Net FY12 Net FY13 Net FY14 Net FY15 Additions Additions Additions Additions
Source: Company, Spark Capital Research Source: Company, Spark Capital Research
. Since 2013, your company had launched new customer and new platform applications for introduction in the American, European and Asian Geographies. IMIL possesses IP . Between 2014~16 your company launched the engineering and developmental activities on several projects with key rights of 5 features customers and these projects will start adding to your company’s revenue from calendar year 2016 onwards. . Since, the average product life cycle of each of these new motors is between 8~10 years, the volumes are expected to of the Case rise to more than double over a four year period, following the introduction calendar across various platforms and geographies. Assembly, 3 features . Over the past 3 years, significant engineering investments together with new customer programs have been initiated of Armature and three key projects will be launched in calendar year 2016. Assembly, and 10 . While noteworthy focus was accorded to new program development, the Company embarked on strong operational improvement measures which have substantially contributed to quality, productivity and innovation, which are reflected features of Brush in the improved growth and profitability. Card Assembly An extract from the FY15 Annual report of the company
Page 30 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY Margin improvement has majorly come from a reduction in the RM costs; a direct result of increasing backward integration
Reduction in RM costs has been the single largest contributor to margin improvement from FY11-FY15, followed by employee costs
Aided by soft raw material prices environment, managements efforts to improve production efficiencies and increasing backward integration, IMIL improved its gross margins to ~36.1% 420bps 24.0%
155bps -0bps 71bps 654bps 20.5%
-63bps -48bps -50bps -32bps -28bps
14.1% Gross margin for FY16 has been aided primarily Incessant efforts on by the steep decline in reducing the cycle time, commodity prices during including efforts on the year optimising the man-to- machine ration have enabled reining in of the
employee costs
Rent
FY11
FY 15 FY 16 FY
Others Others
Repairs
Selling and and Selling
Forwarding Forwarding
Gross margin Gross margin Gross
Quality Control Quality
Employee costs Employee costs Employee
Source: Company Filings, Spark Capital Research
Page 31 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY Lower value addition costs benefit IMIL despite competitors possessing better economies of scale
Average monthly wages across emerging Asia EBITDA % FY11 FY12 FY13 FY14 FY15 FY16 500 450 470 450 390 400 400 325 330 340 345 350 300 Johnson Electric 10.8% 9.8% 10.1% 11.3% 11.0% 7.7% 300 220 240 250 185 200 132 145 150 Nidec 13.1% 10.7% 2.5% 9.7% 10.8% 10.6% 150 100 50 60 50 50
0 Mitsuba 5.0% 3.8% 4.0% 6.3% 7.2% 6.9%
Cebu
Hanoi
Dhaka Manila
Beijing Mabuchi (Calendar Year) 8.0% 3.9% 5.9% 8.6% 13.8% 16.0%
Jakarta
Yangon
Chennai
Mumbai Mumbai
Bangkok
Vientiano
Shanghai
Shenzhen
Bangalore
Guangzhou Phnom Pehn Phnom
Kuala Lampur Kuala IMIL 14.1% 15.5% 18.0% 18.6% 20.5% 24.1% Hi Chi Minh City Minh Chi Hi Source: Industry, Spark Capital Research
Revenue FY11 FY12 FY13 FY14 FY15 FY16 PAT % FY11 FY12 FY13 FY14 FY15 FY16
Johnson Electric (mn USD) 2,104 2,141 2,060 2,098 2,136 2,236 8.4% 8.7% 8.0% 9.7% 9.5% 7.1% Johnson Electric Nidec (bn JPY) 8,057 8,648 8,584 8,738 9,402 9,823 7.6% 6.0% 1.1% 6.4% 7.4% 7.8% Nidec Mitsuba (bn JPY) (Calendar 2,436 2,634 2,730 2,721 2,798 2,778 1.8% 2.0% 2.9% 1.6% 3.9% 2.9% Year) Mitsuba Mabuchi (bn JPY) (CY) 991 1,069 1,112 1,161 1,183 1,200 6.4% -0.6% 7.5% 9.7% 14.8% 13.0% Mabuchi (Calendar Year)
IMIL (INR Mn) 43 56 54 60 63 68 4.6% 6.2% 7.3% 12.8% 12.7% 14.3% IMIL
Page 32 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY Brushless DC motors are the future of power electronics; IMIL close to actualising capabilities in this space
Advantages of Brushless DC Motors over Brushed DC Motors Brushless DC Motors – a panacea for major ills Feature BLDC motor Brushed DC Motor plaguing DC motors 1) Mechanical noise and electromagnetic interference are the biggest Electronic commutation based on Hall position Commutation Brushed Commutation challenges facing brushed DC motors currently. sensors 2) However, higher costs compared to brushed DC motors are inhibiting Maintenance Less, due to absence of brushes Periodic maintenance is required widespread usage of BLDC. Life Longer Shorter 3) IMIL is investing resources to develop know how to produce BLDC at reduced costs. 4) By 2018-2019 the company plans to be able to offer BLDC at costs Speed/Torque At higher speeds, brush friction increases, thus Enables operation at all speeds with rated load similar to a brushed DC motor characteristics reducing useful torque
Efficiency High - No voltage drop across brushes Moderate High - reduced size due to superior thermal Moderate/Low - The heat produced by the Why a BLDC Motor? Output Characteristics. As BLDC has windings on the armature is dissipated in the air gap, thus Power/Frame stator, which is connected to the case, the heat increasing temperature in the air gap and Size Low Maintenance 85-90% Efficiency dissipation is better limiting specs on the output power/frame size. Low, as it has permanent magnets on the Higher rotor inertia which limits the dynamic Rotor Inertia Rotor. This improves the dynamic response characteristics High Operating Speeds No Brush Sparking Higher - No mechanical limitation imposed by Higher - Mechanical limitations imposed by the Speed range the brushes/commutator brushes Arcs in the brushes will generate noise causing Electric Noise Compact Size Quick Response Low electromagnetic interference in the equipment Generation nearby Cost of Higher, as it has permanent magnets Low Brief History of BLDC Motors Building Controls Complex and expensive Simple and inexpensive 1962 1968 1975-Present A controller is always required to keep the The first brushless DC A BLDC motor BLDC motors become Control No Controller required for fixed speed; required motor running. The same controller can be motor is developed to is created for common in computer disk requirements only if variable speed is required used for variable speed control meet the need for use in battery- drives, robotics, medical reliable powered tape equipment, electric recorders vehicles and many other applications. . IMIL is investing USD 2mn on developing capabilities for BLDC motors.
. Management indicated that a good portion of the order book is for BLDC motors 1965 1970 NASA employs the BLDC motor to The US Army builds and . It is expected that by 2018/2019, the company will have the capabilities to offer BLDC run the life support system in its tests BLDC motors for use applications Apollo Lunar Module and other in heavy-duty vehicles aircraft
Page 33 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY New applications opportunities being explored by IMIL
Product Description . Technical aid in the shape of an active gas pedal: its vibration tells drivers when they have crossed Accelerator Pedal the line from light touch to lead foot. the active gas pedal uses an internal connection to the Module navigation, powertrain, and driver assistance systems. The feedback they get from the pedal allows them to reduce fuel consumption by as much as 7 %, with CO2 emissions reduced accordingly
. Automated Manual Transmission - automatic gear is now being offered with the aid of electronic AMT motors
Opening and . Features a single motorised door on both sides, power-assisted throughout the operating range of Closing door doors.
Trunk Opening . The market for these motors was forecast to be 1mn units by 2017, however, ~1mn of such motors and Closing are being supplied by the Agile electric itself, The demand for this has picked up in a big way Device especially in BMW models
Electrified water pumps . An electric water/oil pump, allows the manufacturer to set (with much more precision) how much oil/coolant courses through the engine at given temperature ranges. Thus it is more energy efficient and more in tune with the engine's specific needs. Electrified oil pumps
. Vacuum created by these pumps are used to drive a number of accessories, including the exhaust gas recirculation valves, locking systems, and heating and A/C vent controls, among others. The Electrified vacuum most important function of the vacuum pump, though, is to provide vacuum to the power brake pumps system. An electric vacuum pump provides the above functions more efficiently that a mechanical pump
Page 34 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY New applications opportunities being explored by IMIL
Electric Water Pump Market growth estimates
40 34 35 31 30 28 25 25 21 20 18
15 Millions of Unit of Millions 10
5
0 CY15 CY16 CY17 CY18 CY19 CY20
Source: NIDEC Electric Oil Pump Market growth estimates
25 21 20
16 15 11 10
Millions of Unit of Millions 5 5 1.3 0 CY16 CY17 CY18 CY19 CY20
Source: NIDEC
Page 35 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY Being backward integrated necessitates meaningful capex on enhancing capacities across the value chain
Being backward integrated necessitates meaningful capex on enhancing capacities across the value chain
500 2.5 500 14.3% 16.0% 450 2.0 450 1.8 1.8 1.8 1.9 14.0% 400 1.8 2.0 400 1.7 10.4% 12.0% 350 1.5 350 9.7% 300 1.5 300 10.0% 7.0% 250 250 6.5% 6.5% 8.0% 5.3% 200 1.0 200 3.9% 6.0% 150 150 4.0% 100 0.5 100 50 50 2.0% 0 0.0 0 0.0% FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E
Capex (Rs. Mn) Fixed Asset Turnover Ratio Capex (Rs. Mn) Capex as % of revenue
Source: Company, Spark Capital Research
. Having a presence across Tiers 2- 4 of the mfg. value chain, results in IMIL’s investment . However, strong revenue growth led by the growing market in capacity additions more intensive and leadership position has enabled a healthy asset turn ratio.
. Additionally, asset turns are aided by strong profitability basis the backward integrated nature of operations.
Page 36 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY Potential merger with parent, Agile Electric
ABOUT AGILE ELECTRIC SNAPSHOT OF FINANCIAL STATEMENTS
Summary – Profit & Loss . IMIL’s management might exercise the option to merge Agile FY15 FY14 Electric and IMIL. Revenue 2,907 2,512 . There exists a common management between IMIL and Agile Other Operating Income 1 1 Electric. Total Income 2,908 2,513 . Agile Electric is engaged in the contract manufacture of DC Cost of materials consumed 1,718 1,508 actuator motors, however, unlike IMIL, Agile focuses on Changes in Inventory 34 -22 comfort/convenience applications including power windows Employee costs 312 302 and power seats. Other expenses 390 358 . Agile has five manufacturing units in MEPZ-SEZ, Tambaram Total operating expenses 2,453 2,146 and two units at Maraimalai Nagar, Kancheepuram Dist. (all in EBITDA 455 367 TN) 16% 15% . Agile reported net sales of Rs. 2.9bn and EBITDA of Rs. 455mn in FY15. The EBIDTA margin for FY15 stood at 15.6%. Finance Costs 163 209 . The company reported PAT of Rs.149mn in FY15, including Other Income 58 19 dividend of Rs. 26mn from IMIL. Depreciation & Amortisation 120 97
PBT 230 80 Tax 81 37 35% 47%
PAT 149 43 PAT% 5% 2%
PAT for FY15 also includes dividend from Igarashi of Rs. 25mn.
Page 37 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY IMIL to benefit significantly from increasing penetration of TAM and improving market share over the medium term
TAM Market size estimates and expected volumes and revenue of IMIL
FY16 FY18E FY21E Comments
Global car production volumes (Mn We have assumed the global passenger car production to grow at a CAGR of ~5% through 70 77 89 Units) FY16 - FY18 as well as FY18-FY21
Amongst the TAM applications, ETC is currently the highest penetrated, at ~67%. This is expected to increase to ~73% by FY18 and further to 80% by FY21. TAM Penetration (Number of 1.2 1.6 2.2 Our interactions with industry experts suggest that the penetration of EGR and motors per car) Turbochargers currently stands at 30% and 33% respectively, and is expected to increase to 45% in FY18 and 70% in FY21
TAM Market size (Mn motors) 91 126 197 Derived using the penetration and the global production volumes above
Expect IMIL's market share in the ETC segment (~80% of revenue currently) to increase IMIL Volumes (mn motors) 20 32 54 marginally from the current 38% to 40% by FY21. Expect the market share in the EGR and Turbocharger segments to progressively increase IMIL Market share 21.5% 25.5% 27.3% to 20% each by FY21 Expect the realizations to remain flattish, with improving product mix (increasing mix of EGR and Turbochargers), platform standardization and value engineering expected to aid Average realisation (Rs/motor) 200 200 200 realizations which would be tempered by the cost reduction pressures exerted by Tier 1 suppliers We have not factored in revenue from IMIL’s new product offerings including electric water, IMIL Revenue (Rs. Mn) 4,450 6,422 10,721 oil and vacuum pumps. Per Nidec’s corporate presentations, the overall market size for electric water and oil pumps alone could be 55 mn in FY20 from 31mn in FY16
. Our estimates of the TAM market size is basis our discussions with the management of IMIL, discussions with one of the largest manufacturers of motors based out of China and also on a perusal of presentations and earnings call transcripts including that of Mabuchi Motors, Nidec, Mitsuba and Johnson Electric.
Page 38 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY Valuation comparison with peer companies
Share Mkt Cap Price/Earnings EV/EBITDA P/B ROE Company Price (USD Mn) (USD) FY16 FY17 FY18 FY16 FY17 FY18 FY16 FY17 FY18 FY16 FY17 FY18 IMIL 9.6 295 31.3 25.0 22.3 17.8 14.5 13.9 6.8 5.7 4.8 23.3% 24.7% 23.4%
Nidec Corp 74.4 22,178 25.2 22.7 19.8 12.9 11.1 9.9 3.0 2.7 2.5 12.2% 12.5% 12.9%
Mabuchi Motor 45.6 3,190 18.6 19.8 17.0 7.3 7.0 6.2 1.5 1.4 1.3 7.8% 6.6% 7.7%
Johnson Electric 2.3 2,039 11.8 9.8 8.9 8.0 6.1 5.6 NA 1.0 0.9 9.3% 10.7% 10.9%
Page 39 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY IMIL Financial statements
IMIL Key metrics Rs. mn FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E Profit & Loss Growth ratios Revenues 3,851 4,450 5,423 6,432 Revenues 6.6% 15.6% 21.9% 18.6% Manufacturing & Other Expenses 3,060 3,380 4,135 5,001 EBITDA 17.7% 35.4% 20.4% 11.1% EBITDA 790 1,070 1,288 1,431 PAT 6.1% 30.0% 25.2% 12.1% Depreciation 188 190 215 237 Margins EBIT 602 881 1,073 1,194 EBITDA 20.5% 24.1% 23.8% 22.3% Net Interest Exp / (inc) 57 50 27 14 EBIT 15.6% 19.8% 19.8% 18.6% Profit Before Tax 716 974 1,198 1,344 PAT 12.7% 14.3% 14.7% 13.9% Tax 227 337 401 450 Leverage & WC ratios Net Profit 490 636 797 894 Debt to equity (x) 0.2 0.1 0.0 0.0 Balance Sheet (Rs. mn) Current ratio (x) 1.6 1.2 1.2 1.3 Shareholders Equity 2,510 2,944 3,502 4,127 Debtor days (Sales) 73 70 70 70 Loan funds 576 334 164 94 Inventory days (Sales) 31 28 28 28 Sources of funds 3,175 3,369 3,757 4,312 Creditor Days (Sales) 64 55 55 55 Net block 1,223 1,495 1,633 1,813 Performance & turnover ratios Investments 261 337 337 337 RoACE 13.8% 17.6% 20.0% 19.7% Capital WIP 0 0 0 0 RoAE 20.8% 23.3% 24.7% 23.4% Current assets, loans & advances 2,922 2,879 3,372 3,989 Total asset turnover (x) 1.0 1.0 1.1 1.1 Current liabilities & provisions 1,230 1,342 1,585 1,827 Fixed asset turnover (x) 1.79 1.81 1.89 1.98 Net Current Assets 1,691 1,537 1,787 2,162 Valuation metrics Application of funds 3,175 3,369 3,757 4,312 Current price (Rs.) 647 Cash Flows (Rs. mn) Shares outstanding (mn) 30.6 30.6 30.6 30.6 Cash flows from operations 591 1,369 863 977 Market capitalisation (Rs. mn) 19,804 19,804 19,804 19,804 Capex -205 -462 -353 -418 Enterprise value (Rs. mn) 19,469 18,877 18,569 19,804 Free Cash Flow 386 907 510 559 EV/EBIDTA (x) 24.6 17.6 14.4 13.8 Cash flows from investments -142 -613 -353 -418 Adj. Per-share earnings (Rs.) 16.0 20.8 26.0 29.2 Cash flows from financing -61 -406 -372 -309 Price-earnings multiple (x) 40.5 31.1 24.9 22.2 Cash & Cash equivalents 755 1,260 1,399 1,648 Dividend yield (%) 0.7% 0.9% 1.0% 1.1%
Page 40 FY11-16E CAGR % Igarashi Motors India Ltd – Crystal Ball Gazing Revenue EBITDA PAT Price IMIL Crystal Ball Gazing 17.7% 31.5% 53.0% 57.0%
Rs. Mn FY11 FY15 FY16 FY17E FY18E FY19E FY20E
IMIL with a significant Revenue CAGR of Revenue 1,972 3,851 4,450 5,423 6,432 7,652 9,108 ▲ 20% from FY16 to global market share in the FY20 Entry = Rs. TAM market, stellar 647 (22.2x FY18 EPS) clientele, technical know how and a meaningful cost arbitrage, is expected to be a significant beneficiary of the rapid growth in the TAM market.
FY11 FY15 FY16 FY17E FY18E FY19E FY20E TOTAL Improving quality of EBITDA growth to Cumulative Dividends of mirror revenue EBITDA RETURN growth, with increasing 272 790 1,070 1,288 1,431 1,738 2,113 Rs. 33.5 growth; to be aided (Rs.mn) ▲ OF 75% diversification of product by improving EBITDA product mix 13.8% 20.5% 24.1% 23.8% 22.3% 22.7% 23.2% profile in favour of higher Margin(%) ▲ margin products, combined with continued benefits of backward integration is expected to enable maintenance of Exit at Rs. 1100 Trading History – % of times stock traded margin even in the face of (25.5x FY20 Strong growth to 16x- 18x- 20x- 22x- 24x- relentless cost pressures PE <16x >26x EPS) sustain multiples 18x 20x 22x 24x 26x range from OEMs/Tier 1 suppliers 15% 8% 11% 19% 28% 11% 8%
Page 41 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY Disclaimer
Stock expected to provide returns of <5% – -10% over a 1-year BUY Stock expected to provide positive returns of >15% over a 1-year horizon REDUCE Absolute horizon Rating Stock expected to provide positive returns of >5% – <15% over a 1-year Interpretation ADD SELL Stock expected to fall >10% over a 1-year horizon horizon
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Page 42 CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY Disclaimer (Cont’d)
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Disclosure of interest statement Yes/No
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. products or services other than those above . in connection with research report
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