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 <go>), Page 1 RAMAKRISHNAN SESHAN [email protected] +91 44 4344 0020 Thomson First Call, Reuters Knowledge and Factset CMP Target Rating Igarashi Motors India Ltd Rs. 647 Rs. 745 BUY Compliance with regulatory emission norms to give a significant boost to the TAM market and hence, IMIL’s revenue 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 .