Igarashi Motors India

On May 20, 2016

Igarashi Motors India

4Q results – Strong show, reaffirms our strong belief

IGM reported 4QFY16 results ahead of our expectation on all operating parameters as revenue/EBITDA increased 24%/48% yoy. The company reported the highest-ever EBITDA margin of 25% due to gross margin improvement (aided by backward integration benefits) and operating leverage. We expect FY17/18 will be the strong growth year aided by three new programs. We highlight IGM as a strong play on the emerging global powertrain technology (35% global market share in ETC motors), having the perfect blend of both industry and company specific drivers. We expect motor volume and profitability to grow >=2x in the next four years, with upcoming programs and application diversification. We increase FY17e/18e earnings estimates by 5%/6%, led by 1% higher volume and margin assumptions. Our FY18e margin estimate is still 160bps lower than 24.1% margin reported in FY16. We maintain a positive stance, with a revised Accumulate rating (earlier Buy) and a revised target price of Rs705 (earlier Rs605).

Strong beat at operating level: IGM recorded 24% yoy increase in net revenue to Rs1,266mn in 4QFY16 on volume jump due to start of a new program. EBITDA increased 48% yoy (27% qoq) to Rs319mn, led by a decline in RM costs to sales (230bps qoq). Employee expenses and other operating expenses increased 30%/41% yoy to Rs90mn and Rs131mn respectively. PAT increased 9% yoy (26% qoq) to Rs185mn, with a PAT margin of 15%. Muted PAT growth compared to operating level growth is due to full year depreciation adjustment in 4QFY15.

Triplet market size to grow 3x; new applications entry to increase manifold: We believe the global motor usage in triplet applications will grow 3x by 2025 (250mn+) on rising usage/penetration of electronic throttle control (ETC), turbochargers (waste gate actuator and bypass valve) and EGR (exhaust gas circulation) system in passenger vehicles. Usage of motors (currently ~82mn) in triplet applications like ETC, turbocharger and EGR is expected to go up from 70%/30%/30% respectively to >80% over the next decade, and we believe IMIL will be a key beneficiary of the technology shift due to existing strong relationship with Western technology leaders/system manufacturers (both German and US-based). Focus on addition of the thermal control application system to existing triplet has the potential to make it a quadruplet and expand the addressable market significantly.

Strong balance sheet/FCF generation; expect 24% earnings CAGR: We expect sales/EBITDA/PAT CAGR of 20%/16%/24% CAGR over FY16-FY18e, driven by 19% volume growth on new program startups. We have not assumed current development programs on new applications in our growth assumptions. We believe our margin assumptions are conservative given operating leverage kicker, despite initial gross margin compression on the new program ramp-up. A cash positive balance sheet, consistent working capital cycle (~40 days), strong free cash flow generation and expected increase in payouts provide the much-needed comfort. The management’s execution track record has also been very robust and provides added comfort.

Option value – Agile Electricals merger with IMIL: We believe the management may weigh on merging the parent Agile Electricals and IMIL. Agile is primarily into contract manufacturing of comfort system motors such as power window and power seats among others. Agile had ~US$45mn sales (~Rs3bn sales in FY15), with an EBITDA margin of ~15% and PAT of Rs150mn. We note Agile has a very robust order book as the global market size of comfort system motors is ~1bn and the average usage is set to rise from 20/car (like 120+ in Mercedes S-class) currently to 35/cars by 2020. Though the merger will be margin dilutive, we expect the ratio to tilt in favour of IMIL on IP and profitability edge.

Maintain positive conviction: At CMP, the stock trades at 24x/20x FY17e/18e EPS. We value the stock at 22x FY18e EPS to Rs705 (earlier Rs605), as we believe it has a strong business case aligned with sector technology drivers. Comfort on management and financial performance sustainability will keep the valuation high.

Warm regards,

Reena Kamble