India Nippon Electricals Ltd Research Report By IIFL

India Nippon Electricals (INEL) is among the leading manufacturers of electronic ignition systems for 2W, 3Ws and portable generator sets. We expect INEL’s EBITDA margin to expand 93bps over FY18-20E owing to addition of higher margin products to its portfolio.

Strong underlying demand for 2/3Ws and growing electronic content per vehicle will lead to 16% revenue CAGR over FY18-20E.

INEL is debt free with RoE, RoCE and RoIC of 16%, 19% and 32% respectively (FY18). We forecast EBITDA and PAT CAGR of 20% each over FY18-20E. We recommend BUY with target price of Rs700 (22x FY20E EPS).

Growing proportion of vehicle electronics:

INEL will benefit from rising proportion of electronics in automobiles (from 23% of vehicle cost to 45% by FY30; Source: Govt data).

As per FY17 Annual Report of MeiTY, domestic production of automotive electronics will grow from Rs5,629cr in FY14 to Rs36,500cr in FY20, 31% CAGR (refer exhibit 2). Based on these projections, we expect INEL to see revenue CAGR of 16% over FY18-20E.

Superior product mix to aid margin expansion:

Over past 2-3 years, INEL has invested in development of new 2W products to meet upcoming technology and emission demands.

Exports and aftermarket sales (4% of revenue each), which enjoy superior margins, have grown at 25% and 35% CAGR respectively over FY14-17 (FY18 data not yet available).

Consequently, EBITDA margin expanded ~500bps from 9% in FY14 to 14% in FY18. Over FY18-20E, we expect EBITDA margin expansion of 93bps to 15.1%.

Outlook & Valuation:

We are positive on INEL due to (a) robust underlying sector (2/3W) demand, (b) growing vehicle electronics, (c) improving product mix and (d) strong balance sheet.

INEL is debt free with cash / equivalents of Rs 124cr (FY18), providing scope for investing in new products and technologies when required.

Stock is currently trading at 34% discount to its peak PE of 28x and is in-line with the average 52 week PE.

We believe that a stock with zero debt, high return ratios, improving financial metrics and credible management pedigree deserves premium valuation