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CMP: INR 526 | Market Cap: INR 11.88 Bn | Promoter: 70.37%

India Nippon Electricals (INEL) is an auto ancillary player catering to 2 wheeler and 3 wheeler segment. The product portfolio includes electric ignition systems (flywheel magneto, power boost regulator), controllers (ISG and EGR controller) and sensors. The company operates in electric as well as combustion engine. 

Key triggers:

Products:

INEL operates largely in 2W and 3W vehicles. Company has leadership position in electronic ignition system products, and has also recently entered the market for electric vehicles. Their offerings include wide range of products such as Electronic ignition systems (regulators, rectifiers, AC generators and more), Controllers (ISG and EGR controllers), Sensors (speed, temperature, oil lever, tire pressure among others). In 2W EV, the company already produces DC-DC converters while developing products in sensors, controllers, clusters and much more. Company has a growing aftermarket sales presence.

The Company has 3 Manufacturing facilities located in Tamil Nadu, Puducherry, and Haryana.

INEL is placed in the value chain which complements its parent’s offerings. The parent company offers starter batteries, lubricants, filters, lighting, horn, brakes and wiring harness along with many other products. These products are in adjacencies with offerings of INEL. Significant sales are done to the parent entities and affiliate companies, which provides visibility of sales.

Along with these products, company is also venturing in 4 wheelers and non-automotive segments

Growing market share from key clientele

Exports contributed to just 6% of total sales in FY23 but INEL has built a strong presence in North America, Japan, and Europe. Company also supplies products to regions in Asia and Africa. Some of the key clients are Hero, Suzuki, TVS, Bajaj, Honda, Polaris, Greaves, Mahindra, Kohler among many others. The highlight is that the market share from key customers has increased from 33% (in FY19) to 41% (in F23). This indicates strong dependency and confidence in operations of INEL. 

Aggressive development in electric 2W products

The company is developing multiple products in EV 2 wheelers which include clusters, motors, controllers and sensors. These products are in addition to existing offering of convertors by INEL. The new products will bring in substantial additional revenues as the products will be offered to the same clientele.

On way to stronghold position in aftermarket sales

Current contribution from aftermarket sales is just 10% which the company aims to touch 15% by FY25. The parent entities, Lucas TVS and Lucas India Service have been in existence for 60 and 80 years respectively and have a strong presence across India, especially southern region. Lucas India Service has a network of 2,000+ dealers and 15,000+ retailers, which INEL can leverage. The parentage of Lucas TVS and Lucas India Service will heavily influence the salience of INEL and strengthen the aftermarket sales.

Reputed parentage

The promoter entity is Lucas India Service which is owned by Lucas TVS (owned by TVS group). The promoter entity currently holds 70.37% stake. The shareholding pattern changed on 26th June 2023 where Lucas India Service upped their stake from 50.8% to 70.37%. The earlier promoters who took and exit in the transaction were Mahle Electric Drives Japan Corporation (13.26%) and Mahle Holding India Private Limited (6.25%). This strategic move provided an exit to the Japanese entities.

The TVS group has multiple entities associated with the automotive industry, making the group a mammoth in the sector.

Financials:

INEL is a debt free player with FY23 Revenues/EBITDA margins/PAT margins of INR 6.56 Bn/8.08%/7.53%. The company currently operates at WC days of 57, ROCE of 17.7% and ROE of 8.6%. The company also strategically holds ~8.6% equity of Lucas TVS (promoter of the promoter entity). Lucas TVS is a major supplier of automotive components to OEMs. Currently, Lucas TVS is undergoing capex to set up lithium ion batteries manufacturing unit.

Overview and Outlook:

We like India Nippon Electricals for its product portfolio and parentage. We believe the company is placed well in a niche segment which has amplifying growth potential. There are several products under development at company level which we believe brings in a strong visibility in sales growth going forward. The company is also focusing on strong aftermarket sales and aims to increase the contribution from 10 to 15%. The parent brand is an experienced and reputed player in the aftermarket sales. INEL will be the beneficiary in leveraging the parent’s brand name. The market share from key clients has increased consistently for the company over the past 5 years (from 33% to 41%) which shows dependency and confidence of clients on the company while also providing visibility for future scope. In the past 5 years, company has also increased capacities in line with their sales visibility. At CMP, company trades 21.8x TTM EPS. We are positive on the future prospects of the company. We are working on a detailed note.