India Nippon Electricals - Initiating Coverage - Feel the kick of the start :: Centrum

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--> Rating: Buy; Target Price: Rs695; CMP: Rs423; Upside: 64%



Feel the kick of the start



We initiate coverage on India Nippon Electricals (INEL) with Buy and
TP of Rs695 (~64% upside). We expect INEL’s strong comeback in 1HFY15
with revenue and EBITDA growth of 30% and 54% respectively to sustain
after muted operating performance in the prior three years. Revenue
traction is likely to be driven by promising prospects of TVS Motors,
its key client, securing 100% business from Hero MotoCorp’s new
Rajasthan plant and resumption of business from Honda Motorcycles. As
a consequence, operating leverage should boost EBITDA margins. Strong
earnings CAGR of 35% over FY14-FY17E, zero debt (cash equivalent 40%
of capital employed), an average core RoCE of ~35% and rising, all go
towards making INEL a compelling idea.

$ Change in TVS to have trickle-down effect: TVS Motors, accounting
for 50% of INEL’s sales, has boosted its overall volumes and market
share, upstaging Bajaj Auto to become the 3rd largest 2W player. We
are excited by the recent changes in TVS that could sustain its strong
volume growth: 1) shift to scooters (26% of 1HFY15 volumes),
potentially growing at 24% CAGR over FY14-FY17E, and 2) bridging gaps
in its motorcycles portfolio through 1HCY15, thereby catering to all
segments of the 2W market. Our estimated TVS’ ~22%+ volume CAGR over
FY14-FY17E should have a positive rub off effect for INEL.

$ 100% share awarded by HMCL to INEL from its new plant in Rajasthan:
Hero MotoCorp (HMCL), which accounts for another 25% of INEL’s
revenues, continues to maintain its overall leadership in the
two-wheeler segment. INEL stands to gain from capacity expansion plans
of HMCL as it has been awarded 100% share of business from its new
plant in Rajasthan. The Neemrana plant of HMCL will have an annual
capacity of 750k units and is now operational. Further, our channel
check indicates strong traction from HMSI supported by momentum from
new clients like Suzuki.

$ Strong organic growth well supported by capacity expansion: Given
the strong momentum of key clients, the company has expanded capacity
at its Rewari plant. We understand that it is likely to double its
capacity by end FY15E and has already achieved 50% of its planned
expansion. Given the low capex, healthy operating cash flows and lead
time of 6 months for creating new capacities, we believe that supply
can be easily aligned to demand. We estimate capex of Rs120mn for
FY15E.

$ Valuation and key risks: Strong earnings growth, improving return
ratios, and a consistent 35%+ dividend pay-out can lead to further
re-rating. INEL is trading at relatively undemanding 10.8x/8.6x
FY16E/FY17E EPS (adjusting for dividend income from non-cash
investments). Our TP is based on 15x FY17E EPS (after adjusting for
dividend from non-cash investments) + Rs60/share value of non-cash
investments. The core business RoCE averaged 35% compared to the
overall RoCE of ~14% over FY10-FY14. Key risks: a) aggressive price
strategy to get enhanced market share particularly for fly wheel
magnetos, and b) Delay/failure of product launches by TVS.



Thanks & Regards

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