Ignited To Do Better

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With declining revenues since FY05 not many would have liked to see India Nippon Electricals (INEL) as a part of their portfolio. But INEL has been showing some resilience with a turnaround not only in terms of revenues but also profits in H1FY10. The worst seems to be behind it and with certain initiatives that INEL has taken, the scrip should do well in the coming years. Besides, with its zero debt status, high dividend yield, cash and equivalent of Rs 83.8 crore and low valuations, the company merits a second look for long-term investment. Also, it has been a consistent dividend payer since the last 19 years.

INEL is a joint venture between Lucas Indian Service, a wholly-owned subsidiary of Lucas-TVS and Japan’s Kokusan Denki. It is into the manufacturing of electronic ignition systems for two-wheelers, three wheelers and portable engines. Though a TVS Group company, the company also caters to companies beyond TVS Motors with clientele such as Bajaj Auto, Hero Honda, Honda Motorcycle & Scooters, Royal Enfield, Yamaha Motors, Piaggio etc. On the portable engines’ front, its clients are Greaves Cotton, Honda Siel Power and Birla Power Solutions.

There are certain reasons we feel INEL will do well. First, INEL has a diverse client base and so its revenues aren’t a function of a single client but several others which de-risks its business. Second, there is a revival in the auto sector and with the economy bouncing back in a much better way than expected, the sector is expected to do well and this augurs well for INEL. For the period April–December 2009, two-wheeler sales have witnessed a strong increase of around 24 per cent and with sentiments improving further these numbers should only improve going forward.

Third, INEL has also entered into a new line of business for a domestic client for the supply of electronic control units (ECUs) for diesel passenger car application. Electronic control of diesel engines for passenger cars is a critical function in the automotive industry. However, there is no information on how big this order could be but a media reports claims that this client is Tata Motors. That apart, INEL is also setting up a new unit at Uttarakhand to meet its customers’ requirements. The commercial operations of this unit are expected to start before the end of FY10.

Besides, INEL’s products have received approval from a North American client and it is expected to start commercial production for the same in this fiscal. All these factors will help will push INEL’s revenues further. Also, INEL is increasing its after-market presence, which will not only provide additional fillip to sales, but also improve its margins. INEL is almost a zero debt company, thus limiting interest its outgo and keeping its profits healthy. Its FY09 dividend at Rs 6 (FV Rs 10) works out a yield of 2.62 per cent. But the best part is that the interim dividend has gone up to Rs 3.5 per share in FY10, indicating a better profitability for INEL.

Assuming a similar dividend in H2FY10, its FY10 dividend could be Rs 7 per share, whereby the yield works out to 3 per cent. The company has cash and equivalent of Rs 83.8 crore in its books, which is 45 per cent of market cap of Rs 186 crore. For H1FY10 INEL’s sales and profits grew by 22 per cent to Rs 80 crore and by 76 per cent to Rs 10.64 crore respectively on better realisations and low input costs. For FY10 its estimated sales and profits could be Rs 161.7 crore and Rs 20-21 crore. On an estimated EPS of Rs 26 the scrip is available at a PE of just 8x and this certainly makes it worth a pick with a one year target of Rs 321.