Igarashi Motors-Improving Engine Efficiency

Stock Opportunities
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This small company caught my attention since it does something very special. Small electric DC motors to improve fuel economy and to reduce emission!! Following report has some details.

CMP: Rs 59

Market Cap:~120 Cr

P/E: ~5.2

Industry: Auto parts supplier. Small electric DC motors for automobiles, mostly cars.

Products: Dc motors for engine throttlecontrol, exhaust gasre circulation, wiper motor, electric motors for seats.

Back ground of the company. Based in Chennai. Igarashi electric works Japan(60 year old electrical company) started a joint Venture in India with CGI in 1993. CGI has exited. Igarashi is now a minority share holder with 18%. HBL Power System owns about 63% and now owner of the company. Igarashi Motors India also has a joint venture with Bosh electrical Drives India.

Background of Chairman: Dr K K Nohris. 80 years old (worth the experience!!!?) Strong academic background. Electrical engineer from BHU and a fellow of institute of electrical engineers UK. 50 years of experience in electrical and motors industry. Former CMD of Crompton Greeves. He owns 1.15 % of total shares.

Background of MD: PK Mukund. Electrical engineer and PGDBM. 30 years experiences in Electrical motors Industries. Former Crompton Greeves employee.

Owns 0.26% of companyâs shares. His salary looked very high though. About 80 lacs. (Considering company made profit of about 18 crores)

Dr A J Prasad Promoter Director (Head of HBL Power systems) is IIT Karagpur graduate and PG in manage ment from MIT USA and a doctorate from Columbia University NY!!

Globally 70 million cars are built, each car will have about 20(conservatively) small electric motors that makes the electric motors market a 1.5 billion in numbers! And with developing markets expected to build more cars going forward it is expected to grow to 100 million vehicles per year globally. Luxury and comfort of the automobiles will only get more sophisticated, so market for small electric motors will continue to grow. Just to put things into perspective, a full size Lexus or a Mercedes will have about 100 small electric motors! And guess what are they forâ the power seats, power windows, powered sliding doors, power lift gate, powered sunroof, powered air pump, powered wiper etc. Smaller and economy cars will have fewer though. Market share of this company in electric motors is not even 1%, so it expects to increase tap the opportunities.

But niche of this company is electric motors for engine to improve fuel economy, wonder how it works? The electric motor helps electronically control the engine throttle valve thus optimizing the performance.

Their other special innovation helps exhausts to re circulate the gas and reduce emission. Imagine how regulators are hell bent to reduce the carbon output and improve fuel economy of cars. The company expects this particular market segment to grow at least 30%. It claims their order book is pretty full, and its market share in this segment is 30%.

Tow giant motor manufacturers are Johnson electric China and Mabuchi Japan. Mabuchi Both these make all kind of electric motors not just for automobiles. However Johnson is more like a direct competitor since they Make ETC and exhaust motors and it will be interesting to understand how would this company compete with Chinese.

Nearly 82% of the shares are with promoters and their associate companies, so low float.

Now Financials: They went through a bad phase during 2008-2009 recession and have improved their performance in last 2-3 years.

My knowledge about financial ratios and reading balance sheet is limited. Would request some of you who are good at it to look into details.

Revenue:

2012 2011 2010 2009 2008

Total Income 269.04 197.47 159.22 273.41 307.3

Total Expenses 226.93 169.98 140.49 310.89 273.14

Operating Profit 41.6 27.23 18.22 -53.08 0.88

Gross Profit 42.11 27.49 18.73 -37.49 34.16

Interest 13.15 9.89 8.48 12.85 11.22

Tax 1.22 -0.52 1.04 1.61 2.71

Net Profit 16.54 7.58 2.73 -60.28 9.6

NPMargin 6.1 3.8 1.7 NA 3.1

I am still trying to gather Product Development capability of the Indian technical team and what kind of collaboration they have with Igarashi Japan, also if they pay any royalty.

Their annual reportdoesn’thave information on revenue contribution of different kind of motors, will try to contact the company and update here.

Chinese Threat: I donât know what kind of motors Igarashi China does and if it competes directly with Igarashi India

Utilization may not be full will find out, also about expansion.

They also have a joint venture company with BOSH , will have to find out what kind of products they are working on.

Have not invested at this point of time, am considering. Please let me know what do you guys think.

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Some negatives:

  1. Has got some debt but not very high.

  2. Supplier to OEM’s. Due to which margins will always be under pressure. Not much pricing power.

  3. Parent company is HBL which is not running well. When parent itself is in doldrums how can this company shine. Even if it shines it can get pegged back.

  4. Lots of other companies with better dividend yields and bigger size are available for cheaper prices. No need to consider this company at this point in time.

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There are much better and bigger companies in auto ancillary space (gabriel, sona koyo , zf steering ,hitec gears, munjal showa , lumax auto etc)with compelling valuations and good dividend yields which are trading near or at thier yearly lows . Unless there are some signs of revival in the auto demand in the country, stocks in auto ancillary sector will continue to be weak

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Agree with the argument that auto suppliers margins are always under pressurebecausefiercecompetition, but we should not look at all auto suppliers with a same perspective. Example, look at BOSCH (global, huge and could be much bigger than Suzuki corporation itself), Magna, Johnson Controls and Bharat Forge. Magna nearly bought Chrysler!!

Therefore, if a supplier has niche technology it will flourish. I have not had a look at the ones that you have mentioned, will look. But one of the company you mentioned supplied a Major Sub System to the car company I earlier worked for, it was discovered that there was a serious issue with the system after the vehicle was launched, they couldnt not figure out why, they were mere manufacturer and supplier, it never had technology. I know how much they struggled. Those kind of companies will eventually fail.

I am pretty convinced about the size of the opportunity in case of Igarashi. Huge. There is lot of hoopla about climate change andcarbonfootprint, so huge pressure on auto makers to improve fuel economy. How? either you reduce mass of vehicle or make more efficient engine technologies. As an automobile engineer I know how difficult it is to lighter vehicle, you are seeing increasingly sophisticated cars, they need extra parts and hence more weight. Lot of research is going on in light weight materials, may be after 10 years you might have some break through!

Therefore you need these kind of alternatives technologies to improve fuel economy, as I see, this technology will sell for 5-6 years. The bigger question is, can this small company tap the opportunities? Does it have such a technical team? and can it continue to develop better technologies?

Electrical drives will be next big thing in automobile. In this year Detroit Auto show, every car company demonstrated electric drives (I really mean every company). Igarashi has some venture with BOSCH on electric drives, we should find out what is that venture developing?

etc)with

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thanks mahesh for the details , will have a closer look at the company especially since it appears from your comments you are working in the auto industry.

i’ve been tracking auto component sectors recentlypurely because they are looking attractive at current levels. companies like bosch , motherson sumi etchave been exceptions .every other stock has been hammered and for good reason so felt that its unlikely we will have any outperformer emerging here in the near term.

which company from my list did you refer to ? maybe i can avoid it :slight_smile:

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Shadab, I will PM you the name, it could have been one off case, lets not circulate. However, generally , some of the Indian auto suppliers are making best advantage of low cost manufacturing and labor advantage but dont have technological advantage. Promoters of some of these companies doesnt have any core background and dont understand product. They are dependent on their German or Japanese collaboration.

recentlypurely levels. etchave :))

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Mahesh, can you please describe the king of DC motors they manufacture for the auto ind. If they make the simple motors then they do not have an edge. But if they design the motors and then test/try at the various auto companies and if they approve then they have that niche advantage. Making DC motors is not a very big deal. Also DC drive mfgis notbig thing.It is a highly competitive as there are many domestic manufacturere and alsomanyfrom China/Taiwan dump inIndian mkt.

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Manish, the two small electric motors they supply ETC and EGS are pretty new ideas, I am convinced there is a big market for these in next 5-8 years. On your question about their technical capabilities, I have no information as yet. I spoke to their CFO for a short while and asked same question 3 days back, his answer was all the motors they supply are designed and developed by Indian team of engineers. I have requestedtheirCEO’s contacts to talk to him since he is an engineer. Ihaven’theard from them yet. Their Chairman/CEO/Promoter directors all have the core back ground, I like that. But I dont know their role in product development and product strategy.

Idon’teven know yet if the ETC and EGS motors they supply were developed by Igarashi India.

I have a feeling that it was collaborative development with BOSCH. Just my guess.

mfgis notbig thing.It alsomanyfrom China/Taiwan dump inIndian mkt.

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Idon’teven tried to look at their website which points to the USA website. The Indian Website is not working. That means they may have main R&D, Design facilities in USA. Indian subsidiary may be a mere manufacturing hub. Need to know the royalty outgo to the US parent company. Margins may not expand if they are mere subsidiary.

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Manish, its odd theydon’thave a website for Igarashi India, their annual report says they will have a website soon. I know, its very strange.

I have confirmed few days back that their US office is just a marketing convenience. Parent company is based in Japan. Mainly, product development and production happens in Chennai, India. Ihaven’theard from the company yet for my request to talk to them. Will update as soon as I know. I am hoping some one who knows more than us comes onboard this thread.

Idon’teven

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Mahesh, need to know morefrom the company. Meanwhile there aremore attractive bets in current small/midcap carnage.

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Gentlemen, the management of Igarashi has replied, their CEO is currently in Singapore. They have agreed for a teleconference sometimes early next week. Please chip in with your questions.

We could consolidate before the meeting, let me know if anyone is interested to be part of the meeting.

morefrom aremore

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Mahesh,

Please find below my queries for the management(these are mainly technical queries regarding their products):

1). What is the role of the indian subsidiary? Do they do R&D for the new products in India?

2). Collaborative R&D with Bosch - does it attract royalty to Bosch?

3). D.C. motors innovation is done at the request of clients or they do the R&D and then they present the product to the clients? Whatever fuel economy benefits they claim - is it the design of the engine which makes it efficient or merely their motors? This is important because if innovation is done at Igarashi end then they can claim higher margins for their products.

4). DC drives which they intend to mfg. - what kind of innovation they envisage? As such making a DC drive is notinnovative.

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Thanks Manish, I will put together my questions come Saturday and post all consolidated queries here, we will go from there. Thanks-Mahesh

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Manish, I learnt about what this company does from a Auto supplier to whom Igarashi supplies ETC electric motors. The Car company that I work for invites its suppliers to demonstrate their new technologies once in a while. Magneti Marelli, exhibited lot of their auto technologies today along with Body Throttle, which electronically controlls engine torque. I anxiously asked the engineer several questions to get a hang of the function, manufacturing and market of the particular assembly. And then asked who are the main supplier of the electric motor for Body Throttle assembly… he said Johnson Electic and Igarashi, I then asked if it was Igarashi india, he wasnt sure, my sense is, Igarashi India is the only igarashi (among Igarash in India/China/Japan) that makes ETC motor, will have to confirm. And he also confirmed Igarashi develops motors on its own, Mangeti Marelli gives them only specifications.

I also learnt that this technology is not that new, (may be about 6 years) lately, most of the cars in Europe and US have this already. I dont know what percentage of cars in India, China and other developing markets will have them. Still, the market is huge. North America and Eorope together makes a auto market of about 25 million in volume. Magneti Marelli claims they have about 7% of the market of Body Throttle assemblies, he confessed BOSCH is leader. Also Continental is another major competitor.

Having said all that, Igarashi’s part in the assembly is just the motor. Every thing else, electronics, control program, mechanical part and the rest is done by the main supplier (BOSCH, Mangeti, Continental etc). Big question is “can Igarashi do the entire thing in near future on its own”?? or will it remain a electric motor company?

I am learning more and more about this company. But I am not as excited as I was earlier since it does only the motors. However, what was encouraging was, there were lot of electrictechnologydemostrations for Hybrid and electric drive systems. Huge opportunity. But can Igarashi step up? Will get some more knowledge when I talk to the CEO early next week.

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Mahesh,

Good brain storming exercise you are doing. We are lot clear about the company and its products. DC Motors alone can not make Igarashi a great company to invest into. Need to dig in deeper with mgt talk about the other products theymay venture into. Mkt has given more lucrative opportunities to give this a miss till the mgt talk. Please update as and when you get feedback from CEO.

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Hello Mahesh C,

This year’s AR has following para :

"iv) Commodity and Exchange Risk:

Your Company is exposed to the fluctuations in foreign exchange rates on Exports and Imports. Since about2/3rd Materials purchased are imported, there is an Auto hedge mechanism. During the year discussions withCustomers were closed for the pass throughs of the Commodity and Currency variations, thereby closing outIgarashi Motors India Limitedon the risks due to these. Based on the past experiences, the Company is quoting prices to all customers witha Currency and Commodity variation clause to derisk itself from these variations."

I was wondering if you could shed some light on some questions I have:

1). How much do they benefit from strong $ ?

Elsewhere, they say,

"Bosch, Continental, Delphi, Cooper, Magneti Marelli, Pierburg, Visteon continue to dialogue with

us on new Programs and we will continue to keep dominant share in this space and work to** doubling**

our presence

in this space in the** next 4 years**."

2). Do they mean this generally or do they have tangible internal plans?

3). Do you have some views on Blackstone buy?

Thanks in advance.

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**

Ram, sorry, have stopped following for sometime after I failed to get answers from the management for some of my questions.

Hello Mahesh C,

This

_ :"iv) _

**

_ Risk:Your _

about2/3rd withCustomers outIgarashi Motors India Limitedon _ quoting witha clause _

** variations."I **

** have:1. **

_ ?

Elsewhere, they say,

"Bosch, _

_ withus _

_ todoubling_our presence_in _

** thenext 4 years_."_2). **

** plans?3. **

buy?

Thanks in advance.

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Heard from a couple of strong sources that RK Damani was a buyer on Igarashi counter yesterday. The confirmation seems to be evident from the follow through seen today (up11% @ 139) on significant volumes.

Is anyone still tracking this Company?? Would greatly appreciate any feedback from senior valuepickrs like Donald or Aayush.

From what i’ve read in a few news articles, the blackstone deal seems to be the clincher in this one.

Disclosure: Not yet invested in this stock

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As far as i know Ramesh Damani held more than 1 percent in Igarashi Motors couple of years back and was bullish about the stock. But his holding fell below 1% after that when the stock price did not move for a long time. Currently do not know if he holds anything.

I do not know if RK Damani is building a position in this stock.

Disclosure:I am invested in this stock for some time now.