CG Igarashi Motors: Hold/Buy on declines

Recommendation: Hold/Buy on declines

B. Krishnakumar

STOCK market history throws up quite a few cases of small capital, low profile and fundamentally sound companies that have turned out to be multi-baggers. Chennai-based CG Igarashi Motors fits this category.

The company posted a strong turnaround in operations and declared a maiden dividend for the year ended March 2000. Given the growth prospects and sustained demand for the company's products, long-term investors could contemplate exposure in the company though returns may not be as good as they were in the last three years when the stock doubled.

In technical collaboration with Japan's Igarashi Electric Motors, CG Igarashi Motors manufactures permanent magnet DC micromotors. These motors find application in industries such as automobiles, power tools, household appliances and office equipment. At present, the company derives a major chunk of its revenues from the automobile segment where its products are used in seats, windows and wipers. The company's products are used by car producers such as General Motors, Honda, Mazda, Renault, Mitsubishi and Peugeot.

A conscious thrust towards capacity expansion and consistent efforts to broadbase its customer and geographic profile has been the hallmark of the company's growth. To remain competitive, the company has been reducing prices, about 5 per cent per annum, for over four years now. This strategy has helped broadbase its customer base.

On the other hand, CG Igarashi has also taken initiatives to move up the value chain. It has been developing a broad range of products to cater to the customised needs of its client. CG Igarashi has entered into a strategic alliance with its component suppliers and convinced them to set up production base in the country, resulting in declining import content and savings in freight costs.

As a result of these factors, the company has been able to sustain its profit margins, despite effecting price cuts on a consistent basis. Aided by capacity expansion and the constant emphasis on quality, the company posted a steady growth in performance in the last five years.

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For the year ended March 2000, the company posted a 57 per cent growth in turnover at Rs. 57.53 crores, while the post-tax earnings rose by about 120 per cent to Rs. 5.11 crores. On the equity base of Rs. 11.90 crores, the earnings per share was Rs. 4.29. The company declared a maiden dividend of 15 per cent for 1999-2000. Given that the user segment is slated to grow at about 5-6 per cent per annum, and that the company addresses the needs of a huge market, the growth prospects for CG Igarashi Motors appear bright.

Given that the company still has a relatively high import content in its raw material-mix, the rupee's recent depreciation is a cause for concern. To address these issues, the company has tried to reduce the import content. CG Igarashi is a net foreign exchange earner and has also reduced its exposure to the euro from the earlier level of 60 per cent to the present 50 per cent. As a result, the company has 50 per cent exposure in the euro and the remaining 50 per cent in the US dollar. Given this scenario, the company may be a net gainer.

The company has targetted capacity expansion by about 2-3 million pieces per annum (now it has a capacity of 10 million tonnes). Given the track record and sustained growth in performance, long-term investors could take exposure in the company at the current level of Rs. 29.