Mun­jal Showa Ltd

Money Times - - Expert Eye -

(BSE Code: 520043) (CMP: Rs.186.90) (FV: Rs.2) By Laxmikant Bhole Com­pany Overview:

Mun­jal Showa Ltd (MSL) was in­cor­po­rated in 1985 in tech­ni­cal and fi­nan­cial col­lab­o­ra­tion with Ja­pan’s Showa Cor­po­ra­tion, a pi­o­neer in the man­u­fac­ture of shock ab­sorbers. MSL is a part of the USA-based $1.3 bil­lion Hero group, which has a 45-year his­tory. MSL through its joint ven­ture with Showa Cor­po­ra­tion de­signs and man­u­fac­tures shock ab­sorbers and struts for two-wheel­ers and four-wheel­ers. Its man­u­fac­tur­ing plant is spread over an area of 24,075 sq.mts. in the in­dus­trial area of Gur­gaon, Haryana.

MSL is one of the largest sup­pli­ers of shock ab­sorbers to ma­jor auto gi­ants in In­dia, Ja­pan, Ger­many, USA and UK. Its prod­ucts con­form to the high­est stan­dards of qual­ity, safety, com­fort and de­pend­abil­ity and are QS 9000, ISO 14001 and ISO 9001 com­pli­ant. MSL has es­tab­lished a strong foothold in the auto an­cil­lar­ies man­u­fac­tur­ing mar­ket and en­joys a wide pa­tron­age. It sup­plies orig­i­nal equip­ment to var­i­ous au­to­mo­bile gi­ants such as Maruti Suzuki, Honda SIEL, Kawasaki Ba­jaj, Ki­netic, Hero Mo­toCorp, etc. Its key clien­tele in­clude the Hero group, Honda, Yamaha and Maruti Suzuki with the Hero group (par­ent com­pany) be­ing the largest rev­enue con­trib­u­tor. It sup­plies shock ab­sorbers and struts to

many lead­ing two-wheeler brands such as Splen­dor, Hunk, Ig­n­i­tor, Plea­sure, Mae­stro, Uni­corn, SZ-Yamaha, Pas­sion, etc. and four-wheeler brands such as Honda City, Cele­rio, Swift Wagon R, 800 CC, Omni Van, etc. CRISIL’s rat­ings af­fir­ma­tion on the bank fa­cil­i­ties and com­mer­cial pa­pers availed by MSL re­flects its healthy op­er­at­ing ef­fi­cien­cies and strong busi­ness link­ages with its cus­tomers in­clud­ing Hero Mo­toCorp Ltd (rated ‘CRISIL AAA/FAAA/Sta­ble/CRISIL A1+’) and Honda Mo­tor­cy­cle & Scooter In­dia Pvt Ltd. The rat­ings also fac­tor in its healthy fi­nan­cial risk pro­file, sup­ported by zero debt and healthy cash ac­cru­als.

Key Pos­i­tives:

1. Strong parent­age and col­lab­o­ra­tion with Showa Cor­po­ra­tion gives MSL an edge over its peers

2. A mar­ket leader in most prod­ucts 3. Sta­ble mar­gins 4. Pos­i­tive op­er­at­ing cash flows 5. Strong fi­nan­cials

Per­for­mance Re­view: MSL posted a strong fi­nan­cial and op­er­at­ing per­for­mance for the last two quar­ters and the last fis­cal. In Q1FY19, its rev­enues grew 6% QoQ and 12%

YoY to Rs.442.4 crore. PAT came in flat at

Rs.17.4 crore. In Q2FY19, its rev­enues grew

5% QoQ and 12% YoY to Rs.465.65 crore. PAT was up 10% QoQ but down around 5% YoY at

Rs.19 crore. It posted an EPS of Rs.19.4 for

FY18 and Rs.9 for H1FY19.

MSL ex­hibits a strong balance sheet with a small eq­uity cap­i­tal of Rs.8 crore sup­ported by strong re­serves of Rs.561.6 crore. With an en­ter­prise value (EV) of Rs.704 crore, its EV/Sales ra­tio and EV/EBITDA ra­tio work out to just 0.4x and 5.26x, which ap­pears very at­trac­tive. In FY18, its RoE and RoCE stood at

13.6% and 18.4% re­spec­tively. Cur­rently, the stock trades at a P/E of 9.8x. Its P/BV works out to 1.3x.

MSL has gen­er­ated healthy cash flows over the last few years. As a re­sult, its cash in­vest­ments have piled up steadily.

As at FY18, its cur­rent in­vest­ments stood at Rs.239 crore v/s Rs.161 crore in FY17. 75% of its re­ceiv­ables were within the credit lim­its and the balance 25% was up to the 6 months time­frame.

MSL is an in­vestor-friendly com­pany with an ex­cel­lent track record of pay­ing div­i­dends for more than a decade. Its div­i­dend pay­out ra­tio is good at 23%.

Com­mon Sense Anal­y­sis: MSL be­ing a Hero group com­pany de­rives ma­jor­ity of its rev­enue from Hero Mo­toCorp, which has a strong foot­print in ru­ral ar­eas. Hero Mo­toCorp recorded phe­nom­e­nal growth in October 2018 with sale of 7,34,668 units (up 16% YoY). For­ti­fy­ing its mar­ket lead­er­ship with a strong sales growth tra­jec­tory, this is the fourth time in FY19 and sixth over­all when Hero Mo­toCorp reg­is­tered sales of more than 7,00,000 units of two-wheel­ers in a month. Hero Mo­toCorp’s new Des­tini 125 Scooter is likely to boost sales. Fur­ther, it plans to launch its new mo­tor­cy­cle viz. XPULSE 200T soon. Buoyed by the ris­ing ru­ral in­come, the de­mand for two-wheel­ers is bound to rise for Hero Mo­tor­cy­cles in com­ing months / years. This will au­to­mat­i­cally boost to Mun­jal Showa’s sales and prof­its.

Sum­mary: Given its strong balance sheet, ro­bust cash gen­er­a­tion and di­ver­si­fied busi­ness model, MSL is ex­pected to per­form ex­tremely well in com­ing years. The stock has fallen sharply in line with the car­nage wit­nessed in mid-cap stocks re­cently. How­ever, its fun­da­men­tals re­main in­tact and in­vestors can buy the stock from a long-term per­spec­tive. The stock’s 52-week high/ low is Rs.312/ Rs.163.

Con­clu­sion: As­sum­ing an EPS of Rs.22 for FY19 and a con­ser­va­tive P/E of 10x or 11x, we rec­om­mend in­vestors to buy the stock in a stag­gered man­ner on de­clines for a price tar­get of Rs.222 in the next 12-18 months. The cur­rent volatil­ity in the mar­ket may af­fect the stock in the short run. How­ever, long-term in­vestors can buy and hold the stock with con­vic­tion for hand­some gains in com­ing months.


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