Munjal Showa Ltd
(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.
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.