Munjal Showa Ltd. - Nirmal Bang

Consistent performer!!!

Munjal Showa was established in 1987 in technical and financial collaboration with Showa Corporation of Japan. Munjal Group holds 39% stake followed by Showa Corporation, which has 26% stake in the Munjal Showa Limited. Munjal Showa Ltd operates as an ancillary and manufactures auto components for the two wheelers and four wheeler industries.

Strong patronage from promoter group

Munjal Showa enjoys goodwill in the market on the back of affiliation with the well-known promoter group Munjal family (Hero Group) and Showa Corporation of Japan which makes it a trust worthy name.

Esteemed Clientele

Munjal Showa has established a strong base in auto ancillary manufacturing market and the products serve as an original equipment manufacturer (OEM) to a wide range of players. Hero is the major client of the company and contributes about 76% of its total revenues.

Positive correlation with Hero Moto Corp

We have seen a strong correlation in the volume growth between Munjal Showa and Hero Moto Corp. Out of last 5 years, four times the volume growth of MJS has outperformed the volume growth of HMCL by an average of 1.5-2.5%. Going forward, we expect this trend to continue. Though Management has guided for atleast 10% volume growth we expect MJS volume growth to be 17.2% and 12.5% in FY12E and FY13E respectively compared to the HMCL's volume growth forecast of 14.9% and 10.0% (NBIE estimates).

Expansion to drive growth

The company's Haridwar plant became operational in April 2009 and has a capacity to produce shock absorbers upto 1 crore units per year. The company has already increased its production from 6,000 units per day to 7,500 units per day as on September 2011 and plans to further increase it to 9,000 units per day by FY13.

Valuation & Recommendation

Munjal Showa reported RoE of 17.7% in FY11 up from 13.0% in FY09. We further expect ROE to improve to 25.1% in FY12E resulting from improved margins and better turnover ratios and then marginally decline to 23.9% in FY13E. Going forward, we expect this strong performance to continue on the back of low gearing ratio, superior return ratios, stable margins and support from the promoter group. The company has consistently been paying 100% dividend to its shareholders and in FY11 it declared a payout of 125% at Rs 2.5 per share.

At CMP, the stock is trading at P/E of 5.13x FY12E and 4.44x FY13E earnings which we believe are dearth cheap. We assign a target multiple of 6 (as we believe that the stock will command higher multiple and get re-rated owing to increase in RoE) on our FY13E EPS of Rs 16.2 and arrive at a target price of Rs 97 indicating an upside of 35% from current levels.

Source : Equity Bulls

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