Munjal Showa - Growth triggers in place; Buy - Anand Rathi

Two-wheeler demand scenario average. Hero MotoCorp, the key customer for Munjal Showa (MS) witnessed decent 3QFY14 numbers, and on a lower base the company reported yoy growth for a second successive quarter (after a yoy decline for the preceding four quarters). Two-wheeler sales were up 6.9% yoy and 18.7% qoq. Consequent on the weak demand environment in the auto industry and keener competition, we expect this challenging industry scenario to continue into 4QFY14.

Benefit to trickle in for MS. In 3QFY13, while the overall automotive demand continued to be weak. MS' key customers - Hero MotoCorp. and Maruti Suzuki - reported a decent performance. Hence, we expect MS' revenue to grow 10% yoy. We expect its EBITDA margin to come at 6.5% (60bps lower yoy, though 140bps up qoq). This would result in marginal 0.8% yoy EBITDA growth. As a result, adjusted profit would grow by a marginal 3.6% yoy, to Rs. 166m.

Provision for wage hike. The company's wage-settlement agreement with its workers and staff increments are due for renewal. While negotiations are ongoing, the company has provided Rs. 54.73m towards increments for 1HFY14, based upon its estimates. This has also had the effect of lowering the EBITDA margin, along with reducing operating leverage.

Our take. Although key customers still face demand woes, growth ahead would be driven by non-HMC customers. Positives ahead are inexpensive valuations and more revenue from a diversified customer base. We reiterate a Buy, with a target of Rs. 80, based upon 4.2x FY15e (a ~10% discount to its past five-year average). At the current price, the stock trades at PE of just 4.1x FY14e and 3.6x FY15e earnings. Risks. Sustained slump in motorcycle sales, rise in commodity prices and inadequate price hikes allowed by OEMs.

Source : Equity Bulls

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