Munjal Showa
Growth triggers in place; Buy
Key takeaways
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 `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 `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 `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
��
Growth triggers in place; Buy
Key takeaways
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 `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 `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 `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
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