Continued growth; low value stock

Munjal Showa, a joint venture between the New Delhi-based Hero group and Japan-based Showa Corporation, manufactures shock-absorbers for two-wheelers and four-wheelers in different variants—front forks, rear cushions, struts and gas spring/rear door lifters, etc.

Munjal Showa has three factories in Manesar, Gurgaon and Haridwar. It is one of the largest suppliers of shock-absorbers to major auto giants in India, Japan, Germany, the US and the UK, among the developed markets. The company’s key customers include Hero MotoCorp Ltd, Honda Motorcycles & Scooters, Maruti Suzuki and India Yamaha Motor.

The financial year ended 31 March 2011 was excellent for the company. Net profit increased 38.25% to Rs34.01 crore. In the same period, net revenues zoomed 28.36% to Rs1,268.17 crore. The company has recommended a dividend of 125% (i.e., Rs2.50 per equity share of Rs2 each) for the year ended 31 March 2011 compared to 100%, i.e., Rs2 per share for the previous year.

For the quarter ended 30 September 2011, Munjal Showa’s net profit rose to Rs14.07 crore compared to Rs4.92 crore for the corresponding year-ago period backed by a 22.90% rise in net revenues to Rs375.66 crore.

According to the company, the demand for two-wheelers will grow on account of a good monsoon, new launches of fuel-efficient bikes due to hike in petrol prices, growth in the farm sector, additional allocation of resources to agriculture and infrastructure sector. To meet the expected spurt in demand, Munjal Showa has augmented the capacity of its existing plants through expansion projects and made all the three plants independent for all manufacturing facilities and has also created provision for support to each other in exigencies.



However, according to the latest report of Associated Chambers of Commerce and Industry of India (ASSOCHAM) titled Indian Auto Industry: The Year Ahead, tough times are likely to persist for India’s auto industry up to the first quarter of 2012-13 as major auto-makers are geared to hike prices by nearly 2%-10% in the year ahead.

ASSOCHAM stated that the rising interest rates, steep and steady rise in input costs, unregulated price hike in raw materials, sudden depreciation of the rupee against major currencies, together with labour trouble, are key reasons for the sluggishness in the passenger car market. The report also predicted the growth rate of car sales in the current fiscal to stay at 4%-5% against nearly 30% in the previous year.

All this may put pressure on the stock. Over the past five quarters, Munjal Showa’s average growth in revenues and operating profit was 28% and 40%, respectively. Its average operating margin is low at 7% but return on net worth is a healthy 17%. Its market-cap to revenues is just 0.16, while its market-cap to operating profit is just 2.10 times. The stock is quoting at Rs64. It would be a great investment at around Rs50.