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Munjal Showa Q3FY13 results update

Contributed by Nirmal Bang

Munjal Showa Q3FY13 results witnessed an improvement on sequential basis. However, sales were lower on YoY basis reflecting slowdown in sales of its key client customer Hero Moto Corp. EBITDA improved 2.2% YoY and 14.8% QoQ to Rs 25.5 cr in Q2FY13 and margins improved from 6.3% in Q3FY12 and 5.9% in Q2FY13 to 6.5% in Q3FY13. Lower interest expenses and lower tax rate continued to aid bottom line performance.

The overall slowdown in the auto environment has led to a weak performance on the sales front for the company. Going forward, although the slowdown will continue to be visible in the sector as a whole, we believe that Q4FY13 will be better as compared to previous quarters. Operational performance of the company has improved resulting from control over raw material cost and benefit on the forex side. Lower tax rates have also enabled the company to post a better show on the net level which we believe will continue going forward as well.

Munjal Showa has been consistently working on reducing its dependence on Hero Moto Corp and focusing more on the other OEMs. Hero Moto now accounts for about ~70% of revenues, compared to 78% in FY10. We believe that a diversification in the client list will help the company to reduce risk of concentration and thereby aid in stable revenues.

Moreover, low gearing ratio, superior return ratios, stable margins, healthy dividend yield and support from the promoter group continues to be the key positives for the company. Lower tax rate (resulting from Haridwar plant) and lower interest expenses resulting from debt repayment is likely to boost the bottom line performance of the company.

At CMP, the stock is trading at P/E of 4.44x and 3.87x FY13E and FY14E earnings and 0.89x and 0.76x FY13E and FY14E P/BV with an EV/EBITDA of 2.65x and 2.06x on FY13E and FY14E respectively. We expect RoE of 21.3% for FY14E. We maintain our BUY rating on the stock with a target price of Rs 87 (an upside of 29% from current levels).

- Munjal Showa reported 2.0% decline in sales on YoY basis; however on QoQ basis the sales witnessed some improvement with sales growing at 4.4%. The company witnessed slowdown in sales in its key client Hero Moto Corp sales. Hero Moto Corp reported decline in sales of ~1% YoY whereas on QoQ basis sales were up 18%.

- Going forward, Management expects volume growth to be ~5% for FY13E and 6-8% for FY14E. We have factored in 4.9% growth in net sales for FY13E and 7.9% for FY14E.

- Raw material costs as a % of net sales declined from 76.1% in Q3FY12 to 74.4% in Q3FY13 leading to an improvement in EBITDA.