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Munjal Showa Q3FY14 results update

February 7, 2014, Friday, 18:48 GMT | 13:48 EST | 23:18 IST | 01:48 SGT
Contributed by Nirmal Bang

Munjal Showa Q3FY14 results witnessed improvement led by growth in sales and improved margins. After witnessing subdued volume growth in last 3-4 quarters, volumes increased 6.0% YoY led by higher volumes from Hero Moto.
- Net sales increased 6.5% YoY; and 13.5% QoQ led by improvement in volumes and price hike taken by the company from one of its key client - HMSI. Festive season led to an increased demand for most of its customers; which led to an improvement in sales for Munjal Showa. Going forward, management expects growth to witness improvement. We expect 5% YoY increase in sales for FY15E (vs ~1-1.5% registered in FY13 and FY14E).
- Raw material costs as a percentage of net sales was flat sequentially and YoY as the company passed on the price hike to its vendors.
- EBITDA margins witnessed substantial improvement led by improvement in sales and control over costs.
- Interest expenses continued to decline resulting from repayment of loans. Munjal Showa intends to be a debt free company by March 14 as it will repay its last installment of Rs 3.18 cr.
- Stable currency movement of rupee against the Japanese Yen led to forex gain of Rs 0.67 cr during the quarter.
- Contribution to Hero Moto Corp went up from ~71% last quarter to ~75% of revenues; whereas Honda Scooters accounted for 16% (vs 20% last quarter) and balance 9% is contributed by Maruti, Honda and Yamaha.
- Shock absorber (2W) contributed ~93% of the revenues and struts and window balancers (4W) contributed nearly 6% of revenues in Q3FY14.
- The company has net imports of only 7-8% and thereby limited impact is expected on account of rupee depreciation.
- FY14E is the last year of tax benefit for the company at its Haridwar plant. Effective FY15E, the company will get the benefit only on 30% of the profits from Haridwar, while 70% will get taxed at normal rate. Out of the total production, nearly 40% is from Haridwar.
The overall slowdown in the auto environment had impacted revenue of the company. However, with new product launches lined up by most of its clients, we believe that Munjal Showa will also witness uptick in revenues. Diversification will reduce risk of concentration; aiding in stable revenues. Control over raw material cost and other expenses will result in better operational performance. In addition; low gearing ratio, higher return ratios, healthy dividend yield and support from the promoter group continues to be the key positives for the company.
At CMP of Rs 75, the stock is trading at P/E of 4.5x and 4.1x FY14E and FY15E earnings and 0.7x FY15E P/BV with an EV/EBITDA 2.2x on FY15E respectively. Considering the improved performance, we have upgraded the stock from HOLD to BUY with a revised target price of Rs 92 (5x FY15E EPS) indicating an upside of 26% from current levels.