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Munjal Showa Q4FY14 results update

June 2, 2014, Monday, 16:48 GMT | 11:48 EST | 20:18 IST | 22:48 SGT
Contributed by Nirmal Bang

Munjal Showa Q4FY14 results were flat on QoQ basis with marginal decline in margins. Volumes increased 5.0% YoY led by higher volumes from Hero Moto.

- Net sales increased 5.0% YoY; however was flat on QoQ basis as last quarter was driven by festive season. However, Hero Moto – the key client of Munjal Showa has registered strong volume growth of 14.8%/8.0% in the month of April/May 2014 and thus management is confident of improving sales from current levels with a lag effect. We expect 6.6% YoY increase in sales for FY15E (vs ~1.0% registered in FY14).

- EBITDA margins witnessed decline on both QoQ and YoY basis led by lower gross margins.

- The current capacity utilization of the company stands at 80%. As per management, with some de-bottle necking it can cater to almost 50% increase in demand without any major capex.

- Interest expenses continued to decline resulting from repayment of loans. Munjal Showa has repaid all the debt and is now a debt free company.

- Stable currency movement of rupee against the Japanese Yen led to forex gain of Rs 0.31 cr in Q4FY14. For FY14 forex loss stood at 1.3 cr vs forex gain of Rs 0.5 cr. The company has net imports of 8-9%.

- Contribution to Hero Moto Corp stood at ~70% of revenues; whereas Honda Scooters accounted for 17% (vs 16% last quarter); Honda Cars ~5%, Maruti 5% and balance 1% is contributed by Yamaha.

- Shock absorber (2W) contributed ~90% of the revenues and struts and window balancers (4W) contributed nearly 10% of revenues in Q4FY14.

- FY14 was 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 in FY14. However, expectation of improvement in economic environment will help in recovery of the overall automobile sector. Moreover, Hero Moto Corp- the key client of Munjal Showa is expected to benefit with slew of new product launches lined up and increasing rural penetration. 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 117, the stock is trading at P/E of 5.8x FY15E earnings and 1.1x FY15E P/BV with an EV/EBITDA 3.5x on FY15E respectively. Considering the sharp run up in the stock price (~50% in the last 3 months), we have revised our rating from BUY to HOLD with a revised target price of Rs 130 (6.5x FY15E EPS) indicating further upside of 11.4% from current levels.