Munjal Showa

Being among the first to participate in the rally, automobile stocks may appear expensive at the current levels. Investors can instead look to add automobile component stocks to their portfolio, particularly those which have sizeable exposure to well-known auto companies.

Munjal Showa, which makes shock absorbers, is one such stock. Priced at Rs 64, the stock discounts its trailing four-quarter earnings by 12 times. Hero Honda, Honda Motors and Scooters, Honda Siel Cars and Maruti Suzuki are Munjal Showa’s major customers, with a bulk of sales coming from Hero Honda (about 78 per cent). From catering mainly to the entry-level buyers, Hero Honda has been fortifying its position in the premium bikes market.

As Munjal Showa is the sole supplier of shock absorbers to Hero Honda, the former appears well-placed to reap benefits from the latter’s expanding product portfolio.
Business outlook

Showa Corporation of Japan, a global leader in manufacture of shock absorbers, holds a 26 per cent equity stake in Munjal Showa. In terms of client profile, Munjal Showa has 90 per cent exposure to two-wheelers and 10 per cent to cars.

With credit availability easing up, fuel prices moderating and signs that urban spending is picking up, demand for two wheelers is expected to be on a sound footing this year.

Recently, Munjal Showa commissioned its third plant at Haridwar with an initial installed capacity of 5 million shock absorbers per year mainly to cater to Hero Honda’s new facilities.

Though there were doubts whether Hero Honda will be able to make headway in the premium segment of the two-wheeler market, it has managed to increase its presence in this space from 8 per cent to 11 per cent over the past year through new launches.

That augurs well for Munjal Showa. Apart from Hero Honda, Munjal Showa supplies parts to Honda Motorcycles and Scooters India (makers of Honda Activa and a market leader in the scooter segment).

Maruti Suzuki, the market leader in passenger cars, is another major customer of Munjal Showa (accounting for 8 per cent of total sales) and makes shock absorbers for premium and export models such as A-Star, Swift, Swift Dzire and Ritz.

The remaining 2 per cent comes from supplies to Honda Siel Cars, for models such as Honda City and Honda Jazz. So far, sales growth in these segments has been robust, guided by healthy festival demand and new launches.
Competition

Shock absorbers are an important part of a vehicle’s suspension systems and, therefore, the industry is technology intensive and caters more to original equipment manufactures’ requirements, as the replacement cycle is long (5-8 years).

Munjal Showa commands a market share of 60 per cent in two-wheeler shock absorbers and about 8 per cent in the passenger cars segment. While Gabriel India has a huge presence in the passenger cars segment and replacement market, Munjal Showa is a key OEM player for two-wheelers.
Financial performance

After posting a CAGR of 15 per cent for two years till FY’07, Munjal Showa saw brakes being applied on its growth in FY’08 due to the slowdown in two-wheeler sales. Sales in FY’08 marginally rose by two per cent and net profits plunged by 25 per cent. But with two-wheeler majors, particularly Hero Honda, bouncing back quickly, the company registered a sales and net profits growth of 17 per cent and 7 per cent, respectively, in FY’09.

A capex to the tune of Rs 175 crore for its Haridwar plant, funded by debt and internal accruals, resulted in interest cost doubling from Rs 2.2 crore in FY’08 to Rs 5.4 crore last fiscal.

Helped by excise duty cuts, the June quarter of FY’10 registered a sales growth of 17 per cent, though profits were down by 7 per cent due to steep increase in interest cost, which may continue to dampen profits growth. However, with production ramping up in the plant, the tax concessions derived from it may partly offset the interest burden. Debt-equity ratio is at a comfortable 0.43:1. Operating profit margins for the quarter were maintained at 7.8 per cent.

Munjal Showa has a small exposure to foreign current fluctuations. While it exports a very negligible portion to Showa Corporation, it imports about 8 per cent of raw materials from Japan. With the prices of domestic steel looking stable in the medium term, Munjal Showa may not face much pressure on the input costs front.
Risk

Hero Honda accounted for 85 per cent of Munjal Showa’s sales in FY’05. Though the dependence has been marginally reduced to 78 per cent in the current fiscal, prospects of Munjal Showa are still highly leveraged to the fortunes of Hero Honda

via BL