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Keynote Capitals Research 2

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MSL Sensex

Munjal Showa Ltd Date: 21-Dec-2012

Key Stock Data

Sector Auto Parts CMP `63.25 52wk High/Low 88.0/60.0 Market Cap `255Cr 6m Avg. daily vol 13132 BSE Sensex 19453.9 Reco ‘Buy’ Target Price `85.71

Stock Codes

Bloomberg Code MJS IN Reuters Code MNJL.BO BSE Code 520043 NSE Code MUNJALSHOW Face Value `2

Shareholding pattern (30th Sep, 2012)

Price Performance (%)

1 Mth 3 Mths 6 Mths 1 Yr

-2.1% -3.6% -19.2% -0.2%

Stock Price Performance

Investment Summary

Dominant position in shock absorbers: At present only two domestic players, Gabriel India (GIL) and MSL dominate the industry by contributing 80% of total industry volumes. MSL commands a market share of above 55% in two-wheeler shock absorbers.

Munjal Showa is not affected due to separation of Hero and Honda: Munjal showa supply its product to Hero Motocorp and Honda Motorcycle & Scooter India. Both clients have aggressive expansion plans, which would be beneficial for the Munjal Showa.

Strong growth going forward, sales at a CAGR of 18.2% over FY09-FY14E: MSL management stressed that current capacities of the company will be able to fulfill the expected demand from the clients. Given its end-to-end arrangement with its clients, we expect company’s Net sale to grow at 18.2% CAGR for the period of FY09-FY14E.

Lower tax and interest outgo to ensure robust profit growth: MSL’s Haridwar Plant is on tax free regime and therefore EPS accretive. We expect it to bring down effective tax rate from 21.9% in FY12 to 11% in FY13.

Attractive Dividend Paying History: MSL’s stock price gives a healthy dividend yield of 4.74. The company increased its dividend by 20% from `2.5/share to `3/share in FY12. Increase in dividend yield also demonstrates that the company is in stable growth conditions.

Munjal Showa VS Gabriel India: After comparing MSL with Gabriel India, We found MSL trading at steep discount to Gabriel India on the basis of PE and P/S ratio.

Valuations: We initiate coverage with “Buy” recommendation with the DDM based target price of `85.71, arriving at 4.68x FY13E and 3.71x FY14 earning for the levered firm.

Key Financials (`Cr) Particulars FY09 FY10 FY11 FY12 FY13E FY14ENet Sales 829.4 988.0 1,289.3 1,556.9 1,699.6 1,913.6YoY Growth % 16.9% 19.1% 30.5% 20.8% 9.2% 12.6%Total Expenditure 788.5 934.1 1208.3 1434.2 1582.0 1776.4EBITDA 40.9 53.9 81.0 122.7 117.6 137.2YoY Growth % 24.1% 31.7% 50.2% 51.5% -4.1% 16.7%EBITDA Margin (%) 4.9% 5.5% 6.3% 7.9% 6.9% 7.2%NPAT 20.7 24.6 34.0 67.1 73.3 92.3YoY Growth % 3.6% 19.8% 34.1% 102.1% 10.5% 26.0%NPAT Margin (%) 2.5% 2.5% 2.6% 4.3% 4.3% 4.8%ROE (%) 13.0% 14.2% 17.7% 29.2% 26.0% 27.2%EPS (`) 5.2 6.2 8.5 16.8 18.3 23.1PE(x) 12.2 10.3 7.4 3.8 3.5 2.7P/BV(x) 1.6 1.5 1.3 1.1 0.9 0.7

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K E Y N O T E


Key Management Personnel

Munjal Showa established out of technical and financial collaboration between Hero group and Showa Corporation of Japan. While Showa Corporation holds 26% stake and Munjal group holds 39% stake in the company as on Q2FY13. MSL is the sole supplier of shock absorbers to Hero Motocorp Ltd. Following is the list of key management people in the company.

Management People Chart 3

Performance at glance

MSL has come up out of the turbulent years FY08 and FY09 strongly. While its sales grew 2.5% and 16.9% in terms of Net sales during FY08 and FY09 respectively, PAT declined by 23.1% in FY08 and showed moderate by 3.6% in FY09. The growth was tempered by steep rise in interest rates and phenomenal increase in raw material inputs especially steel. The slowdown has resulted in direct impact on the productions and sales of the component manufactures.

Whereas, FY12 was much better year as company posted improved performance owing to recovery in domestic market. The company also reported Net sales and PAT growth at a CAGR of 17.6% and 21.0% for the period of FY07-12.

`Cr

Particulars FY08 FY09 FY10 FY11 FY125 Yr

CAGR (%)

Net Sales 709.4 829.4 988.0 1289.3 1556.9 17.6% % Change 2.5% 16.9% 19.1% 30.5% 20.8%EBITDA 33.0 40.9 53.9 81.0 122.7 24.2% EBITDA Margin (%) 4.7% 4.9% 5.5% 6.3% 7.9%PAT 19.7 20.4 24.5 32.8 66.3 21.0% PAT Margin (%) 2.8% 2.5% 2.5% 2.5% 4.3%% Change -23.1% 3.6% 19.8% 34.1% 102.1%EPS (`) 4.8 5.2 6.2 8.5 16.8Dividend yield (%) 3.2% 3.2% 3.2% 4.0% 4.7%Installed Capacity Shock Absorbers (No) 21513000 21513000 30542400 30542400 30542400Struts (No) 1212000 2424000 2424000 2424000 2424000Window Balancers (No) 1006500 1006500 818100 818100 818100

Mr.Brijmohan Lall Munjal - Chairman/Founder Director

Mr.Mahesh Taneja - Chief Financial Officer

Mr.Yogesh Chander Munjal - Managing Director

Mr.Tetsuo Terada - Joint Managing Director

Mr.Pankaj Gupta - Gen Mgr:F&A/Secretary

MSL established out of technical and financial collaboration between Hero group and Showa Corporation of Japan.

Strong assistance from promoter group

FY12 was much better year as company posted improved performance

owing to recovery in domestic market.

MSL reported Net sales and PAT growth at a CAGR of 17.6% and

21.0% for the period of FY07-12.

K E Y N O T E

5 Keynote Capitals Research

Investment Rationale

Dominant position in shock absorbers

Being a technology intensive industry, unorganised sector has no presence in the OEM segment for shock absorbers. At present only two domestic players, Gabriel India (GIL) and MSL dominate the industry by contributing 80% of total industry volumes. MSL commands a market share of above 55% in two-wheeler shock absorbers and about 8% in the passenger cars segment.

During the year 2010-11 the Market size of shock absorber grew 31% y-o-y to `3644Cr. According to CMIE, the market will cross `5300Cr in 2013-14 registering a CAGR of 14% during FY11-14. CMIE expects the industry’s sales to grow by 16.3% in FY13. In terms of input costs as well, the industry is better off. Steel prices are expected to rise by a moderate 3.7% during the year. Hence, raw material expenses are likely to rise in line with sales.

Particulars Units 2009-10 2010-11 2011-12E 2012-13E 2013-14E

Production 000 nos 56358.9 68919.6 74777.8 82106 91794.5

Export Tonnes 3748.3 8512.1 9005.8 9951.5 11683

Import Tonnes 2679.2 5300.7 5692.9 6441 7481.2

Realisation Rs./Numbers 487.1 518.8 534.4 555.7 575.2

Sales Rs crore 2745.4 3575.5 3995.8 4562.6 5279.7

Domestic Market value Rs crore 2782.1 3644 4079.4 4665.3 5397.6

Source CMIE

Munjal Showa is not affected due to separation of Hero and Honda

In December 2010, the Board of Directors of the Hero Honda Group have decided to terminate the joint venture between Hero Group of India and Honda of Japan. The Hero Group would buy out the 26% stake of the Honda. Under the joint venture Hero Group could not export to international markets (except Sri Lanka) and the termination would mean that Hero Group can now export.

Munjal Showa to benefit from Hero Motocorp and HMSI’s expansion plans.

Munjal showa is sole supplier to Hero Motocorp Ltd.

MSL also provides products to Honda Motorcycle & Scooter India, Private Limited (HMSI). HMSI is the wholly owned subsidiary of Honda Motor Company Ltd, Japan.

Hero Motocorp and Honda Motorcycle have very aggressive expansion plans, which would be beneficial for the Munjal Showa.

MSL commands a market share of above

55% in two-wheeler shock absorbers

According to CMIE, Shock absorbers market will cross

`5300Cr in 2013-14

CMIE expects the industry’s sales to

grow by 16.3% in FY13.

Under the JV Hero Group could not export

to international markets (except Sri

Lanka) and the termination would

mean that Hero Group can now export.

Hero Motocorp and Honda Motorcycle have

very aggressive expansion plans

K E Y N O T E


Strong growth going forward, sales at a CAGR of 18.2% over FY09-FY14E

Munjal showa is a supplier of shock absorber to leading two wheeler player. The company has been supplying shock absorbers to HMCL (Hero Motocorp Ltd), HMSI (Honda Motorcycles and Scooters India Pvt Ltd) etc. MSL is a sole supplier of shock absorbers to HMCL. Company’s existing clients have targeted to meet predetermined sales targets with around 10% growth, with the support of new models likely to be launched both in 2 Wheeler and 4 Wheeler segment in the coming years.

MSL’s manufacturing units in Gurgaon, Manesar and Haridwar with installed capacities of 30.54Mn Shock absorbers, 2.42Mn Struts and 0.82Mn Window balancer are almost using their full capacities. During FY12 MSL produced 32.36Mn Shock absorbers, 0.98Mn Struts and 0.74Mn window balancer which we expect to register a CAGR of 2.8%, 9.2% and 4.5% respectively over FY12-14E ensuing from the demand from the client on new launches and better domestic demand. MSL management stressed that current capacities of the company will be able to fulfill the expected demand from the clients. Given its end-to-end arrangement with its clients, we expect company’s Net sale to grow at 18.2% CAGR for the period of FY09-FY14E.

Net Sales to grow 9.2% in FY13E Chart 5

Lower tax and interest outgo to ensure robust profit growth

MSL’s Haridwar Plant is on tax free regime and therefore EPS accretive. We expect it to bring down effective tax rate from 21.9% in FY12 to 11% in FY13.

Particulars FY12 FY13 Q1 Q2 Q3 Q4 Q1 Q2

Total Tax (` Cr) 3.9 3.81 2.85 8.21 1.66 0.72

% Change Q-o-Q -16.3% -2.3% -25.2% 188.1% -79.8% -56.6%

% Change Y-o-Y 8.0% 56.8% -12.0% 76.2% -57.4% -81.1%

% Effective tax rate 19.8% 21.3% 17.8% 25.4% 10.9% 7.6%

709.4 829.4988.0

1289.31556.9 1699.6

1913.6

0%5%10%15%20%25%30%35%

0

500

1000

1500

2000

2500

FY08 FY09 FY10 FY11 FY12 FY13E FY14E

Net Sales % Growth (RHS)

` C

r

MSL management stressed that current

capacities of the company will be able to

fulfill the expected demand from the

clients

MSL’s installed capacities of 30.54Mn

Shock absorbers, 2.42Mn Struts and 0.82Mn Window

balancer

Lower tax is game changer for the

company

New product launches by two wheeler auto giants will create a

huge demand for the company’s products.

K E Y N O T E


Tax Rate to go down Chart 7

Interest cost to go down due to repayment of loan

Apart from tax benefits, the company is also reducing pressure of debt from its balance sheet. As on FY12 the company has total debt of `73.16Cr, which includes secured loan of `63.16cr and unsecured loan of `10Cr. Total debt of the company declined by 15% as compared to FY11. MSL reported interest coverage ratio of 10.99x in FY12 as compared to 8.86x in the previous year. This indicates that earnings can easily cover interest payment.

The Debt to Equity ratio is expected to decline to 0.13x by FY14E from 0.29x (FY12) on account of a reduction in debt. The interest coverage ratio is expected to improve to 27.58x in FY14E from 10.99x (FY12) owing to decline in the interest outgo.

Improvement in Debt to Equity Ratio Chart 8

4.83 5.17 6.158.51

16.7818.32

23.0935.1%

37.1% 36.4%

29.0%

21.9%

11.5%10.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

0.00

5.00

10.00

15.00

20.00

25.00


EPS (`) Effective Tax Rate (%) (RHS)

0.23

0.610.68

0.42

0.29

0.190.13

0.00

5.00

10.00

15.00

20.00

25.00

30.00

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80


Total Debt to Equity (x) Interest coverage ratio (x) (RHS)

MSL posted strong EPS growth of 97.18% in FY12 as compared

to FY11

Apart from tax benefits, the company

is also reducing pressure of debt from

its balance sheet.

The Debt to Equity ratio is expected to decline to 0.13x by FY14E from 0.29x

(FY12) on account of a reduction in debt.

K E Y N O T E


The tax and interest benefit will ensure steady cash flows and intact earnings growth for the company in the current scenario of increasing raw material costs and wage hike.

Margins impressive going forward Chart 6

Attractive Dividend Paying History

MSL’s stock price gives a healthy dividend yield of 4.74. The company increased its dividend by 20% from `2.5/share to `3/share in FY12. Increase in dividend yield also demonstrates that the company is in stable growth conditions.

Dividend History

Year End 200803 200903 201003 201103 201203Dividend amount (`Cr) 8 8 8 10 12Dividend % 100 100 100 125 150Dividend Yield (%)* 3.16% 3.16% 3.16% 3.95% 4.74%*Stock price considered = `63.25 per share

We expect MSL to maintain a payout ratio in the range of 15% to 17.7% in FY13E and FY14E. We have built in an estimate for dividend per share at `3.25 and `3.5 for FY13E and FY14E respectively.

Dividend Yield Chart 9

4.7% 4.9%5.5%

6.3%

7.9%6.9% 7.2%

2.8% 2.5% 2.5% 2.5%

4.3% 4.3%4.8%

0%1%2%3%4%5%6%7%8%9%

0

500

1000

1500

2000

2500


Net Sales EBITDA Margin (RHS) PAT Margin (RHS)

` C

r

3.16% 3.16% 3.16%3.95%

4.74%5.14%

5.53%

0%

1%

2%

3%

4%

5%

6%


Dividend Yield (%)

Lower tax and interest outgo to ensure

robust profit growth

Increase in dividend yield also

demonstrates that the company is in stable growth conditions.

The company increased its dividend

by 20% from `2.5/share to `3/share

in FY12

K E Y N O T E


Peer comparison

We have compared MSL with its immediate competitor Gabriel India. Gabriel India is a manufacturer and supplier of Shock absorbers, Struts, Front forks and Engine bearings. It also has a wide range of Ride control products. It has well-known clients like Bajaj Auto, Ashok Leyland and Tata Motors etc.

After comparing MSL with Gabriel India, We found MSL trading at steep discount to Gabriel India on the basis of PE and P/S ratio.

Munjal Showa VS Gabriel India `Cr

Particulars Munjal Showa Ltd Gabriel India Ltd

FY12 FY12

Net Sales 1556.88 1128.24

PAT 66.33 47.47

PAT Margin (%) 4.3% 4.2%

EPS (`) 16.78 3.61

PE (x) 3.77 7.83

Stock Price (`) 63.25 28.25

Mkt cap (`) 257 405.67

P/Sale (x) 0.17 0.36

Dividend Yield (%) 4.74% 2.31%

Valuations

At current market price of `63.25 stock is trading at 3.45x FY13E and 2.74x FY14E earnings, Which is low as compared to Gabriel India. Considering improved demand from clients and decline in the interest outgo as well as lower effective tax rate is likely to boost the bottom-line of the company. We initiate coverage with “Buy” recommendation with the DDM based target price of `85.71, arriving at 4.68x FY13E and 3.71x FY14 earning for the levered firm.

Dividend Discount Model

Gordon Growth Model

Single stage DDM model

FY12

Dividend Per Share 3.00

MSL trading at steep discount to Gabriel

India on the basis of PE and P/S ratio.

Dividend yield of munjal showa is higher than the Gabriel India.

At current market price of `63.25 stock

is trading at 3.45x FY13E and 2.74x FY14E earnings, Which is low as

compared to Gabriel India.

K E Y N O T E


Assumptions

CoE (r)

Rfr 8.00%

Rm 15.00%

Beta 0.54

CoE 11.78%

Gn 8%

Target Price (`) 85.71

Upside 33.93%

Valuations Table

Particulars FY09 FY10 FY11 FY12 FY13E FY14E

EPS (`) 5.17 6.15 8.51 16.78 18.32 23.09

RoE (%) 13% 14% 18% 29% 26% 27%

P/E (x) 12.23 10.28 7.44 3.77 3.45 2.74

Price/BV (x) 1.58 1.46 1.32 1.10 0.90 0.75

Risk and concern

The key concerns are volatility in raw material prices such as steel, iron etc

The concentration of business with few customers, may adversely affect the profitability

of the Company.

The profitability of the Company may further be affected by changes in Government

Policies regarding excise duty and import duty.

ROE to be in the range of 25% to 28%

K E Y N O T E


Financial Statement

Profit and Loss A/C `Cr

Y/E, 31st March FY09 FY10 FY11 FY12 FY13E FY14E Net Sales 829.4 988.0 1,289.3 1,556.9 1,699.6 1,913.6 % change 16.9% 19.1% 30.5% 20.8% 9.2% 12.6% EBITDA 40.9 53.9 81.0 122.7 117.6 137.2 EBITDA margin (%) 4.9% 5.5% 6.3% 7.9% 6.9% 7.2% Other income 14.3 20.0 2.3 1.6 1.1 0.9 Interest exp/ (inc) 5.5 12.1 9.1 11.2 7.0 5.0 PBTD 49.8 61.8 74.2 113.1 111.7 133.1 Depreciation 16.9 23.1 26.3 27.2 28.9 30.5 PBT 32.9 38.7 47.9 85.9 82.8 102.6 Taxes 12.2 14.1 13.9 18.8 9.5 10.3 PAT (Reported) 20.7 24.6 34.0 67.1 73.3 92.3 Less: Extraordinary Income /Others 0.3 0.1 1.2 0.8 0.0 0.0 Adj PAT 20.4 24.5 32.8 66.3 73.3 92.3 Adj PAT margin (%) 2.5% 2.5% 2.5% 4.3% 4.3% 4.8%

Source: E- Keynote capitals Research

Balance Sheet Statement `Cr

Y/E, 31st March FY09 FY10 FY11 FY12 FY13E FY14E Liabilities

Equity share capital 8.0 8.0 8.0 8.0 8.0 8.0 Total Res. & Surplus 157.3 172.6 195.0 248.2 300.5 361.9 Total Shareholders’ funds 165.3 180.6 203.0 256.2 308.5 369.9 Secured Loan 101.3 88.8 80.7 63.2 50.5 44.7 Unsecured Loan 0.0 34.9 5.0 10.0 8.0 5.0 Total loans 101.3 123.7 85.7 73.2 58.5 49.7 Deferred tax lia. 13.6 17.3 16.7 15.7 16.6 17.6 Other liability 0.0 0.0 0.6 0.7 0.7 0.7 Total liabilities 280.2 321.5 306.0 345.6 384.3 437.9

Assets Net fixed assets 199.8 254.2 254.5 245.0 262.7 282.3 Capital WIP 40.6 8.5 8.6 11.2 10.9 11.6 Total non-current assets 240.3 262.8 263.1 256.2 273.6 293.9 Inv - non current 10.0 5.0 0.0 3.0 3.0 3.0 Current assets Inventories 28.8 30.4 36.7 49.1 52.5 61.2 Sundry debtors 91.5 128.2 143.0 176.0 189.5 200.3 Cash & cash equivalents 5.3 2.4 3.1 4.7 5.6 6.1 Loans and Advances 29.4 37.3 45.0 45.7 49.3 55.3 Total current assets 154.9 198.3 227.7 275.5 296.9 322.9 Total current liabilities 116.1 131.8 176.8 178.2 177.5 168.3 Total provisions 13.1 16.3 14.8 15.9 17.4 19.4 Net current assets 25.8 50.2 36.2 81.4 102.0 135.1 Other Asset 4.1 3.5 6.8 5.0 5.6 5.8 Total assets 280.2 321.5 306.0 345.6 384.3 437.9


Net sale to grow at 12.6% in FY14 on account of new

launches and better domestic demand

We expect effective tax rate to go down

from 21.9% in FY12 to 11% in FY13.

PAT margin to be in the range of 4% ‐ 4.8%

in FY13E & FY14E

Total loan fund was declined by 14.6% in

FY12

Cash and Cash equivalents increased

by 51.6% in FY12

K E Y N O T E


Cash Flow Statement `Cr Y/E, 31st March FY09 FY10 FY11 FY12 FY13E FY14E Cash flow from operations

PBT 32.9 38.7 47.9 85.9 82.8 102.6 Tax paid 12.2 14.1 13.9 18.8 9.5 10.3 Dep & amortization 16.9 23.1 26.3 27.2 28.9 30.5 Working capital changes 0.7 27.3 (14.7) 43.6 19.8 32.6 Others (0.3) (8.1) 2.1 (4.9) (21.6) (25.2)

A-Net cash from operations 36.6 12.3 77.0 45.9 60.8 65.1 B-Net cash from investments 90.7 31.9 26.9 16.7 25.4 25.8 C-Net cash from financing 57.3 16.7 (49.5) (27.5) (34.6) (38.8) Net change in cash (A-B+C) 3.1 (2.9) 0.7 1.6 0.8 0.5 Cash at the end of the period 5.3 2.4 3.1 4.7 5.6 6.1

Source: E- Keynote capitals Research Key Ratios Y/E, 31st March FY09 FY10 FY11 FY12 FY13E FY14E Growth Net sales (%) 16.9% 19.1% 30.5% 20.8% 9.2% 12.6% EBITDA (%) 24.1% 31.7% 50.2% 51.5% -4.1% 16.7% PAT adjusted (%) 3.6% 19.8% 34.1% 102.1% 10.5% 26.0% Valuations EPS (`) 5.2 6.2 8.5 16.8 18.3 23.1 P/E (x) 12.2 10.3 7.4 3.8 3.5 2.7 Price/BV (x) 1.6 1.5 1.3 1.1 0.9 0.7 EV/EBITDA (x) 8.5 6.9 4.1 2.6 2.6 2.2 P/Sales (x) 0.31 0.26 0.20 0.16 0.15 0.13 Profitability EBITDA margin (%) 4.9% 5.5% 6.3% 7.9% 6.9% 7.2% Adj PAT margin (%) 2.5% 2.5% 2.6% 4.3% 4.3% 4.8% RoE (%) 13.0% 14.2% 17.7% 29.2% 26.0% 27.2% RoCE (%) 9.5% 11.3% 20.3% 32.5% 27.8% 28.3% B/S ratios Inventory days 10.6 10.2 8.8 9.3 10.1 10.1 Creditor days 33.7 32.5 34.5 35.2 31.7 27.4 Debtors days 33.0 37.8 35.6 34.8 36.5 34.8 Debt/equity 0.61 0.68 0.42 0.29 0.19 0.13


MSL is trading at 3.8x FY12 earnings, which is low as compared to

its historical PE

Debt to equity to be in comfort zone

K E Y N O T E


KEYNOTE CAPITALS LTD.

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Munjal show ltd

Economy & Finance

aggressive

effective

tax free regime

71x fy14 earning

stable growth

54mn shock

msl management

keynote capitals